Claiming agents Commission as an expense

Recently our Association was sent this following article by James Johnson, a lawyer who asked if we would be interested in publishing the article on our website.

The article discusses the possibility that some agent commissions paid by entertainers are not tax deductible. This certainly raised some interest and the article is worth reading for entertainers and agents.

Spriggs v Riddell – The Application to the Entertainment Inudustry

A landmark case has provided that professional athletes who pay fees to agents for negotiating their contracts can claim these fees as tax deductions. Given that the entertainment and sports are so closely related, it is without doubt that the principles provided in this case extend and are applicable to the entertainment industry.

Spriggs is a former professional Australia Football League (“AFL”) player. Riddell is a former professional National Rugby League (“NRL”) player. Both players had similar contracts with their respective agents.

Importantly, the contracts provided that a percentage of both their payment received from playing and sponsors was to be paid to their respective agents. Spriggs in 2004, and Riddell in 2005, received invoices from their respective agents for negotiating their contracts. Upon receiving these invoices, both players claimed these expenses as tax deductible.

The Commissioner of Taxation (“FCT”) prohibited the players from claiming fees paid to agents in respect of negotiating contracts. The players appealed this decision to the High Court of Australia (“the Court”), claiming that the fees were tax deductible.

The Court considered the following sections of the Income Tax Assessment Act 1997 (Cth) (“ITAA”):

Section 8-1

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature.

The issue before the Court was whether the fees paid to agents in respect of negotiating contracts were incurred in the course of earning income. In other words, were the fees paid for ‘getting work’ or were they paid for ‘doing work’?

The FCT argued that the players’ expenses were not incurred in the course of earning their income, because they were incurred in getting new playing contracts. The FCT raised a case of similar facts, Federal Commissioner of Taxation v Maddalena (“Maddalena”).

Maddalena was a semi-professional rugby league player who attempted to claim travel and legal expenses associated with obtaining a new playing contract. The FCT claimed that these expenses were not deductible.

In this case, the court held that Maddalena was not able to deduct these expenses, because they were not incurred in producing income or conducting a business, therefore, they were of capital nature which is not deductible under the s.8-1(2)(a) of the ITAA.

Spriggs and Riddell argued that Maddalena should be distinguished from their case in that Maddalena’s fees were not incurred in the course of earning income, because Maddalena was a semi-professional athlete and therefore, was not conducting himself in a business-like manner. Spriggs and Riddell further argued that they were professional athletes competing in professional leagues.

The HCA agreed with Spriggs and Riddell’s arguments that Maddalena should not be used as a precedent due to the fact that they were engaged in modern day professional sport, which is a business, as opposed to 1970 semi-professional sport, which was not a business for the purposes of the ITAA.

The HCA then proceeded to assess whether the fees paid to agents in respect of negotiating contracts were incurred in the course of earning income. The HCA unanimously held that the fees were incurred in the course of earning income, because each of the players had been engaged in a business for several years, by playing professional sport,before the fees were incurred.

This means that fees paid to agents by professional athletes for negotiating contracts are tax deductible if the expense is incurred in the course of earning income. In this case, Spriggs and Riddell incurred fees in the course of earning income, because they had already played for several years in a professional sport league.

Similar to athletes, entertainers who conduct themselves in a business-like manner will benefit from this case as they will be able to claim as tax deductible fees paid to agents for negotiating contracts.

There are several issues that this case leaves open, including:

– 2 -Spriggs v Riddell (AEAA).doc

1. It seems that a first-year professional athlete, or an entertainer not already engaged in the entertainment industry professionally, could not claim as tax deductible fees incurred for agents negotiating their playing contracts. This is because neither the athlete nor the entertainer would have been previously engaged in their respective industry professionally, therefore, the expense would not be considered to have been incurred in the course of earning income.

2. Agents are generally limited in the amount that they can charge for their services. Generally, the amount chargeable must be ‘reasonable’. A reasonable amount in pro-soccer, for example, is no more than 10%. Since the scope of what agent fees are claimable has been extended in this case, will this increase what quantifies a reasonable amount? In other words, can agents now charge more?

Authored by James Johnson, Lawyer

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