The sun’s out and the weather’s heating up which means only one thing…. Cricket season!
As a cricket tragic, summer wouldn’t be complete without the steady soundtrack of my trusty AM radio And as I listen to the comforting drawl of Jim Maxwell, I can’t help wondering what would’ve happened if my life had taken a different path? What if I’d become the Australian Cricket Captain rather than an accountant?
As I was growing up, I dreamt of donning a baggy green not a suit and tie! So what’s the difference between me and Steve Smith? Sports scientists and coaches would likely point to a catalogue of differences; age, fitness, psychology, not least talent. Being a tax specialist, I’ll fall back on what I know: Steve Smith, as a sportsman is taxed differently to the average Australian.
The taxation of our top sports stars has always been controversial. Headlines denouncing sports stars for tax fraud or for re-domiciling to more favourable tax jurisdictions such as Bermuda or Switzerland paint the perception that sportspeople somehow have access to unfair advantages or treatment by the Australian Tax Office (ATO).
In reality, however, the tax rules and principles that apply to professional sportspeople are firmly grounded in legislation, case law and interpretations established by the ATO.
So what are the main tax differences between sportspeople like Steve Smith and an average Australian like me?
1. As an accountant, I can continue earning money into my ‘golden years.’
Most Australians have the ability to keep working into their 60s or indeed 70s by choice, and for the majority of white collar workers their earning capacity increases as they get older.
Successful athletes on the other hand, often earn a very large amount of income over a relatively short period. While the career of a professional sportsperson may span a period of 20 years or more, realistically, the period in which he or she earns most of their income is usually less than five years.
With the highest marginal tax rate for individuals in Australia being 49%, tax can often be the biggest expense for a sportsperson in this period.
In recognition of this, the government has developed several tax provisions for ‘special professionals’, a group which includes (among others) sportspeople, entertainers and authors.
2. Sportspeople can spread their tax by ‘averaging’ their income
The fluctuations in a sportsperson’s earnings can have a significant impact on the tax paid each year. As such, sportspeople can average their income over five years. While the averaging calculations are somewhat complex, they most often lead to a lower overall tax burden, minimising the amount of tax that is paid at the top marginal rate.
3. I can’t claim sunscreen as a tax deduction
While I might treat an afternoon at the cricket as a networking opportunity, that doesn’t mean I can claim my sunscreen as a tax deduction. However, Steve Smith can.
A broader range of tax deductions are available to sportspeople as they generally use different tools and services to average Australians in the generation of their income. For many, their physical prowess or skills are directly related to their income earning ability, leading to additional available tax deductions. Some of the more unusual deductions include:
- Player fines and related legal fees for on-field indiscretions
- Travel costs of an accompanying person, such as a parent or a spouse, where that accompanying person undertakes a key role for the sportsperson (e.g. a caddy for a golfer, a coach, or a spokesperson/manager)
- Gym memberships and personal training fees
- Sunglasses and sunscreen
4. Steve Smith earns money around the world; in Australia, India, Pakistan and England…
Like most taxpayers, the majority of my income is generated in Australia. Should I work overseas, the tax treaties Australia has forged with other countries would usually prevent me from paying double tax (tax in the country where the income is generated, and in Australia).
However, in determining were income should be taxed, most of Australia’s tax treaties come with very stringent criteria such as length of time spent in-country and whether a deduction has been claimed in-country by the taxpayer’s employer or contractor.
It may be difficult, in some circumstances, to interpret these requirements for sportspeople, particularly where they are flying into a location for just one match or tournament. As such, special provisions for sportspeople have been inserted into most of Australia’s tax treaties to ensure clarity with respect to these types of circumstances.
As a result of these special provisions, most Australian sportspeople can expect to have their offshore sports income subject to withholding taxes in the countries they are playing, but they should be entitled to a reduction of their Australian taxes as a result.
It can also be difficult for sportspeople (or their advisors) to confirm whether tax has been paid abroad which makes meeting the strict timelines for filing a tax return challenging.
5. No one will pay me to wear brand-named clothing or aftershave
While big name sports stars can earn income from a range of different activities; often the most lucrative are those that take place outside the sporting arena.
Payments received for physical activities carried out, such as match payments, prize money, commentary fees and interview fees, will usually be captured under the general tax rules applying to personal exertion income and will be directly assessable to the sportsperson.
Sponsorship payments and endorsements, however, are generally accepted to be income relating to the exploitation of an asset or assets. In this case the asset is a right or rights associated with a sportsperson’s image or reputation.
Payments of this nature may be dealt with differently for tax purposes which presents tax planning opportunities. For example, a right to use the sportsperson’s image may be granted to a related discretionary trust such that the resultant income is assessed to the trust and taxed when paid out to its beneficiaries (most often family members).
While the tax treatment of sportspeople differs to everyday Australians so too does the manner in which they derive their income. While the perception that sportspeople are somehow more privileged in this area still prevails in some circles, the reality is that the tax legislation relating to their income is equally as stringent.
So when all’s said, what’s the biggest difference between me and Steve Smith? I get to sit back and have an extra scone and cream during morning tea, safe in in the knowledge that I don’t have to face Dale Steyn on a bouncy WACA pitch.
On reflection, I’m pretty happy being an accountant.