Advantage sports: being a team player can reduce your tax bill
Tax Alert - June 2021
By David Watkins & Emma Marr
New Zealand employees stranded in Australia for long enough to trigger an Australian tax liability may now find themselves at a newly-created relative disadvantage to professional sports people, with an Australian Budget announcement that would ensure New Zealand continues to have a primary taxing right over members of its sporting teams and support staff notwithstanding COVID-19 related travel restrictions. This is an interesting development for sports teams and their staff, however does not provide any good news for anyone else who has inadvertently created a tax presence in Australia in the last year, or expects to in the next year. The measure creates a relative tax advantage for a very small and specific group of New Zealanders in Australia.
The Australian Budget announcement stated that the Australian Government would amend their tax law to ensure New Zealand can exclusively tax members of its sporting teams and support staff, if they spend enough time in Australia to trigger Australian income tax or fringe benefits tax liabilities. The rule will apply if the individuals spend more than 183 days in Australia for certain cross-border sporting competitions because of COVID-19 related travel restrictions, and applies to the 2020-21 and 2021- 22 income and fringe benefits tax years. Legislation has since been introduced to bring this change into law.
The Australian Government viewed this as necessary to ensure that the double tax treaty between New Zealand and Australia “operates as intended” for such team members. It’s not clear from the announcement why this concession should be limited to members of sports teams competing in cross-border sporting competitions.
There are two Articles in the double tax treaty (DTA) between New Zealand and Australia that potentially apply to New Zealand sportspeople who spend time in Australia. One applies to income from employment and one applies to entertainers and sportspersons. Both allow Australia to tax a sportsperson’s income, however the employment income Article includes a 183-day exemption so that Australia cannot tax income arising from a short stay in Australia.
The Article that taxes entertainers and sportspersons generally takes priority over the employment income Article. However, if the sportsperson plays in a recognised team (other than a national representative team), that regularly plays in a league competition played in both New Zealand and Australia, the employment income article takes priority instead – meaning that the 183-day exemption applies (as long as the employer doesn’t have a permanent establishment (PE) in that country).
This is intended to apply to club-level rugby, netball, basketball and soccer competitions which take place in both countries. A New Zealander who is taxed in Australia on their salary or wages is effectively subject to tax at the higher of the prevailing rates in Australia and New Zealand, and receives a tax credit in New Zealand for tax paid in Australia. If Australia can’t tax the sportsperson the income will only be taxed in New Zealand, where marginal tax rates are generally lower.
In other words, having the 183-day exemption is important for New Zealand sportspeople competing in Australia. Before 2020, sportspeople would typically be in Australia for regular short stay visits, amounting to less than 183 days in any twelve-month period. This meant the salary and wages they earned for their work in Australia would be taxed in New Zealand, not Australia.
Due to COVID travel restrictions, some of the New Zealand based teams in such competitions have been required to remain in Australia for prolonged periods in both the 2020 and 2021 calendar years.
Effect of Australian Budget announcement
The announcement modifies the 183-day test for members of eligible sporting teams, so that even if they exceed 183 days in Australia, New Zealand maintains exclusive taxing rights over the salary and wages (as long as the sportspersons employer hasn’t created a PE in Australia. Although spending six months in a country might usually be considered “permanent”, there are exemptions that apply to a presence required due to COVID.)
The intended outcome under the announcement is particularly beneficial for the NZ resident players given the higher marginal rates that apply in Australia as compared to the marginal rates that apply in New Zealand (foreigners are taxed progressively in Australia, starting at a 32.5% rate from the first dollar earned). Instead their income will be subject to tax only in New Zealand.
This targeted measure is a tax equivalent of a free-kick, but for New Zealanders in Australia, the proposed amendment only applies to members of eligible sporting teams. The effect of COVID-related travel restrictions goes much wider than New Zealand resident professional sportspersons. There will be many other cases where non-resident businesses have found themselves with people or equipment stranded in Australia for extended periods of time, potentially resulting in the creation of a PE in Australia.
While the existence or otherwise of a PE may be able to be managed, the 183-day test for non-resident employees in Australia is not similarly flexible. Once the bright-line test is met, New Zealanders will be subject to Australian tax on their salary and wages. In many cases, this will be at higher rates than in New Zealand, and the individuals will need to claim a foreign tax credit when they file their tax returns. This seems like an oddly specific exemption for the Australian Government to provide, and creates an un-even playing field for other business operating in Australia.
If you have any concerns about your tax liability in Australia, contact your usual Deloitte tax advisor.
June 2021 Tax Alert contents
- New business continuity test – Inland Revenue releases guidance
- Intra-group service charges – are your group’s processes up to date?
- The wage subsidy debate continues… over a year on, was the scheme a success? And are you safe from audit?
- Advantage sports: being a team player can reduce your tax bill
- Are your records up to standard?
- Mileage reimbursement rates – what you need to know
- Snapshot of recent developments