It is critical that early in their careers professional athletes plan their taxation affairs even though they may not be earning notable sums of money. Careful planning in early years can save significant tax in future years.
There are few professions which provide you with options for legally minimising your tax than that of a professional sportsperson. Like other special professionals, with the correct advice sportspeople are able to average their income to take greater advantage of lower tax rates.
Accomplished sportspeople at times can earn extremely large incomes. Given we live in one of the highest taxed nations in the world, with our top marginal tax rate at 45%, tax can have the potential to be the greatest expense that a professional athlete incurs during their working lives.
In a constantly evolving sports environment there will be many financial challenges and opportunities that athletes face. To assist avoid confusion for athletes about their tax here is our 5 Key things that every athlete should know about their tax.
Are you a Resident?
Your residency status affects the income that will be assessed in your tax return and the tax rate applicable for the financial year.
The ATO uses a different residency test to other Australian government departments and this means you can be a resident of Australia for tax purposes without being an Australian citizen or permanent such as the Department of Immigration and Border Protection.
The ATO classifies any of the below situations as constituting Australian residency for tax purposes:
You have always lived in Australia;
You moved to Australia and live here permanently;
You have been in Australia continuously for six months or more, and for most of the time you have been in the same job and lived in the same place;
You have been in Australia for more than half of the income year, unless your usual home is overseas, and you do not intend to live in Australia.
Australian residents for tax purposes are taxed on their worldwide income, foreign residents are generally taxed only on their Australian-sourced income as are temporary Australian residents. Your residency status can change year on year and there is no ‘one size fits all’ rule that can be applied to each situation. If care is not taken the impact on your tax obligations can be extremely high.
What Income Do You Pay Tax On?
As an Australian Resident you must declare all income you have earned anywhere in the world. You are entitled to a tax-free threshold meaning you do not pay tax on the first $18,200 (the threshold in the 2019 financial year) and you also may have to pay Medicare Levy of 2% of your taxable income.
Examples of the types of income you must include in your assessable income include:
All competition winnings and fees received
All endorsements (in cash or in kind)
All prizes
Salaries and wages
Holiday pay, long service leave and any other payment relating to your employment
Interest earned on any savings
Dividends received
Income from any rental properties
Gains from the sale of some assets
Overseas income (Australian residents only)
What Common Deductions Can You Claim?
In order to claim a tax deduction, you must have paid an expense from money you have earned after paying tax. You cannot have been reimbursed and you must establish a direct connection between the earning of the income and the relevant expense.
Some common deductions for professional athletes include:
Motor vehicle expenses
Travel expenses, such as taxi fares, Uber fares and road tolls
Manager or agent fees (if paid by you and not your club or the federation)
Work related portion of telephone, internet costs and pay tv subscriptions
Professional advice fees such as accountants
Membership fees for player associations
Replacement of equipment and training gear when not provided by sponsors
Repairs of equipment
Depreciation on training equipment
Income Averaging - What is It?
Were you aware that professional sportspeople could average their income over 5 years to access a reduction in tax in higher income years?
Athletes often earn fluctuating levels of income from year to year. To avoid paying higher amounts of tax in a year when income is in a higher tax bracket than in previous years, some are able take advantage of income averaging.
In general terms income averaging works by reducing the amount of tax owed in a high- income year by comparing it to the previous four years’ sports related income and applying a tax concession on the “above average” amount.
This makes it exceptionally valuable in the first few years of your sporting career, when the prior year average income is low.
Income that earned from sporting activities is potentially subject to income averaging. The methodologies that apply to income averaging legislation are complicated, so a sports specialist like Oreon Sports is more likely to be able to identify your eligibility.
Record Keeping
Record keeping is important. You can only claim a tax deduction in your tax return, if you have spent money on items or services that directly relate to your income earning activities and you have records to prove it!
Not only is it important to keep records it is also important that your records are maintained to record all income and expenditure in an organised manner for three reasons:
It is helpful should the Australian Taxation Office decide to review or audit your return
It assists in reducing the cost of preparing your income tax return as your accountant doesn’t have to spend time sorting through your receipts to determine your tax deductions
You can have confidence that you are not accidentally missing out on tax deductions to which you are entitled.
Apps such as the ATO’s myDeductions makes it easier and more convenient to keep your tax deductions and income records all in one place.
Ultimately, the more specialist knowledge and skills that are acquired, the more valuable the advice the service and the advice becomes. Oreon Partners, through their specialist sports division, Oreon Sports, are specialist advisers to athletes and sporting organisations around Australia and internationally. Contact Tim Pullman today (tpullman@oreon.com.au) to see how we can assist you with your taxation and financial needs.