ATO Interpretative Decision

ATO ID 2004/511

Income Tax

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Issue

Where the taxpayer, the trustee of a family trust, executes a deed with a professional sportsperson which grants the family trust a non exclusive right and licence to use and exploit the name, image, likeness, talents, identity, reputation and signature (hereafter referred to a 'image') of the sportsperson, has the sportsperson vested property in the trustee such that the trustee derives assessable income that is not personal services income for the purposes of Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The sportsperson has vested property in the trustee to the extent that the deed grants a licence to the trustee which authorises the exploitation of the sportsperson's image such that the trustee derives assessable income, which is not personal services income for the purposes of Part 2-42 of the ITAA 1997, from the use of the licence.

Facts

The taxpayer, the trustee of a family trust executes a deed with a professional sportsperson which grants the taxpayer a non-exclusive right and licence to use and exploit the image of the sportsperson in any form whether written, electronic or otherwise.

The operative provisions of the deed have the effect that:

(a)

the sportsperson grants the taxpayer the non-exclusive right and licence to use the image of the sportsperson throughout Australia, and

(b)

the taxpayer agrees to employ the sportsperson to perform certain services

These services include:

(i)

participating in promotional, marketing and advertising activities

(ii)

cooperating with sponsors, suppliers and licensees of the sportsperson's image

(iii)

appearing on television and radio programs

(iv)

giving interviews to television, radio, newspaper or magazine journalists

(v)

using and endorsing nominated products or services

(vi)

cooperating with media as and when required by the trustee.

The taxpayer contracts with various media for the supply of the sportsperson to make radio and television appearances and provide interviews. The taxpayer also contracts with manufacturers of sports merchandise for the usage of the sportsperson's image on merchandise related to the sportsperson's sport. The taxpayer generates income for the trust under these contracts.

Reasons for Decision

Personal services income is defined under subsection 84-5(1) of Part 2-42 of the ITAA 1997 as follows:

Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would be mainly such a reward if it was your income).

Paragraph 20 of Taxation Ruling TR 2001/7 explains that Part 2-42 of the ITAA 1997 requires each item of ordinary or statutory income derived to be analysed to determine whether or not it is personal services income. An entity may therefore have some income which is personal services income and some which is not.

Paragraph 29 of TR 2001/7 also clarifies that income which is mainly from assets an entity holds is not personal services income.

For present purposes, it is therefore necessary to determine which items of ordinary income of the trust arise mainly from the exploitation of assets and which are mainly a reward for the efforts or skills of the professional sportsperson.

The income of the trust derived under its contracts with various media whereby the contract fee is mainly a reward for the personal efforts or skills of the sportsperson will be personal services income of the sportsperson within the meaning of Part 2-42 of the ITAA 1997. Examples would be the income derived by the trust from the sportsperson's radio and television appearances and media interviews.

Under current Australian Law, a sportsperson does not have a right of property in their name, image or likeness (Australian Consolidated Press Ltd v. Ettinghausen (unreported, NSWCA, 13 October 1993 at para 7); Re Elvis Presley Trade Marks [1997] RPC 543 at 547. A sportsperson therefore cannot assign any such property to a family trust or company.

However a professional sportsperson may pursue a cause of action in passing off or for breach of section 52 of the Trade Practices Act 1974 if the sportsperson's image or likeness is used in a manner which misleads the public or a significant portion of the public into thinking there is some form of association, licence or endorsement between the sportsperson and the product or services of another trader (Hogan v. Koala Dundee Pty Limited (1988) ATPR 40-902; Talmax Pty Ltd v. Telstra Corporation Ltd [1997] 2 QdR 444; Pacific Dunlop v. Hogan (1989) 23 FCR 553).

The execution of an instrument which authorises action which might otherwise have led to a cause of action in passing off or for a breach of section 52 of the Trade Practices Act creates a 'licence' in the grantee. A licence is a 'permit to do something which without a licence would be unlawful' (Butterworths Australian Legal Dictionary, 1998, 2nd edn. Nygh, P and Butt, P). For this reason, the deed between the trustee and the sportsperson creates a licence in the trustee.

The granting of a licence vests property in the grantee which did not previously exist. In law, 'property' is described as 'every type of right, (that is, a claim recognised by law), interest or thing which is legally capable of ownership and which has a value'; (Butterworths Australian Legal Dictionary, 1998, 2nd edn. Nygh, P and Butt, P).

Therefore the licence which vests in the trustee is an asset within the meaning contemplated by paragraph 29 of TR 2001/7. This means income which accrues from the exploitation of that asset is not personal services income of the professional sportsperson. Examples of income derived by the trustee which are not personal services income therefore include income derived under contracts with manufacturers of sports merchandise for the usage of the sportspersons image and signature on merchandise related to the sportsperson's sport.

Therefore, to the extent the deed purports to grant the trustee rights in relation to the services of the sportsperson, this is not an assignment but rather a contract of services between the trustee and the sportsperson. The income generated by the trust from supply of the sportspersons services is the personal services income of the sportsperson with in the meaning of Part 2-42 of the ITAA 1997.

However, the income the trust derives from the exploitation of the sportsperson's image is not personal services income. This is because the deed vests property in the trustee by way of licence to exploit these items.

Year of income:  Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1997
   Part 2-42
   section 84-5(1)

Case References:
Australian Consolidated Press Ltd v. Ettinghausen
   (unreported, NSWCA, 13 October 1993)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/7

Other References:
Butterworths Australian Legal Dictionary, 1998, 2nd edn. Nygh, P and Butt, P

Keywords
Alienated personal services payments
Alienation of personal services income
Personal services income

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  25 June 2004

ISSN: 1445-2782