In sad news for celebrities and Instagram influencers across Australia, the introduction of the so-called 'fame tax' as part of a raft of integrity measures announced in the 2018/19 budget means that they could end up paying higher taxes on the income and non-cash benefits earned through the commercial exploitation of their image rights.
In this article, we explore the impact of the changes on individuals who currently use a separate entity to cash in on their image rights.
Social media and the rise of #sponcon
Having celebrities such as actors and sportspeople lend their famous names, beautiful faces and sculpted bodies to the promotion of a brand or product is nothing new. However, with the ever-increasing importance of social media to many business' bottom lines, brand collaborations with big-name celebrities and #sponsored endorsements by 'influencers' are on the rise (a trend that carries other advertising and compliance implications, as we've previously discussed here). Along with the more traditional brand of celebrities, an increasing number of 'Insta-famous' bloggers and influencers are now making money by spruiking a wide range of (sometimes questionable) products to their legions of impressionable followers.
While some people may dismiss influencers as the worst type of celebrities – 'famous for being famous' – they're laughing all the way to the bank. Adelaide-based fitness sensation Kayla Itsines boasts a shared wealth of AU$63 million (according to the AFR's 2017 Young Rich List) thanks in large part to her 9.7-million strong Instagram following, and fashion blogger Chiara Ferragni's social media empire is so successful it has become a case study at Harvard Business School.
How celebrities can cash in on their image rights
As the law currently stands in Australia, high profile individuals are able to licence their image rights to another entity, such as a company or a trust, for the purpose of 'commercial exploitation'. If the individual (or at least their accountant!) is tax-savvy enough to set up this type of arrangement, any income derived from the use of their image or fame goes to that entity, rather than to the individual.
According to the Budget papers, "this creates opportunities to take advantage of different tax treatments and facilitates misreporting and incorrect tax outcomes".
For example, the entity licensing the image rights from the famous individual can claim losses on the investment, and only pays the corporate tax rate of 30 per cent on any profits resulting from the commercial exploitation of these image rights. Especially for individuals whose personal income puts them into the highest income tax bracket, this differing tax treatment could mean a difference of tens or even hundreds of thousands of dollars. And that's not even taking into account non-cash benefits, which can have a substantial value. Companies regularly provide celebrities and influencers with gifts of designer clothing, car loans and lavish holidays, in the hope that they will post about them on their social media and generate publicity for the brand.
Impact of the 'fame tax'
All this is about to change, and it is bad news for any Insta-famous celebs hoping that their freebies won't be counted as part of their income tax. From 1 July 2019 onwards, all income (including all non-cash benefits) will be treated as part of the individual's assessable income and will be taxed accordingly. It is likely that, at least for the majority of celebrities impacted by the change, the result will be an increase in both the amount to be taxed and the tax rate. However, due to the current inability to measure the extent of this type of income, the Government considers that the exact revenue implications of this change are "unquantifiable".
The Government has not yet released further details on how the 'fame tax' will work in practice. For example, it remains to be seen whether the changes will impact the commercial exploitation of registered trade marks such as names and signatures (a topic we've previously considered in greater detail here) which are owned by a company rather than an individual.
Draft provisions for implementing the changes will likely be released, followed by a consultation period where stakeholders can comment on the proposed changes in advance of the 1 July 2019 introduction. For parties likely to be affected by the change – watch this space!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.