Private ruling: Management fee deductibility
Date of advice: 26 July 2016
Published: September 2016
Ruling period: Years ending 30 June 2016 to 2022
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to claim a deduction for management fees, as part of the agent agreement? | A1: Yes

Relevant facts and circumstances: You are a professional athlete with the sporting organisation. You entered into a contract with the Club. You agreed to engage the Agent to provide professional athlete management services for a period. These services are set out in the agent agreement and include: • Represent you and provide advice, counsel and assistance to you in procuring, extending, negotiating, executing, performing and enforcing a contract with the sporting organisation. • Provide advice, counsel and assistance (including taking such steps as are reasonably necessary to promote you) to you in procuring, extending, negotiating and performing marketing and promotional opportunities/public speaking engagements and other endorsement arrangements. The Company is not a party to your agent agreement and the Agent does not provide services to the Company. The agent agreement shows the fees you agreed to pay the Agent for the above services. The Company engages you to provide services to enable them to carry on its business. The Company's business is described as promoting and marketing the name, likeness, image, brand, expertise, endorsements and sponsorship of you. You, the Club and the Company agreed to an additional services agreement (ASA). This allows you to provide services to the Club and the sporting organisation in addition to those that must be provided under the sporting organisation's collective bargaining agreement. Use of Your Image The ASA shows the following: the Company agrees that the payment of the fee entitles the Club to use your image. In addition, the Club may also use your image in connection to and in relation to the ASA, provided the prior written consent of you is obtained which consent shall not be unreasonably withheld. You agree with the Company and the Club that you will make yourself available as and when reasonably required by the Company and the Club to ensure that the Company complies with its obligations under the ASA. Payment of Fee The ASA shows the Club shall pay the fee to the Company. There is no employment agreement between you and the Company.

Relevant legislative provisions: Section 84-5 of the Income Tax Assessment Act 1997 | Section 86-1 of the Income Tax Assessment Act 1997 | Subsection 86-15(2) of the Income Tax Assessment Act 1997 | Division 87 of the Income Tax Assessment Act 1997 | Division 85 of the Income Tax Assessment Act 1997 | Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: You requested a ruling on whether management fees charged per the agent agreement are tax deductible. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) is the main provision that allows deductions for amounts relating to gaining or producing 'that part of your ordinary income or statutory income that is your personal services income', except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Subsection 8-1(1) of the ITAA 1997 says that 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 purposes of gaining or producing your assessable income. For an expense to be incurred in gaining or producing assessable income it must be directly relevant to the entity's current income earning activities and have the essential character of an income producing expense. | Detailed Reasoning - Assessable Income: Personal services income and the additional services agreement: Personal services income is included in the assessable income of the individual, regardless of whether a company, partnership or trust has derived that income. A company, partnership or trust that derives personal services income is called a personal services entity: see subsection 86-15(2) of the ITAA 1997. The definition of personal services income is contained in subsection 84-5(1) of the ITAA 1997 which states: 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). The fact that the income is payable under a contract does not stop the income being mainly a reward for an individual's personal efforts or skills (subsection 84-5(4) of the ITAA 1997). Section 86-1 of the ITAA 1997 provides that income from the rendering of your personal services is treated as your assessable income even if it is the income of another entity and is not promptly paid to you as salary. However, income is not attributed if the other entity is conducting a personal services business. The entity will be taken to be conducting a personal services business, if at least one of the four statutory tests is satisfied. A personal services business is defined in Division 87 of the ITAA 1997. In your case, based on the information provided, the Company is a personal services entity that we do not consider to be conducting a personal services business. Therefore, any income received by the Company for the provision of additional services for the Club in accordance with the additional services agreement is your personal services income because it is paid mainly as a reward for your personal efforts or skills. | Detailed Reasoning - Deduction: Management fees: In your case you have engaged the Agent to provide athlete management services connected with your contract and additional services you provide. As a result you have agreed to be charged a fee by the Agent for their services. The Company is not a party to this agreement, the Agent does not provide services to the Company, the Company is not liable to pay the Agent and therefore has not incurred an outgoing in relation to earning its assessable income. Division 85 of the ITAA 1997 limits the amounts individuals, who are not conducting a personal services business, can deduct relating to their personal services income. Particular deductions excluded or limited under this Division include rent, mortgage, rates or land taxes for your home that is a place of business, motor vehicle expenses and payments to associates. When you are not conducting a personal services business then deductions are limited to those available to employees under paragraph 8-1(1)(a) of the ITAA 1997. In your case, as per the above section, we do not consider that the Company is conducting a personal services business, nor has it incurred the expense. However, these management fees are necessarily incurred by you in deriving your assessable income either directly, or as described above attributed to you as assessable income because it is your personal services income for the additional services you perform. Therefore you can claim a deduction for the fees you pay for athlete management services per the agent agreement for the period covered by that agreement.