Edited version of private advice

Authorisation Number: 1051701898872

Date of advice: 12 October 2020

Ruling

Subject: PAYG withholding

Question

Are you required to withhold an amount from payments made to A grade players under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

1 August 2020

Relevant facts and circumstances

You operate a local rugby league club fielding several rugby league teams in the local football competition.

Your senior rugby league program includes an A grade team and a reserve grade team.

Players regularly transition between teams and you are not obligated to select any specific player to play in an A grade match. However, some players are regularly selected and play most games in A grade.

The A grade season typically has 14 rounds and three final runs, should the team make it to the grand final.

You and each A grade player will enter into a verbal agreement with the following terms:

You agree to -

§  Pay the A grade player a fixed amount for each game (regardless of performance, outcome and time spent on the field) that they are selected (and play) for you at the 'A grade' level (herein referred to as a 'matchday payment');

§  Provide football uniforms, a limited amount of strapping and first aid equipment.

The A grade player agrees to -

§  Only play for you during the season (but there are no consequences for a player if they choose to leave and play for another club);

§  Abide by the National Rugby League (NRL) code of conduct;

§  Supply their own football boots, mouthguards and other personal safety equipment;

§  Incur their own expenses for travel to and from matchday games;

§  Generally be available to train with the team two nights a week.

The matchday payment paid to a player will be based on experience and skill and range between a minimum of $200 and a maximum of $400 per match.

Players are generally paid monthly based on being selected in A grade and being available to play.

In order to make these matchday payments, you rely on the sale of tickets on match days and money raised from raffles. Where insufficient monies are raised, A grade players will not be paid matchday payments.

A grade players do not get paid:

§  for attending pre-season training or training sessions during the season;

§  for attending club or team functions; or

§  if they do not play, either due to injury sustained during a game or because they are not available.

No formal recruitment process is undertaken by you and there are no special terms or payments given to players based on a recruitment process, A grade or otherwise.

There are no sign-up bonuses or other forms of incentives provided to any players, A grade or otherwise.

You, as required by the State governing body for rugby league ('State governing body'), pay into a compulsory insurance scheme for all teams that you field, A grade or otherwise. This is regardless of whether players in these teams are paid a matchday payment. The insurance is not connected with any agreement between you and the players, but an obligation imposed on you by the State governing body.

The players in each team, including the A grade players:

§  are either employed, seeking employment or studying outside of their rugby league pursuits;

§  do not have contracts to play rugby league for any professional rugby league team; and

§  do not rely on matchday payments to pay their living expenses or as their primary source of income.

Players that do not make the A grade team (and therefore do not receive a matchday payment) and players that are on the A grade team have the same relationship with you. For example, a reserve grade player:

§  attends the same training sessions and Club functions as the A grade player;

§  attends reserve grade matches;

§  is either employed, seeking employment or studying outside of their rugby league pursuits;

§  purchases their own boots and safety equipment

§  incurs their own expenses to travel to training and matchday

§  is also supplied with uniforms and limited strapping.

In substance, the only difference between a reserve grade player and an A grade player is the matchday payment.

Relevant legislative provisions

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision

Division 12 of the TAA outlines the situations where a paying entity is obliged to withhold part of an amount paid to another entity.

Section 12-35 of the TAA requires an entity to withhold an amount from a payment it makes to an employee. Section 12-35 states:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

In order for a payment to come within section 12-35 of the TAA, the payment must be made to an individual 'as an employee'. The recipient of the payment does not need to be an employee of the paying entity but be in receipt of the payment in its capacity as an employee.

This requires a finding that the recipient is an employee (of someone) and that the payment is being made to them as part of that employment.

In order to establish whether there is an employment relationship, first a legal relationship, or binding contract between the parties must be identified. Then, and only once that contract or legal relationship is identified, can it be examined to identify whether it is an employment relationship (or something else). As described in Taxation Ruling TR 2013/1 Income tax: the identification of 'employer' for the purposes of the short-term visit exception under the Income from Employment Article, or its equivalent, of Australia's tax treaties, at paragraphs 72 and 73:

72. An employment relationship cannot exist in the absence of a contract, whether that contract is express or implied... The existence of such a contractual relationship is determined by applying the ordinary principles of contract law...

73. As was stated by the Industrial Relations Commission of New South Wales in Swift Placements, the initial requirement is the creation of a legal relationship between the parties concerned for the performance of work. It is only then that there is a need to ascertain whether the relationship so created is one of employment (under a contract of service) or of some other kind (such as, principal - independent contractor or principal - agent).

As per the decision in the Federal Commissioner of Taxation v Maddalena71 ATC 4161 (Maddalena), there is no doubt, in certain circumstances,

that the occupation of a professional footballer vis-a- vis his club is an employee ...

The agreement made by the taxpayer with Newtown- which, is no doubt, typical of a professional footballer's agreement- is a contract of service whereby the player agrees to play football for the club and to do so "well and faithfully and to the best of his ability and skill." His obligation is to play for the club ''in any team and in any grade as to when and where he may be from time to time called on by the said club so to do''. He submits himself to carry out ''all the training and other instructions of the club through its responsible officials''. He also agrees ''to abide by and observe the Constitution, Rules and By-Laws of the Club in their entirety and to observe all rules directions or additional rules (if any) which may from time to time be made by the Club''.

It is unnecessary to consider afresh the various indicia that are to be looked for in determining whether a particular agreement does or does not create the relationship of master and servant, for here everything in the agreement points to the existence of that relationship, and I have found nothing of countervailing weight." (per Menzies J, at 4162)

This view was also reflected in the High Court decision in Buckley v Tutty (1971) 125 CLR 353 (Buckley v Tutty) and in Kelly v Federal Commissioner of Taxation 85 ATC 4283 (Kelly).

However, a contrast must be drawn between professional footballers and amateur footballers (although this classification does not necessarily have a direct bearing on whether amounts paid to the footballer are ordinary income). Each of the arrangements considered by the courts in Maddalena, Buckley v Tutty and Kelly all refer to arrangements of professional sportspeople.

In respect of amateur sporting arrangements, it is less likely that, firstly, there is a contract and secondly, that any agreement in place (if it is in place) is of or for services in return for payment.

In order to establish whether there is a contract in place between the parties, three aspects must be satisfied - there must be an agreement (which can be express or implied), there must be consideration that passes between the parties and thirdly, there must be an intention to create legal relations.[1]

In an amateur environment, an arrangement between the parties is more likely to be analogous to those arrangements that arise in the context of voluntary associations. The participation, for example, in voluntary associations was considered by the High Court in Cameron v Hogan (1934) 51 CLR 35:

They are for the most part bodies of persons who have combined to further some common end or interest which is social, sporting,... religious... or humanitarian in character, or otherwise stands apart from private gain and material advantage. Such associations are established upon a consensual basis, but, unless there were some clear positive indication that the members contemplated the creation of legal relations inter se, the rules adopted for their governance would not be treated as amounting to an enforceable contract.(at 370-371)[emphasis added]

Further, the provision of a particular benefit to a participant in the course of that activity is not evidence of consideration passing between the parties in an enforceable contract. As was the case in Teen Ranch Pty Ltd v Brown (1995) 87 IR 308 (Teen Ranch v Brown), the provision of board/lodging to the participant was not evidence of an employment relationship. The Court concluded that as there was an absence to create legal relations, the provision of the benefit:

was not in any sense the consideration for a bargain under which the volunteer agreed to provide his services. He did not work for the Ranch in order to earn these benefits.... In my opinion the evidence makes it very clear that the volunteer's work was not done in consideration of or in return for or in order to earn those benefits. The one was never intended to be, and was never seen to be, the price or quid pro quo for the other.

Application of these principles to the current case

To establish whether there is an employment relationship between you and the A grade players, first a legal relationship, or binding contract must be identified. In order to establish whether there is a binding contract in place between you and the A grade players, we have considered whether there was an agreement between you and those players, whether consideration passed, and finally, whether there was an intention to create legal relations.

In relation to the first aspect, we consider that there is a loose and informal agreement or arrangement between you and the A grade players. Upon further examination of the arrangement entered into between you and the A grade players, we observed that:

§  An A grade player is not contractually bound to play matches, to train nor can they be compelled to attend either games, training or Club functions. The A grade player is not bound to play matches to a certain standard (although a lower standard of play may mean they might not be selected for the 'A grade' team in subsequent weeks). The informal arrangement in place between you and the A grade player does not evidence an agreement whereby the player agrees to provide any particular service, or perform any 'work' for you at all;[2]

§  An A grade player will be paid the matchday payment regardless of performance or time spent on the field;

§  An A grade player will not be paid the matchday payment where you do not have the revenue takings to fund the payment;

§  In the absence of the matchday payment, an A grade player would still train and play matches, and this is the case for all of the senior players who are not selected for the A grade team (that is, the 'reserve grade players'). Each of the reserve grade players are equally expected to attend training and matches and are not in receipt of the matchday payments. That is, there is no differential in the "service" provided to you by an A grade player and a reserve grade player. Indeed, we consider there is fundamentally no difference in the relationship between you and an A grade player and between you and a reserve grade player other than the matchday payment;

§  The matchday payment is small in comparison to the time involved in travelling to and attending matches and training;[3]

§  There is no evidence that an A grade player could enforce payment and sue you for the matchday payment in the event of non-payment. The agreement between you and the A grade player does not stipulate when the matchday payment is to be made and, as noted above, if you do not generate enough revenue from gate takings and fundraising, the A grade player does not receive the matchday payment;

§  Any expectations, duties or standards of behaviour seemingly imposed by the arrangement exist regardless of the matchday payment. Players' Codes of Conduct and expectations of behaviour apply to all players registered to play Rugby.[4] These same Code of Conduct and relevant policies come from overarching rules and regulation of the game (and a need to ensure the safety of players and not bring the game into disrepute). These rules and regulations apply regardless of the receipt of a matchday payment and are not imposed on any player via an agreement with you. Instead, rules and regulations game or league wide are a condition of play more generally.

§  Although the informal agreement between the parties is that the A grade player will not leave and play for a rival during the season, there is no implication for the player if they were to choose to do so, and they may, in fact, choose to do so.

Consequently, we do not consider that the matchday payments paid by you to the A grade player are for consideration for any services provided by them. Consistent with the conclusion reached by the Court in Teen Ranch v Brown, the A grade players are not playing the sport in order to earn the matchday payments. These matchday payments are not intended nor seen to be the price or quid pro quo for playing an 'A grade' match. Whilst the A grade match may have been the event for the payment, we consider that the matchday payment is not consideration for the services of the player provided during that match.

Finally, as to whether there is an intention to create legal relations, we consider the arrangement between you and the A grade players to be more analogous to arrangements arising in the context of voluntary associations. We consider that any arrangements you enter into with an A grade player reflects the voluntary nature of the pursuit of the sport of Rugby, reflecting a common end or interest, that is a sporting pursuit. As such, in the current arrangement, we consider that there is no intent to create a legal relationship between you and the players. Further, we consider that even if there was such an intent, it falls short of a contract of or for services.

On this basis, we conclude that there is both a lack of consideration and a lack of an intention to create a binding legal relationship between you and the A grade players. As a result, the arrangement or understanding between you and the A grade players is so informal so as conclude that there is no contract either of or for services. That is, there is no enforceable contract that arises between you and the A grade players.[5]

There is no need to further consider the nature and character of that informal agreement. As there is no legal relationship between you and the A grade players, there can be no employment relationship. Therefore, matchday payments from you to the A grade player cannot be paid to the player 'as an employee' as required by section 12-35 of the TAA. Therefore, you are not required to withhold an amount from payments made to A grade players under section 12-35 of the TAA.

[1] LexisNexis, Halsbury's Laws of Australia, 110 Contract, 'Formation of Contract' [110-200] (at 7 October 2020)

[2] As per the Court in Dietrich v Dare (1980) 30 ALR 407 at 410

[3] LexisNexis, Halsbury's Laws of Australia, 165 Employment, 'Formation ' [165-135] (at 7 October 2020)..

[4] National Rugby League 2019, The NRL Member Protection Policy and the NRL Code of Conduct available at https://www.playrugbyleague.com/policies/

[5] Dietrich v Dare (1980) 30 ALR 407