1011791878944

Edited version of private ruling

Authorisation Number: 1011791878944

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Ruling

Subject: Trust - Personal Services Income - Licence of personality rights

Question 1

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

Advice/Answers

Yes

Question 2

Where the taxpayer obtains an independent commercial valuation of their image and marketing rights, can this valuation amount be used to determine the value they is paid under a contract arrangement with the sporting organisation, representing the income derived by the trustee, as a result of granting of the licence to the family trust, that which will not be treated as personal services income?

Advice/Answers

Yes

This ruling applies for the following periods

Financial year ended 30 June 2012

Financial year ended 30 June 2013

Financial year ended 30 June 2014

Financial year ended 30 June 2015

Financial year ended 30 June 2016

Financial year ended 30 June 2017

Financial year ended 30 June 2018

The scheme commenced on

1 July 2011

Relevant facts

The taxpayer is a high profile person.

The taxpayer wishes to assign their image and marketing rights to a discretionary family trust using a 'deed of assignment'. This will be used for the purposes of their current contract with the body, any future playing contracts with other organisations, and any other non playing contracts with manufacturers of merchandise, etc.

The taxpayer wishes to obtain a commercial valuation of their image and marketing rights. This valuation would be recalculated as requires, as circumstances change, or when and if their contracted is renegotiated over the course of their career.

The sporting body has agreed in principle that it is commercially sound, given the taxpayer's reputation, to split the payment of their total contract to reflect the following:

    � an amount being a salary payment for the value of their personal services as a player; and

    � an amount being a payment to their discretionary family trust for the commercial value of their image and marketing rights.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 2-42

Income Tax Assessment Act 1997 subsection 84-5(1)

Income Tax Assessment Act 1997 subsection 84-5(4)

Reasons for decision

Question 1

Summary

The sportsperson has vested property to the trust in the form of a non exclusive licence for the use and exploitation of their image. Therefore, income derived from the use of the licence is not considered personal services income and does not fall within the ambit of Part 2-42 of the ITAA 1997.

Detailed reasoning

Personal Services Income

Part 2-42 of the ITAA 1997 applies when an individual has personal services income. Broadly, Part 2-42 ensures that the personal services income is included in the assessable income of the individual, regardless of whether a company, partnership or trust has derived that income. The provisions also limit the deductions to which the individual or entity are entitled.

The definition of personal services income is contained in subsection 84-5(1) of the ITAA 1997 which provides that:

    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 mainly be such a reward if it was your income).

Taxation ruling TR 2001/7 states that the meaning of personal services income is wider than that which might otherwise be the case under the common law, but does not include income that is mainly:

    � from an entity supplying goods or granting a right to use property;

    � generated by assets an entity holds; or

    � generated by the business structure.

The ruling also provides that personal services which are ancillary to the granting of a right to use property or use of assets are not personal services income.

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 fact that income is paid under a contract does not stop the income from being mainly a reward for the personal efforts or skills of an individual (subsection 84-5(4) of the ITAA 1997). The true nature of contractual obligations (i.e. whether the arrangement involves the rendering of personal services or is for the production of a result from the provision of personal services) depends on the facts and circumstances of the particular case, including the commercial substance of the arrangements between the parties. Primarily, the income of the trust derived under its contracts 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.

Under current Australian Law, a sportsperson does not have a right of property in their publicity or personality rights (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 protect the goodwill in their reputation through an extended tort in passing off or for breach of section 52 of the Trade Practices Act 1974. This cause of action is available 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 to the trustee for the non exclusive right to use and exploit their image.

The granting of a licence is proprietary in nature and vests property in the grantee which did not previously exist. In law, 'property' is described as 'every type of right, (including a chose in action), 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 is generated 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.

Question 2

Summary

A commercial valuation may provide for the market value of the income generated by the licence granted to the trustee by the sportsperson.

Detailed reasoning

The definition of personal services income in subsection 84-5(1) of the ITAA 1997 requires an analysis for the ordinary or statutory income of an individual or a personal services entity to work out which amounts are mainly a reward for the rendering or provisions of personal services (Taxation Ruling TR 2001/7).

This is because the assessable income rules in Division 6 operate on particular amounts of income. Therefore there can be apportionment for the payments received as income that is personal services income and income which is not.

A consideration taken into account in determining whether income is from the supply and use of income producing assets include the market value of the supply and use of the asset compared with the market value of the personal services. This is also consistent with the market value approach taken in the employment test in relation to principal work (section 87-25 of the ITAA 1997).

The market value is used to determine whether aspects of income which are derived from the personal services of the individual are income which falls under Part 2-42 of the ITAA 1997. Therefore, it follows that an independent commercial valuation to determine the market value of the image and marketing rights can be used to represent the income derived by the trustee.

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