Decision impact statement
Spriggs and Anor v Commissioner of Taxation
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Court citation:
[2009] HCA 22
2009 ATC 20-109
72 ATR 148
(2009) 256 ALR 596
(2009) 239 CLR 1
Venue: High Court
Venue Reference No: M92 and M93 of 2008
Judge Name: French CJ, Gummow, Heydon, Crennan, Keifel and Bell JJ
Judgment date: 18 June 2009
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
Professional footballers
Deductibility of management fees
Definition of 'business'
Business including employment
Précis
Outlines the Tax Office response to these cases which concerned whether fees paid to managers to negotiate employment contracts between professional football players, football clubs, and other entities, are deductible under section 8-1 of the ITAA 97
Decision Outcome:
Taxpayers' appeals allowed
Brief summary of facts
Mr Spriggs and Mr Riddell (the taxpayers) are professional sportsmen. During the 2005 income year, Spriggs was under a contract to play in the Australian Football League ("AFL") competition and Riddell was under a contract to play in the National Rugby League ("NRL") competition.
The taxpayers claimed deductions under section 8-1 of the ITAA 1997 for fees paid to their managers in the 2005 income year under their respective player management agreements to negotiate new playing contracts.
Spriggs
Spriggs played in the AFL competition for Geelong Football Club for the 2000-2004 playing seasons. During that time, he contracted with a player manager to represent him in negotiating his AFL standard playing contract, endorsements, merchandising, appearances and media contracts. Under this agreement, the manager was entitled to 3% of Spriggs' total gross earnings for the term of any successfully negotiated AFL standard playing contract and 20% of Spriggs' total gross earnings in relation to marketing and media activities.
Spriggs' playing contract with Geelong terminated on 31 October 2004 and he was subsequently de-listed. Spriggs was then selected by the Sydney Football Club in the 2004 AFL National Draft and the manager successfully negotiated a playing contract for Spriggs with Sydney for the 2005 and 2006 playing seasons.
In December 2004, Spriggs paid fees of $2,310 under his management agreement. The only income Spriggs earned from his non-playing activities during the 2005 income year was $641 from the AFL for licensing fees from Select Player Cards for the use of his playing image.
Riddell
Riddell established his NRL professional playing career in 1998 and played for the St George Illawarra Rugby League Football Club for the 2001-2004 playing seasons. In 2001 Riddell contracted with a player manager to, among other things, advise Riddell in respect of his sporting career; negotiate playing contracts on his behalf; and negotiate product endorsements and sponsorships. Under this agreement, the manager was entitled to 7% of all contract monies paid to Riddell (excluding match payments); and 20% of all gross monies earned by Riddell for sponsorship, media contracts, endorsements, advertising and promotional work.
Prior to the end of the 2004 playing season with St George, the manager negotiated the terms of a new playing contract for Riddell with the Parramatta Club for the 2005, 2006 and 2007 playing seasons.
In November 2004, Riddell paid fees of $21,175 under his management agreement. During the 2005 income year, Riddell also earned $11,394 from sponsorships and promotional activities negotiated by his manager.
Appeals
At first instance, the Federal Court (Gordon J) (2007) ATR 740, 757 held that the fees paid by the taxpayers were deductible, as being incurred in carrying on a business of turning their football talents to account for money. Her Honour also held that the taxpayers' circumstances were factually different and distinguishable from those in FC of T v Maddalena.
The Commissioner appealed to the Full Federal Court. The Full Federal Court (Goldberg, Bennett and Edmonds JJ) (2008) 170 FCR 135 allowed the Commissioner's appeals and unanimously held that the fees were not 'working expenses' that were relevant and incidental to the taxpayers' employment income as professional footballers. The Full Court also held that the fees were not incurred by the taxpayers in the course of carrying on a business of playing football under their employment contracts, and that Maddalena was not distinguishable.
The taxpayers applied for special leave to appeal to the High Court and leave was granted.
Issues decided by the court
The High Court unanimously held in both cases that the fees were deductible under paragraph 8-1(1)(a) of the ITAA 97, being incurred by the taxpayers in the course of gaining or producing assessable income from carrying on a business of commercially exploiting their sporting prowess and associated celebrity (paragraph 73).
The Court found that each of the playing contracts was not solely a contract of employment between the taxpayers and their clubs, but was a tripartite contract involving the AFL/NRL and their player rules, which allowed for the taxpayers to receive income from non-playing activities (paragraphs 41, 43 and 49).
Accordingly, the Court rejected the Commissioner's arguments that the fees paid for the negotiation of the playing contracts were incurred only to obtain new employment contracts and had no connection with the course of the taxpayers earning income from their non-playing businesses (paragraphs 63-4). In conducting both 'a wide survey and an exact scrutiny of the taxpayers' activities', the Court found that the taxpayers were 'engaged in the business of commercially exploiting their sporting prowess and associated celebrity'. The conduct of that business involved a clear synergy between two related income producing activities, and was anticipated by the framework provided by the playing contracts and related documents (paragraphs 60, 69 and 70).
The Court also found that neither the decision in Maddalena, nor the definition of "business" in section 995-1 of the ITAA 97 required the conclusion that employment activities could not form part of the carrying on of a business for the purposes of paragraph 8-1(1)(a), though the Court accepted that a person, as in Maddalena, is not conducting a business merely because the person earns income under an employment contract (paragraphs 65 to 68).
The Court also unanimously held that the fees were deductible under paragraph 8-1(1)(b), being necessarily incurred by the taxpayers in carrying on their businesses (paragraph 77).
Finally, the Court found that the fees were not capital expenses under paragraph 8-1(2)(a), but, rather, were recurrent expenses incurred by the taxpayers in the course of carrying on their businesses in respect of entering into a number of playing contracts, which were revenue assets (paragraphs 82 to 84).
Tax Office view of Decision
Outgoing incurred in gaining or producing assessable income
The High Court has recognised that an individual can carry on a business, for the purposes of both paragraph 8-1(1)(a) and paragraph 8-1(1)(b), that includes activities undertaken under an employment contract as an employee. As the contractual framework under which the taxpayers carried on their businesses as football players applied to all players operating in the AFL and NRL competitions, the Tax Office accepts that the principles set out by the High Court have equal application to those other players.
However, the Court has also recognised that the facts in these cases are quite different to the facts in Maddalena, where the Court had earlier recognised that the taxpayer's employment as a footballer was not part of any business undertaken by the taxpayer.
Whether, in relation to any other sporting, artistic or professional activity, an individual would be found to be carrying on a business that includes employment activities, or would be found to be pursuing two or more activities of 'unrelated income derivation', will depend on 'a wide survey and an exact scrutiny' of the individual's activities. The Court has indicated that what is of likely relevance in coming to that conclusion is the contractual framework under which the individual operates his or her income earning activities, and the synergy, or connection, between the various activities.
Administrative Treatment
The Tax Office invites submissions on whether the Court's finding, that an individual can carry on a business that includes activities undertaken as an employee, has any wider implications under the taxation laws.
The Tax Office will consider whether any further public advice or guidance is necessary, having regard to any comments received.
Implications on current Public Rulings & Determinations
The Tax Office will amend Taxation Ruling TR 2000/5 to clarify that it does not apply to employees whose employment activities form part of the carrying on of a business.
Implications on Law Administration Practice Statements
None
Legislative References:
Income Tax Assessment Act 1997
6-5
8-1
8-1(1)(a)
8-1(1)(b)
8-1(2)(a)
995-1
Case References:
FCT v Maddalena
(1971) 71 ATC 4161
45 ALJR 426
2 ATR 541
Ronpibon Tin NL v FCT
[1949] HCA 15
78 CLR 47
FCT v Payne
2001 ATC 4027
202 CLR 93
46 ATR 228
FCT v Day
[2008] HCA 53
2008 ATC 20-064
70 ATR 14
(2008) 236 CLR 163
FCT v Stone
222 CLR 289
2005 ATC 4234
59 ATR 50
Buckley v Tutty
125 CLR 353
46 ALJR 23
[1972] ALR 370
Commissioner of Taxes (Vic) v Phillips
[1936] HCA 11
[1936] ALR 205
55 CLR 144
Sun Newspapers Ltd v FCT
[1938] HCA 73
[1938] ALR 498
61 CLR 337