Stone v Commissioner of Taxation FCAFC 145 - Case Study Example

Name: Course: Tutor: Date: Tax in Sport Introduction This paper seeks to examine two main cases revolving around tax in sports. The cases that will be examined in this paper include the court case of Stone v Commissioner of Taxation [2003] FCAFC 145 and Commissioner of Taxation v Stone [2005] HCA 21. This paper will outline the facts revolving around the Stone v Commissioner case of 2003 and discuss the legal issues raised. Furthermore, this paper will focus on the rational behind the judgment of this case. Moreover, this paper will examine the appeal case of 2005, it will depict the issues raised in the appeal and the ways in which the arguments were different in the appeal case of 2005 as compared to the case in 2003. In addition, this paper will present a discussion in my own view, with regards to why an athlete should be taxed on such income. This paper will also examine how Stone could have reduced the amount of tax to be paid. Stone v Commissioner of Taxation [2003] FCAFC 145 Facts of the case This court case revolved around Joana Stone, a police officer and a renowned javelin athlete versus the Commissioner of Taxation. Besides being a police officer of the Queensland Police service, Joanna Stone also participated in women’s javelin throwing athletics events. As from 1996, Stone was an affiliate of the Australian Olympic team and had been active participant in the women’s Javelin competitions. In 1998 Stone won the women’s javelin competition at the Good will Games and the World Cup .Over time, Stone started receiving grants from the Queensland Academy of Sports (QAS) and the Australian Olympic Committee (AOC) for participating in various competitions. While receiving several grants for participating in javelin competitions, Stone continued to serve as a police officer and received her regular income. Generally, Miss Stone received five categories of payment. She received payments for participating in international and local javelin competitions, grants from AOC and QAS, appearance fees, sponsorships and awards money from the Little Athletics Australia (Davies 2005). The Commissioner of taxation assessed Stone’s income tax and claimed that her income was taxable since they were derived from conducting business of being a professional athlete. The Australian Federal Court was faced with the task of determining whether the grants that Stone received can be considered as income. The Courts had to determine whether Stone’s participation in Javelin competition can be classified as business or a hobby. Subsequently, the Australian Federal Court ruled that Stone’s participation in javelin competitions was not a business since she was an employee of the Queensland Police Force thus her grants and price money were not subject to being taxed as income. Nonetheless, the Federal Court ruled that the sponsorship payments and appearance fees that Stones received were subject to being taxed as income (McDermott 374). Issues raised and the rationale behind judgment A key issue raised in this case, is what constitutes of an income? Over the years the Australian Courts have faced difficulties when it comes to determining what constitutes of an income. These difficulties emerge due to legislations that do not include all receipts in the definition of income particularly in tax legislations thus preferences and exemptions cause the difficulties when it comes to defining income. Nonetheless, according to Australian statutory and concepts income is defined based on the provisions of tax legislation (Clark & Miller 13). For instance, assessable income is defined in section 6 of the Income Tax Assessment Act 1936(Cth) (ITAA). However, there is no comprehensive definition of income in tax legislations of 1936 or that of 1997. In reference to ordinary concepts, income is drawn from employment, performing services and operating a business (Clark 2). A crucial issue emerging from this court case, revolved around distinguishing between amateur and professional sport. This is a predominant issue that can be used to determine whether the payments that Stone received while participating in the juvenile competition are taxable. It is therefore a main issue in this court case whether or not Stone was pursuing a hobby or conducting a business. Another issue emerging from this case is based on whether the grants obtained by Stone from various sources were given as reward for personal service and whether the grants were given as compensation for income items (Clark 4). When determining the case between Stone versus the Commissioner of Taxation, the courts employed several key principles. The first principle was based on whether payment should be considered as income according to ordinary concepts and its usages. The second principle was based on examining the specific facts that revolve around nature of the payment in the hands of the recipient. In determining this case, the federal court emphasized on examining Stone’s javelin career to establish whether her career pursuits was a hobby or she was conducting a business of being a professional athlete. The courts referred to the information put across by the Australian Taxation Office (ATO) to establish a ruling on this case. Usually, ATO deals with taxation receipts and benefits that sports athlete receive in Australia. The ATO made a number of statements concerning the nature of payments received by Miss Stone. Both the Federal court and the ATO were somewhat restrained by the historical attributes of what comprises of conducting a business and the nature of income from a voluntary payment (Clark 7). The judge presiding over the case, Judge Hill held that the circumstances revolving around the Stone’s case showed that Stone had turned her talent into a money making asset thus her participation in javelin competitions was a business venture. However, the Full Federal Court held a different opinion. The Full Court held that Stone’s pursuits of sponsorships were not an application of her talent for commercial objectives as a sports woman. Thus the Full Court held that Stone was not conducting the business of turning her talent into a money making venture. The rulings made by the Full Federal Court and Judge Hill were constrained by the legal differentiation between a hobby and a talent. It is worth noting that Miss Stone had solicited and received sponsorship, this shows that there was a commercial exploitation of Stone’s talent. In the ruling of this case, it was essential to establish the intentions of Miss Stone for soliciting sponsorships (Clark 8). In determining this case the courts referred to several principles derived from Furguson v FCT whereby the court established that the nature of sporting undertakings particularly those that are profit oriented and conducted repeatedly can be categorized as business. Judge Hill noted that athletes who pursue sporting activities full time and on profit making basis are clearly conducting business’ However, in the case of Miss Stone who participated in women’s javelin competition part time, her undertakings could be considered as a hobby nonetheless there was still a likelihood that this could be considered to be a business. Judge Hill acknowledged that the motive of profit making was not the sole determinant of whether an athlete is practicing a hobby or conducting a business (Davies 1). Hill also acknowledged that this case was on a borderline since on one hand the facts presented in the case supported that the various grants and rewards received by Miss Stone were assessable. On the other hand, the facts indicate that Miss Stone was practicing a hobby since at an early age Miss Stone engaged herself in javelin throwing and she showed her enthusiasm in this sport. Judge Hill also noted that Stone did not choose the competitions that she participated in based on the rewards or grants given. Instead Stone participated in these competitions to gain experience. Hill expressed that in most cases athletes who employ their sporting talent as a profit making venture or a business are more likely to choose competitions that they will participate in based on profits or rewards that they will receive. Moreover, Judge Hill expressed that professional athletes who conduct a business use their talents in exchange for money through sponsorships, appearance money for attending functions and prize money rather than tangible products. It was observed that Miss Stone virtually received all these forms of payments (Davies 1). Nevertheless, Judge Hill reached into the conclusion that based on evidence, Miss Stone had turned her talent into profit notwithstanding she competed in javelin competitions for leisure purposes and so that she could enhance her talent. Furthermore, due to the fact the Miss Stone had a formal occupation as a police officer, it was apparent that her participation in javelin competition was more likely to be a hobby and not a business. On the basis of these rationale, the Australian Federal Court in the 2003 case held that Miss Joanne Stone, a javelin athlete was not conducting a business in addition to being an employee of the Queensland Police Force. Thus the grants and the price money that she received were not subject to being taxed as income. Nevertheless, the Federal Court ruled that the sponsorship payments and appearance fees that Miss Stone received were payments for services hence they were subject to being taxed as income (Davies 1). Issues raised in the 2005 appeal case A subsequent appeal of the 2003 case to the Full Court of the Federal Court brought about a unanimous overturn to the decision that was made earlier. In a joint consensus, Judge Hely, Emmett and Heerey noted that the Income Tax Assessment Act of 1997(Cth) was solely the relevant statue that could be applied in this case. This is in contrast with the 2003 case since Judge Hill did not make any reference to this statue. Instead Judge Hill had applied the Income Tax of 1936 in the 2003 case so as to determine the definition of income. Nevertheless, the Judges in presiding over the appeal case noted that there was no major difference in the language used in the 1936 Act and the 1997 Act. Therefore in this case, the key obligation of the court was to determine whether Stone’s receipts were income based on the provisions of the ordinary concepts (Davies 1). Similar to Judge Hill’s ruling, the judges presiding over the appeal case noted that determining whether an individual is conducting a business depends on several factors. However, no factor used to in the previous case was determinative in this case. In this case, the court observed that Miss Stone pursued sponsorship money in order to further her goals as a sportswoman. With regards to the grants that Miss Stone received, the court noted that the grants were given in a regular basis due to her prowess and achievements in javelin events. Hence this did not indicate that Miss Stone was participating in any business activity. Likewise, the donations that Miss Stone received were not systematic to indicate that it was part of conducting a business. Moreover, it was in the opinion of the court that with no doubt Miss Stone had a full time career as a police officer. It was also noted that in the course of her career as an athlete, Miss Stone was also undertaking additional studies to further her career as a police officer and secure a promotion in the Queensland Police force. The courts established that Stone was not conducting a business since she was employed full time as a police officer and she participated in javelin competition in her spare time whether or not there was prize money. The judges acknowledged that it was possible to conduct a business while doing other activities. However, because Miss Stone had a full time career as a police officer, her activities were basically not a business activity (Davies 1). Subsequently, the judges addressed the codes presented by the Commissioner of Taxation, that were several intermediate classifications between sports men and women for who sports was apparently a hobby or a recreation activity. On the other hand, there are a certain classification sports men and women who turn their talents to money making ventures or business activities that are in pursuit of money. However, the judges held that the Commissioner of Taxation was not able to create a criterion that can be used to distinguish sports persons who participate in sports as a hobby or those that use sports as a business activity in pursuit of money. Thus in the absence of evidence that Miss Stone was conducting a business, the court concluded that the prize money that she received was not assessable as income. Moreover, the decision of the Judges in the 2005 appeal case was different from Judge Hill‘s ruling that the money under the Australian Olympic Committee Medal Incentive Scheme was assessable income in reference to ordinary concepts. The Judges stated that in the absence of evidence showing that a sports person is conducting a business activity by participating in sporting competitions, the grants and prize money in this case cannot be considered as income according to the ordinary concepts. Nevertheless, the Full Court of the Federal Court ruled that the sponsorship fees and appearance money were given to Stone as payment for service and hence they were subject to being taxed as income (Davies 1). Following Stone’s appeal to the Full Federal Court, the court observed that Miss Stone was not conducting a business. The courts paid attention to the competitions that Stone chose to contest in. It became evident that Stone chose the competitions that she would participate in based on the experience that the competition would offer and not the prize money of the competition. Subsequently, the Commissioner appealed to the High Court whereas Miss Stone cross appealed against the ruling that the appearance fees that she received were assessable income. The Commissioner accentuated that Stone had being carrying out a business activity by turning her talent to account for money since she was recognized as a celebrity with market value (McDermott 373). The High court established a unanimous finding that that all of Miss Stone’s receipts were taxable income. The courts found that Stone was carrying on the business by getting financial reward from competing and wining javelin competitions. This finding was due to the fact that Stone had over time started to receive payments for endorsing companies and their products. This established that Stone had used her athletic ability to get money. Given the fact that Stone had accepted that the sponsorship fees she received was assessable income, her sponsorship receipts could not be categorized as business whereas other receipts are categorized as sport. Neither would some of her receipts could not be differentiated from other based on the activity generating another receipt in the course of conducting what could be regarded as a business. The court acknowledged that the appearance fees and sponsorship agreements could be considered as rewards for services. However, set in the context of Miss Stone’s sports activities, it is apparent that her sponsorship agreements were commercial in nature made in pursuit of athletic experience. Referring to the case of Graham versus Commissioner of Inland Revenue, the court held that Stone could be carrying on a business, even if their motives were oriented towards getting experience a an athlete rather than making profits(McDermott 373). Views on why athletes should be taxed on their income The decision that the court made in the case of Commissioner of Taxation v Stone in my own opinion, draws the Australian law into line with the way in which the International Olympic Committee (IOC) has been managing the affairs of Olympic athletes such as Joanna Stone over the years by turning modern sport into a business venture. The Court determined that the money earned by Stone should be treated as income based on the provisions of Income Tax Assessment Act of 1997. Despite having a full time career as a police woman, Miss Stone also used her athletic ability to get financial gains. As a result, Stone used her ability to generate a second income besides the regular salary that she received for working at the Queensland police service. Given the fact that the second income of other tax payers is often taxed, it would not be unfair if the income generated from an athletic ability is taxed. Miss Stone’s argument that business and sport should be separated is unfounded since modern day sport has over time turned into a business. The unanimous decision of the High Court portrays what activities with regards to athletes constitute of conducting a business and thus represent an assessable income. Regardless of an athlete’s motive for participating in athletic contests, the payments that athletes receive as grants, sponsorship fees, awards money and appearance fee should be taxed mainly because they have managed to build their athletic ability to become an asset that generates income. There are different forms of businesses that vary depending on the means used to generate income. Some businesses generate income by producing products whereas other businesses generate income by offering services. In order to fully understand why athletes should be taxed on the various incomes that they receive it is important to examine the means through which athletes attain their income. Foremost, athletes get their income from grants and sponsorships which are often given to aid in the preparation of major contests and other objectives. The grants that athletes receive are usually non-refundable and are in some cases used for personal goals. These incomes can be compared to bank loans which are refundable and accrue interests over time that must be paid by the recipient. Therefore, such income should be taxed since they are non refundable and they eventually boost the performance of the athlete causing the athlete to generate more income. Secondly, the award money and appearance fees that athletes receive should be taxed, since they are given as payment for service. This shows that by participating in contests and performing remarkably, athletes are performing a service in exchange of financial gains. If an athlete is commercially exploiting their athletic abilities or using their image to promote the products or services of companies, any payments that they receive should be taxed according to ordinary concepts since it is evident that they are conducting a the business of being a professional athlete. How Stone could have minimized the amount of tax to be paid There are various options that Stone could have used to minimize the amount of taxes she pays. As a professional athlete, she was more likely to receive large amounts of income over a short period of time from sponsors or awards and therefore needed to undertake prudent tax planning to ease her income tax burden. There basic approaches to minimizing taxes for professional athletes are; minimizing the amount of taxable income, taking advantage of tax credits, maximizing tax deductions or spreading the tax liability over a longer period of time or to a lower tax bracket. These involve several strategies as discussed below. One of the key approaches that Stone should consider is Tax Planning. The key aim of tax planning is to appropriately structure one’s financial matters in order to reduce the amount of taxes to be paid. There are several basic propositions that Stone can employ to reduce her taxes through tax planning. Each proposition has a number of variations. In order to reduce the amount of tax to be paid Stone should reduce her taxable income. Reducing taxable income does not imply that one should earn less or retract that amount of money one receives. One of the ways that Stone can reduce her taxable income is by distributing her taxable income to her retirement plan scheme. Her contribution to a retirement plans will inevitably reduce her taxable income thus minimizing the amount of tax she was to pay (Fishman 311). Taking advantage of tax credits is another way that Stone can use to minimize the amount of tax to be paid. Tax credits help to minimize taxes, tax credits can be given for retirement savings, adopting children and college expenses among many others. Given the fact that Miss Stone was undertaking additional studies to further her career as a police officer and secure a promotion in the Queensland Police force. She would have applied for tax credits for college expenses in order to minimize the amount of tax to be paid (CCH Australia 377-401). One of the strategies Stone could have employed was by assigning income to a third party who is in a lower tax bracket such as a relative. Provided that she could demonstrate the third party’s involvement in earning of the said income, this strategy would reduce the amount of tax paid by transferring the burden to a lower tax bracket. Another option would be to spread the tax liability from the current period to future periods by deferrals. She could achieve this by negotiating with her sponsors to schedule her payments regularly over a longer period of time to prolong the incidence of taxation. This may take the form of regular payments to a pension plan upon her retirement which would defer the tax burden to the future. Stone could also have maximized deductions from taxable income by donating to charity or undertaking tax sheltered investments. She could have made and kept records of regular donations to charitable causes which would have qualified her for tax deductions. She could also have invested in tax sheltered projects such as provision of low income housing. These investments include high risks which must be factored in making the decision but their returns are exempted from taxation (Fishman 458). Conclusion The key issues raised in the court case of Stone v Commissioner of Taxation [2003] FCAFC 145 revolve around distinguishing between amateur and professional sport. The Commissioner of taxation assessed Stone’s income tax and claimed that her income was taxable since they were derived from conducting business of being a professional athlete. The Australian Federal Court was faced with the task of determining whether the grants that Stone received can be considered as income. The Courts had to determine whether Stone’s participation in Javelin competition can be classified as business or a hobby. Another issue emerging from the case is what constitutes of an income? Over the years the Australian Courts have faced difficulties when it comes to determining what constitutes of an income. Assessable income is defined in section 6 of the Income Tax Assessment Act 1936(Cth) (ITAA). Nevertheless, there is no comprehensive definition of income in tax legislations of 1936 or that of 1997. In reference to ordinary concepts, income is drawn from employment, performing services and operating a business (Clark 2). It is therefore worth questioning if the grants sponsorships fees, appearance fees and award money received by Miss Stone be classified as income? In order to substantiate this issue it was important for the courts to determine Stone’s motives for participating in javelin contests. The courts established that Stone did not choose the competitions that she participated in based on the rewards or grants given, instead Stone participated in these competitions to gain experience. The Australian Federal Court in the 2003 case held that Miss Joanne Stone, a javelin athlete was not conducting a business in addition to being an employee of the Queensland Police Force. Thus the grants and the price money that she received were not subject to being taxed as income. Nevertheless, the Federal Court ruled that the sponsorship payments and appearance fees that Miss Stone received were payments for services hence they were subject to being taxed as income (Davies 1). Following Stone’s appeal to the Full Federal Court, the court ruled that all of Miss Stone’s receipts were taxable income. Works Cited CCH Australia Limited & Internal CCH editors and analysts. Australian Master Tax Guide 2009. 44th edition. Sydney: CCH Australia Limited.2009, p 377-401. Clark, Braedon. The meaning of income: the implications of Stone v FCT. Revenue Law Journal. Volume 14, 2004, Issue 1, Article 9. Clark, Braedon & Miller, Leslie. Taxation in Sports. Annandale: Federation Press.2000, p 13 Davies, Chris. The high court decision in Commissioner of taxation v stone and its impact on sport in Australia. Indigenous Law Bulletin. Retrieved on January 7, 2011 http://www.austlii.edu.au/au/journals/JCULRev/2005/6.html#fnB23 Fishman, Stephen. Tax Deductions for professionals. 5th Ed. California: Nolo. 2020, p 295-455. McDermott, Beth. Cases and Comments. Sydney Law Review.VOL 28:373. 2006, p374-386. McDermott, Beth. Commissioner of Taxation v Stone (2005) 215 ALR 61: It's Implications for the Role of Intention in Assessing Business Receipts, and the Treatment of Gains Made by Athletes. Sydney Law Review (2006) 18; 28(2). Nelson, Anneliese. When, where and why does the State intervene in Sport: a contemporary perspective. Retrieved on January 7, 2011. Court cases Commissioner of Taxation v Stone [2005] HCA 21 Ferguson v FCT [1979] FCA 29 Graham v Commissioner of Inland Revenue [1961] NZLR 994 Stone v Commissioner of Taxation [2003] FCAFC 145 Read More