Football players and the tax man have a long history of taking to the
field of play which is hardly surprising when they form by far the
greatest number of Australia’s ranks of professional athletes. Their
latest squabble might yet see them duke it out in the Supreme Court,
but if that happens you could see an All-Australian bench lining up to
win the day for the athletes.

Currently a cross section of AFL and NRL players are being
audited and queried by the ATO over claims for business expenses
relating to management fees. Ultimately any firm resolution by the tax
office will impact on claims that would affect all professional
athletes who retain a sports agent or management, and likely lead to a
Supreme Court test case. While these player audits are more technical
in nature, the ATO did have bigger fish to fry last year with
revelations concerning systematic salary cap cheating by Carlton
Football Club and secret payments to players. Given past history we
can’t help wondering what progress the ATO has made since launching its
original tax fraud investigations early last year?

The tax office vs the sporting industry: Part 1

The
ATO is presently undertaking football player tax audits and questioning
why management fees paid as a percentage of negotiated player contracts
by AFL and NRL agents should qualify as business deductions?

While
it doesn’t directly impact on agents as it relates only to claims made
by players, no agent for any reason like any other profession wants
their client caught up in a taxation bun fight. But when it comes to a
player taxation audit who knows on such fishing expeditions what else
the ATO might identify as matters of interest to them?

By now
drawing a line through the eligibility of management fees as a business
expense, the ATO is putting under examination the principle by which
management fees are levied on players for the negotiation of their
playing contracts which is typically charged out to the player by his
agent at 6% in the NRL and 3% in AFL. It seems a significant part of
the problem for the players in seeking to offset these fees as a tax
deduction, is the ATO can’t seem to agree on a firm policy among its
own before now? The sports industry claims that over the years and
despite repeated requests, the ATO has never offered any kind of
definitive ruling on what is, or isn’t a legitimate deduction for
professional management fees paid by sports stars?

Different
accountants, depending on which Taxation official they speak to in
which state, are being given differing opinions going back as long as
seven or eight years ago. Even the player unions’ own specialist tax
advisors seem remarkably ill-advised as to obtaining a conclusive, let
alone favorable ATO ruling which is now causing a lot of angst with
agents and players. The AFL Players’ Association is thought to pay
somewhere between $50,000 and $80,000 a year for expert tax and
accountancy advice yet it’s equally mystified as to the ATO position.

It
would now appear to be an absolute minefield for players innocently
caught in any ATO retrospective or future ruling because of conflicting
advice as to whether the ATO allows any management fee deduction at
all, or whether it is decided on fees relating to the negotiation of a
contract extension or rollover of an existing club deal, as opposed to
an entirely new contract.

Now if the ATO moves in the direction
I understand it favors certainly with AFL players, it is looking to
argue that if players are un-contracted after October 31, (AFL contract
year runs from November 1-October 31), then when they sign a “new”
contract either with their existing club or move to another club, this
cannot be claimed as a business expense. On the other hand if a
player’s manager renegotiates during the term of his current contract
in what amounts to a contract extension prior to October 31, or what
agents themselves regard as a roll-over contract, then the ATO would
not consider it a new contact. Therefore at least a significant portion
of any management fee payable on that extension could be claimed.

Yet
I am told some players have been claiming 100% of their management fee
as an expense arising from any player contract negotiation whether new
or rolled over. As things now stand this appears to be the number one
target of the ATO, but even putting to one side the question of what
constitutes a new contract or not, given the ATO might – and has
previously ruled in favour of players claiming for a significant
portion of a renewed contract, what is deemed “significant”? But this
still leaves unanswered the biggest question of all. Should players be
able to claim all management fees paid as professional business
expenses in the negotiation of all player contracts regardless of when
and what their status is – irrespective of being “extended”, “rolled
over” or just plan “new”?

Why a contract extension is a tax expense but a new contract isn’t?

It’s
nonsense to argue that because a player may not technically come out of
contract before the expiration of the AFL’s October 31 deadline before
he agrees a new deal, that as far as the club and management is
concerned it’s an extension rather than a new deal? This is surely
splitting contractual hairs? Essentially the player more often than not
remaining at a club is receiving improved salary and an upgrade in
special terms and conditions that bring him additional benefits. In
most industries this employment package would be regarded as a new
contract, with the previous agreement redundant. But if you follow the
ATO logic, if the player signed exactly the same deal beyond the
October 31 deadline, yes it is a new deal. Yet by signing before
October 31, he has until now been able to claim most of the management
fee he owes on his tax, but post end of October he can’t. You can argue
it is surely only deemed a new contract by virtue of it falling on one
side of the calendar or the other? Yet fees associated with one can be
claimed, but not the other?

Currently in the AFL more often than
not, most players’ contracts are extended or renegotiated before the
end of October. It’s not only to do with implications of draft or
trading rules which would make his current club nervous, but from where
the club and management sit, players overwhelmingly want to stay put.
But there are perfectly good reasons why contracts can and do lapse
whether the result of management (more likely), than the club. It may
be the player and his agents are keen test the waters in the trade
market with several clubs keen for his signature. Yet he could still
remain with his old club. But it seems under the current ATO scenario,
tax implications would act as an additional restriction on future
employment. It could be argued this disincentive could actually be seen
as a restraint of trade for players to operate in a “free” workplace –
albeit one already restricted by league regulations? They would in
effect be financially penalised for wanting to consider a possible
change of employment which other workers are not subject to?

So
all things considered with regards to the NRL and AFL player market, I
have trouble agreeing as to why professional fees paid to agents or
management to negotiate any employment contract with any club (new or
rolled over) that complies with the existing guidelines of either
league, isn’t a legitimate business expense? I can even argue why the
ATO “new deal” in fact means an agent would have to do considerably
more work while also incurring additional expense and travel, if say he
had a player moving from Melbourne to Perth, or Brisbane to Sydney? But
the fees payable on this new deal for the player cannot be claimed. Yet
had the AFL player remained in Melbourne by extending his current
contract before the end of October, he could claim expenses on his tax
for a lot less effort expended on his behalf, and certainly less
expense to his management who get no tax benefit at all!

Taxing times ahead for professional sportsmen and clubs: Part 2

If
and when the ATO produces a final ruling as to the eligibility or
otherwise of football players being able to make any claim for
management fees paid on player contracts as a business expense, it is
more than likely to be the thin edge of the tax wedge! Because of no
conclusive ruling, some players have been claiming up to 100%
deductions for payment of contract management fees while others claim
nothing. Now with audits on the go and claims being disallowed along
with other work place related expenses by players, the ATO is being
challenged by player advisors. So if the ATO is to have a win on this
one, it’s not only NRL and AFL players who will be affected?

By
any blanket rejection of player contract management fees as a business
expense, it would obviously be applied by the ATO across the total
sports industry. But with opposition mounting against the prospect of
the ATO trying to enforce such a ruling, players and their financial
advisors and management are looking to their unions to step up to the
plate and negotiate at least some kind of compromise. Without that some
elements in the industry are ready to push the ATO all the way to a
Supreme Court test case.

With regard to the way the sports
industry currently operates, the vast majority of AFL and NRL players
retain agent’s or management who aside from providing all manner of
services and expertise, most critically negotiate player club
contracts. Instead of players being billed for time by the hour or
specific fees for all manner of services, sports agents simplify the
process both here and overseas by operating on the principle of being
paid a commission on player contracts.

So what the agent
has to consider first in retaining any athlete as a client, is whether
they are playing a professional team sport where the club contract is
their principal employment (football club), or an individual where no
one deal might form the bulk of their income including endorsement
deals, or even media work? But ordinarily commission fees for non core
playing contracts are more likely to be much more substantial…in a
range usually from 10% cent up to 20%. Most football players under
management in Australia earn far and away the bulk of their income from
their club contract. It might be a case of only 10% of an agent’s
player clients get to earn much income beyond their contracted salary.

As
such whether it is 3% (AFL) or 6% (NRL) of a player’s contract, that’s
the sole determinant as to what he would usually pay his management as
an overall professional fee regardless of time and commitment, although
this still varies based on the individual needs of players. Some are
low maintenance, others just the opposite!

Why is the NRL’s MR 6% supposedly twice as valuable as the AFL’s MR 3%?

They’re not!

Today
with football codes professionally regulated with players unions and
the like, management in both codes is delivered in most instances by
responsible people who are dedicated to the well-being of their player
clients. But the bar to entry in AFL player management is set much
higher through its AFLPA accreditation, than with the NRL. So why there
is a 100% fee difference between virtually identical services provided
by management in both codes is something that escapes the top AFL
agents. But the reality is that competition is so great with far too
many managers hanging out their shingle where some may only have one
client, that player’s just won’t cop the idea of a 100% fee hike for
NRL parity no matter how positive they feel about their manager?

Most
AFL players including even the lowest paid not only expect a fair bit
for their 3%, but soon acquire a strong dislike of the tax man as the
average pay across the board is probably in the vicinity of $140,000,
and see a nice big chunk of that going to the Government, become very
focused on tax minimization. With other possible income on top of their
player salary, it’s not hard to see why players generally would be
responsive to any suggestion that professional fees paid to their
management on player contracts, is an allowable tax deduction. Which is
where those now looking to claim their full whack back are keen to take
on the ATO, particularly when they might see little difference in
paying fees to their accountant as an allowable business expense, but
somehow the manager isn’t?

But professional athletes
don’t just attract the attention of the ATO because they develop a
well-honed dislike for paying tax. Some sports in Australia operate
more responsibly than others but it’s always the high profile sports
like football and cricket that will attract the most attention. The ATO
could also argue “follow the money” when it comes to major sport. So
for years the ATO has threatened to audit an entire sport, and teams
sports offer the best prospects where over-ambitious or greedy clubs
with driven agendas for whatever reason, have the potential to cut
corners…and their tax bill!

Melbourne Football Club found
itself in huge trouble with the ATO after club president Joe Gutnick
blew the whistle on his club’s cap cheating to the AFL before the start
of the 1999 season. Up to seven Melbourne players including former
captain and now media identity Garry Lyon were implicated in irregular
player payments outside the cap. The club ended up paying a $400,000
ATO fine after more than $1 million in total player payment breaches
were uncovered between 1994 and 1998, while the ATO pursued a number of
players including Lyon, who has since settled the matter. However, that
didn’t spare him from public humiliation in May, 2003, when a combined
Australian Federal Police and ATO party launched an early morning raid
on his house in connection with the earlier breaches.

But
when it comes to an ATO public can of worms, Carlton as serial cap
cheats are the champions with illegal payments to players placing the
club in so much turmoil that it ultimately saw John Elliott dumped as
club president in 2002. In December 2002, the ATO revealed it was
investigating possible tax breaches after the AFL had fined the club
$930,000 for its latest cap cheating, which also attracted the
attention of corporate watchdog, the Australian Securities and
Investments Commission. While ASIC was to weigh up breach of accounting
standards or the Corporations Law, the ATO would check out failure to
pay fringe benefits and other taxes. The club would also be asked to
respond to whether any players understated income from either match
payments or other sources, and under-paid tax.

But the ATO
was already previously investigating under the table payments made by
one-time CEO Ian Collins to players in the early 90’s, assisted it
seems back then by another Carlton employee James Sutherland, now
Cricket Australia CEO. Among matters under ATO investigation was one
player being paid a total of $70,000 outside the cap in a sham deal to
a private company, with Collins also alleged to have instigated in a
similar fashion, payments of some $150,000 spread over three years to
former Blues star and two-time Brownlow Medalist, Greg Williams.

After
unsuccessfully trying to suppress the media from revealing his battle
with the ATO, Williams claimed that he was in an ongoing dispute with
the ATO involving the payments made to him by Carlton between 1993 and
1995. However, he claimed the payments were made outside his salary and
regarded them as fringe benefits at the time and believed Carlton
should have paid the tax rather than himself?

Pardon me sir – I’ve got the Optus Oval cap Blues!

Remarkably
Ian Collins having helped hatch the sham deals before leaving it to
others to carry on the cap deception, subsequently took up a senior
appointment with the AFL in 1993. Then these very same deals were
subsequently revealed to the AFL during an amnesty offered to clubs for
salary cap breaches, following an amnesty brought in under Collins
himself in 1994. It was this amnesty famously ignored by Essendon at
the time, that later got them into trouble when they were exposed for
cap cheating.

Now all AFL clubs are audited and if the
league’s own salary cap investigations officer doesn’t get you, surely
the ATO can? Of course having a retired or current player here or there
who’s tax sums don’t add up or who’s got his nose out of joint for
whatever reason, can do wonders for any investigation. While the likes
of Canterbury, Essendon, Melbourne and Carlton, have all paid a heavy
price in being cap cheats, you can’t helping wondering when and if
Carlton has even more grief ahead of it if the ATO and ASIC is still on
the case?