Taxation of Special Professional Income for Athletes: What You Need to Know
As a professional athlete, your income may come from a variety of sources, ranging from salaries and winnings to endorsement deals and sponsorships. Understanding how the Australian Taxation Office (ATO) taxes your income is essential to ensuring you remain compliant and avoid any surprises when it comes time to lodge your tax return. In this post, we'll outline how the ATO taxes professional athletes, with a particular focus on special professional income and the unique tax considerations that apply.
What Is Special Professional Income?
Special professional income is a term used by the ATO to describe income that is earned from activities related to eligible professionals specific skills or abilities. This can include not only wages and salaries but also other types of income such as appearance fees, sponsorship deals, and even income derived from endorsements.
The key factor that distinguishes special professional income is that it is directly related to the special professional’s career and the skills they have developed. The ATO recognises that professional athletes may not have a typical career trajectory or earnings pattern, which is why specific tax rules apply to their income. While athletes pay tax on their total income just like other individuals, the significant variability in earnings from season to season can create challenges when it comes to managing tax obligations.
Who is eligible to be taxed under the Special Professional Income Averaging rules?
You are eligible for special professional income averaging (a concessional tax treatment) if:
you are an individual who is an Australian resident at any time during the income year
you are a special professional, and
you satisfy the first-year requirements (see below) in either the current income year or an earlier income year.
The first year you are eligible for special professional income averaging is the first income year for which the taxable professional income (TPI) you earned as a resident special professional individual is more than $2,500. This is known as year 1.
Types of special professionals:
Author or inventor
Performing artists
Production associate
Sportsperson
For the purposes of this blog, we will focus our attention on sportspersons, however, the below guide can be applied to other eligible professionals as outlined above.
Special Tax Treatment: Income Averaging for Professional Athletes
One of the key features that professional athletes can access to manage their income tax is income averaging. This system is designed to smooth out the fluctuations in an athlete’s income, ensuring that they are not penalised with a higher tax rate in high-earning years, only to face a tax burden that’s difficult to manage in lower-earning years.
How Does Income Averaging Work?
Under the ATO’s income averaging rules for special professional income, an athlete's income over a period of years is averaged to determine the effective rate of tax that applies to the income for a given year. This helps ensure that an athlete is not excessively taxed during years when they earn significantly more (e.g., from a large contract, winnings, or sponsorships) while still paying their fair share during lower-income years.
Typically, the ATO allows income averaging for athletes over a period of four years. Average taxable professional income (ATPI) in an income year is one-quarter of the sum of your (TPI) for each of the preceding 4 years. Special rules apply for working out the ATPI if your first income averaging year was less than 4 years ago. So, in the first 4 years, ATPI is worked out as follows if you were an Australian resident during the year immediately before your year 1:
year 1 = nil
year 2 = 1/3 of TPI in year 1
year 3 = 1/4 of the sum of your TPI in years 1 and 2
year 4 = 1/4 of the sum of your TPI in years 1, 2 and 3.
The income from each year is averaged to determine the appropriate tax rate, which could reduce the tax burden in high-income years and increase it in leaner years. Typically, where a special professional’s income is on an upward trajectory, the result upon lodgement of the tax return is usually a (sometimes substantial) tax refund, as the income base to which the tax is applied is lower than actual income derived (and what the PAYG withholding from the employer is based on).
It’s important to note that income averaging does not eliminate tax liabilities; rather, it helps to level out the impact of fluctuating income over a period of time.
Taxable Income for Professional Athletes
Here’s an overview of the different types of income that may be considered special professional income for athletes:
Salary and Wages
Most professional athletes earn a salary or wages from a sports club or association. This income is subject to the standard PAYG (Pay As You Go) withholding tax. The ATO treats salaries and wages earned by professional athletes just like the salary of any other employee, subject to progressive tax rates.
Prize Money
Prize money earned from competitions or tournaments is also taxable income for professional athletes. The amount of tax paid depends on the total income and the applicable tax rates. In some cases, professional athletes may have specific arrangements for tax residency depending on where the competition takes place.
Example: If an Australian tennis player wins a major tournament, the prize money they receive will be taxed as part of their total income for the year.
Endorsement and Sponsorship Income
Many athletes enter endorsement agreements or sponsorship deals with companies. Income derived from these deals is considered part of an athlete’s taxable income. Whether it’s an endorsement contract for a product, a partnership with a brand, or an advertising deal, all of these sources of income need to be reported.
Example: A professional cricketer signs a sponsorship deal with a sporting goods company for $100,000. This income will be included in their total income for the year and subject to tax at the applicable rate.
Image Rights Income
Image rights, which refer to the commercial use of an athlete’s name, likeness, or brand, are another form of special professional income. Athletes may earn significant sums through licensing deals that allow companies to use their image or name for marketing and branding purposes.
Example: An Australian footballer might license their image to a video game company to feature them in a sports video game. The royalties or licensing fees received from this arrangement are taxable.
Performance Fees
Performance fees paid to athletes for participating in exhibitions, charity events, or other non-competition events are also considered taxable income. Even if the event is not a competition, the fee paid for the athlete’s appearance or participation is taxable.
Example: A retired tennis star is paid $20,000 to participate in a charity exhibition match. This fee is taxable and should be included as part of their income.
Deductions for Professional Athletes
Just like other taxpayers, professional athletes are entitled to claim deductions related to their work. However, there are specific expenses that are common for athletes and may be deductible:
Training Costs: Expenses related to training, coaching, and fitness may be deductible, provided they are directly related to the athlete’s profession.
Travel and Accommodation: If an athlete travels for competitions or training, travel, and accommodation costs can be deducted, as long as the trip is primarily for professional purposes.
Equipment and Gear: The cost of purchasing sports equipment, uniforms, and other gear that are necessary for the athlete’s profession may be deductible.
Agent and Manager Fees: Fees paid to agents, managers, or other representatives who help negotiate contracts and manage the athlete’s career may also be deductible.
Accounting and tax professional fees: Fees paid to your accountant and tax agent with respect to management of your taxation affairs are also deductible.
Tax Residency and International Income
Tax residency is another key factor in determining how a professional athlete’s income is taxed. An athlete who is a resident of Australia for tax purposes will generally be taxed on their worldwide income, regardless of where it is earned. However, if an athlete is a non-resident, they will only be taxed on their Australian-sourced income.
In the case of international competitions or endorsement deals, athletes may be subject to foreign taxes in the country where the income is earned. The ATO has tax treaties with several countries, which may allow athletes to claim a foreign tax credit or exemption to avoid double taxation.
Example: A professional golfer who competes in a tournament in the United States may have to pay US taxes on their winnings. They may then be able to claim a credit for those taxes when lodging their Australian tax return, reducing the amount of tax they owe in Australia.
Key Takeaways
Athletes face unique tax circumstances due to the variety of income streams that arise from their professional careers.
Special professional income includes salary, prize money, endorsements, sponsorships, image rights, royalties, and performance fees.
Deductions are available for expenses directly related to an athlete’s profession, such as training, travel, and equipment.
Tax residency plays a significant role in how international income is taxed. Athletes should be aware of any tax treaties that might affect their obligations.
Record-keeping is crucial for athletes, as they may need to track various sources of income and related expenses to ensure accurate tax reporting.
As a professional athlete, you should seek advice from an experienced tax professional who understands the intricacies of the ATO's taxation rules for special professional income. By doing so, you can maximise their deductions, avoid costly mistakes, and stay on top of your tax obligations throughout their careers.
At DGF Advisory, we have extensive experience in dealing with professional athletes and the nuances that are associated with your income derivation. If you’re an athlete or a sports organisation looking for guidance on how the ATO taxes your income, don’t hesitate to get in touch with us.
Disclaimer: This blog post provides general information and should not be considered as tax advice. Professional athletes are encouraged to consult with their tax tax agent for advice tailored to their specific circumstances.
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