The ‘Instagram Tax’ – A snapshot
The rapid rise of social media influencers has paved the way for a similarly rapid rise in these influencers granting ‘fame and image licences’ to separate entities with the effect of reducing their income tax liability (Fame and Image Licensing Arrangements).
Whilst to date the legality of Fame and Image Licensing Arrangements has been murky, as of 1 July 2019 a new approach by the Australian Taxation Office is expected to take effect forbidding individuals from reducing their income tax liability through Fame and Image Licensing Arrangements.
In Australia, fame or image are not recognised under Australian intellectual property law and therefore the licensing of them is legally complex.
In summary, the legal right to license your fame and image exists due to the various causes of action available to an individual against others who might be using that individual’s fame or image without consent. These causes of action mean that individuals can require payment for the use of their image and by extension can grant licences authorising the use of their image to separate entities. Below is an example of how a typical Fame and Licensing Arrangement works.
In 2017, Influencer X was approached by a sportswear clothing company (theCompany). The Company offered Influencer X $100,000 to publish a series of social media posts featuring and endorsing the Company’s product.
Influencer X accepted the Company’s offer (the Agreement) and then established the IX Family Trust (the Trust) of which Influencer X’s spouse was the sole beneficiary. Influencer X granted the Trust the licence to use Influencer X’s fame or image. The Trust then entered into a licensing agreement with the Company and received the $100,000 for the use of Influencer X’s fame and image pursuant to the Agreement (the Licence).
In the 2017-18 financial year (the Financial Year), Influencer X paid income tax at the top marginal tax rate and would have paid tax of $45,000 on the $100,000 payment had it been paid directly to them. Instead, as Influencer X’s spouse was the sole beneficiary of the Trust and earned no other income in the Financial Year, when the Trust distributed the $100,000 of ‘licensing’ income to them, they only paid $24,632 of tax.
The Licence thereby reduced the tax paid by $20,368.
Impact on Followers
As the above scenario illustrates, where an individual grants a fame or image licence to a separate entity they are able to realise various tax benefits which may not be available to other non-high profile individuals.
The Australian Government Treasury Consultation Paper, published in November 2018 stated that the Government is concerned that Fame and Image Licensing Arrangements compromise the integrity of Australia’s tax system, particularly in the context where there is evidence that Fame and Image Licensing Arrangements are being entered into deliberately to shift income outside of an individual’s personal assessable income.
The 2018-19 Budget Papers confirmed that the Government intends to legislate that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in the assessable income of that individual. This legislation was expected to come into effect on 1 July 2019, however in the absence of the foreshadowed exposure draft legislation as at June 2019, it remains to be seen when exactly the legislation will come into effect.
Assuming the policy is passed into law there will be a significant impact on both existing and proposed Fame and Image Licensing Arrangements. Contracts, deeds and other legal documents relating to Fame and Image Licensing Arrangements will need to be reviewed to ensure their compliance with the new laws and also to assess their commerciality in the context of the new legal and taxation landscape.
Polczynski Robinson is expertly placed to assist in the navigation of these proposed changes to Fame and Image Licensing Arrangements. If you are concerned that you might be impacted by the proposed ‘Instagram Tax’ please contact Andrew Robinson or Hugh Farquhar on 02 9234 1500.