To withhold or not to withhold – that is the question faced by every amateur sports club that makes match payments to its players. The correct answer requires some investigation.
First, what are a club's PAYG withholding obligations?
A sports club should consider whether it has to withhold tax from match payments it makes to a player on the basis that the player is either:
- an 'employee' – and the match payments are salary or wages (First Test); or
- not an employee but supplying services to the club – and the player has not quoted a valid ABN (Second Test).
The club does not need to withhold from match payments under the Second Test if the player has given the club a written declaration that they are providing their services (i.e. playing sport) as a hobby (Statement by Supplier Declaration).
This same declaration does not apply to the First Test. The question is whether the player is an employee of the club and, if so, whether the match payments are salary or wages. The Statement by Supplier Declaration offers no protection for clubs in relation to this First Test.
Who is an employee?
Clubs should expect that, during a review of their PAYG withholding obligations, the ATO will look at whether players are 'employees' of the club.
Whether a club employs its players is a question of fact determined by looking at the totality of the relationship between the club and its players.
If the club and player do not intend to have an employment relationship, they should keep evidence of that intention in a written agreement. However, intention is only one factor that the ATO will consider.
Factors that are likely to be relevant in the context of sports clubs include:
- the activities being undertaken – sport is generally considered to be a hobby or pastime, which is relevant when considering the relationship between the club and its players
- the size of the match payments
- the control that clubs have over players – are they required to attend training and other club functions or are they able to miss training if they have other commitments?
- whether the club pays the players' expenses – e.g. does the club provide the players with all of their equipment?
- what happens if a player is injured – does the club pay for their medical expenses above the insurance that is typically required by clubs fielding sporting teams, or are players required to look after their own rehabilitation and medical expenses?
- whether players get match payments for games that they do not play
- whether players receive match payments regardless of the result of any game
- whether players are 'contracted' to play solely for the club during the season
- whether players are employed outside of the club or rely on the match payments for their living.
What are the consequences for the club if the ATO decides that a player is an employee?
If the ATO decides that a club should have withheld tax from match payments, the club will be required to make those payments (without being able to claw back these amounts from the players) and may also have to pay a penalty of up to 100% of its withholding obligations.
If the club is incorporated, directors are personally liable for the amounts that should have been withheld.
How do you minimise the risk?
The best solution will depend on each club's circumstances.
- Most clubs should consider reviewing their current arrangements. If the players sign written agreements, clubs should ensure that these agreements reflect the actual relationship between the club and the players.
- If the club is currently relying on the Statement by Supplier Declaration, this will not be enough to satisfy the ATO that the players are not 'employees' of the club. Further investigation is required.
- Clubs should gather evidence that substantiates their relationship with the players so that this can be provided to the ATO during a review.
- If a club wants to be certain of the ATO's position on whether players are employees, the club should consider whether to apply for a private ruling.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.