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TAX ISSUE IN SPORTS

Malaysia.
Clubs, associations or similar institutions are formed not for commercial purposes but for social,
recreational, sports, arts, science, literature or other purposes for the interest and benefit of their
members. Examples of such clubs, associations or similar institutions are an athletic club, an
antique car collectors club and a historical society. However, the activities of some clubs,
associations or similar institutions are trade dealings which are run for a profit that is subject to
tax as business profits. Examples of such clubs, associations or similar institutions are a fitness
centre or a professional football club.
In order to distinguish whether a body of persons carrying on a club, association or similar
institution is a trading/business enterprise or run for the benefit of its members, the ownership
and membership of that body of persons and its dealings have to be examined as follows:
(a) If the ownership of that body of persons is different from its membership, the club is
likely to be a trading enterprise. On the other hand, if a club, association or similar
institution is established and owned by its members for the benefit of its members, this
would mean that all the assets belong to the membership which controls the club and its
dealings. Such control may be exercised through an elected committee.
(b) Transactions with members are not considered as trade dealings. Any surplus of
receipts over expenditure in respect of income from transactions with members must be
used for the benefit of all the members of the club, association or similar institution (e.g.
to buy new equipment or to pay for social occasions open only to the membership).
However, when a club, association or similar institution provides its facilities (e.g.
restaurant, golf course) to non-members on a commercial basis, it is deemed to be
carrying on a trade and income from trading with non-members is taxable.

Taxability of Clubs, Associations Or Similar Institutions;


Prior to the year of assessment 2009, there was no specific provision on the tax treatment of
clubs, associations or similar institutions. Clubs, associations or similar institutions have been
subject to tax based on the following general taxation principles:
(a)
members fee and income from transactions with members are not subject to tax
based on the principle of mutuality; and
(b)

income derived from transactions with non-members is subject to tax.

With effect from the year of assessment 2009, section 53A of the ITA 1967 was introduced to
enhance the transparency in the tax treatment of clubs, associations or similar institutions. This
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provison applies to clubs, associations or similar institutions which are established and controlled
by its members and not run for business purposes.

Tax Treatment of Clubs, Associations Or Similar Institutions;


Income from transactions with members
Clubs, associations or similar institutions are run either for the benefit of their own
members, or for the wider public good. If a club, association or similar institution is
meant for the benefit of members only, any income arising from mutual dealings with the
members is not subject to tax. Examples of mutual receipts from members of clubs,
associations or similar institutions include entrance fees and member subscriptions;
drinks and food sold at the clubs, associations or similar institutions bar /restaurant to its
members; and amounts paid by members to attend a talk, presentation or workshop
organised by the clubs, associations or similar institutions.
Such income and any expenses or capital allowances attributable to such income is to be
disregarded for the purposes of the ITA 1967 pursuant to subsection 53A(2) of the ITA
1967.

Income from transactions with non-members


(a) Although a club, association or similar institution is generally formed not with the aim
to make profits, it may receive income from activities or transactions with nonmembers which are taxable income. Examples of such receipts include proceeds from
fund raising drives to the public, e.g. sale of cookies or handicraft; drinks sold to nonmembers visiting the club; fees received for hiring out of the clubs hall, facilities or
equipment to the public; amounts paid by non-members to attend dinners or social
functions organised by the club.
(b) The spouse and parents of members of clubs, associations or similar institutions are
considered non-members. Therefore, income derived from transactions with spouse
and parents of members is subject to tax.

Income from investment and external sources


(a) Income from investment of clubs, associations or similar institutions such as interest,
rent, dividend being non-mutual receipts is taxable.

TAX ISSUE IN SPORTS

(b) There may be clubs, associations or similar institutions that enter into arrangements
with external parties under which the external party conducts or provides particular
operations on the premises of the club, association or similar institution. These
arrangements with the external parties may include installation of vending machines for
drinks, catering, restaurant, bar, gymnasium and entertainment.
(c) If the clubs, assciations or similar institutions enter into such an arrangement with the
external party, the income derived by the external party from the patrons of the above
mentioned facilities is in accordance with the contractual arrangements. The amounts
paid to the clubs, associations or similar institutions by the external party for
operating on their premises is income derived by the clubs, associations or similar
institutions from external sources and not from members/non-members. Therefore,
such income is fully taxable to the clubs, associations or similar institutions.

Tax Rates
The taxable income of a club, association or similar institution is taxed at scale rates that
are applicable to individuals as in Paragraph 1, Part I, Schedule 1 of the ITA 1967. Clubs,
associations or similar institutions are not eligible for personal reliefs that are applicable
to individuals when computing their chargeable income.

Record Keeping
All clubs, associations or similar institutions are required to keep separate accounts in
respect of income derived from transactions with members and with non-members.
Records that distinguish between member and non-member functions have to be kept if
clubs, associations or similar institutions do not have a limitation on dealings with nonmembers.

Filing Of Income Tax Return Forms


Clubs, associations or similar institutions in Malaysia are required to file an Income Tax
Return Form (ITRF) i.e. Form TF for each year of assessment. The ITRF should be
furnished to the Director General of Inland Revenue on or before 30 June in the year
following that year of assessment.

TAX ISSUE IN SPORTS

In Malaysia, sports are under the concurrent list of State and Federal legislation. All sports
association must register to Sports Development Act 1997 to do sporting activities. The Football
Association of Malaysia (FAM) is registered association under Sports Development Act 1997
that enable her to receive annual fund and financial grant from the Malaysian government. The
Malaysian FA (FAM) is not a body corporation under the Companies Act 1965 and as a private
body, the relationship of the members (players and administrators - member affiliates / clubs) is
based on contractual relationship.

The issues of non-payment of players financial welfare are seriously discussed. Most of the
clubs failed to settle their debts towards players financial welfare totalling about RM1.2 million
RM833, 793 for EPF, RM101,526 (Socso) and RM365,895 (income tax) in year of 2012. The
imposition of sanction is well illustrated in the FAM Regulations, however the execution of the
regulations is not strictly adhered.

In the event that clubs do not pay players' wages or failed to make contributions to the
Employees Provident Fund (EPF) and Social Security Organisation (SOCSO), or fail to pay
regular income tax to the Inland Revenue Board for a minimum of one (1) month or player
complain to the FAM or upon investigated by FAM and found to be true, then the player may
terminate the Contract unilaterally and inform in writing to the FAM.

With the rare exceptions of Nicol David and Lee Chong Wei who are presently the world's topranked players in squash and badminton respectively, the Malaysian market is not ripe for local
athletes and celebrities to attach astronomical values to their image. Notwithstanding the same,
the law does provide protection for such rights, regardless of its value.

Although there is no law which confers a statutory right on an individual to control the use of his
image, it is submitted that the legal doctrines applied in the United Kingdom for the exploitation
and protection of image rights are generally applicable in Malaysia, except for the right of
privacy which is provided under specific legislation in the United Kingdom.

Prizes are normally subject to tax as earnings. Prizes are normally subject to tax as earnings
where the individual participates with the prize in mind. In a more pragmatic approach where
occasional prizes are received, etc in form of trophies where the value is not substantial and as
such, tax may be avoided. In England, ever since an international footballer succeeded in
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TAX ISSUE IN SPORTS

justifying his claim not to be taxable on payments from English Football Association and a third
party following his performance in World Cup 1966, prizes are not always taxed; case in point is
Moore v Griffiths (1972) 48 TC 338.

For sponsorships, normally, the arrangements will be evidenced in writing, usually in the
agreement between the individual and the sponsors, and it will be taxable as part of the
individuals total income from sport. Some sponsorship may be taxed as employment income
under the contractual arrangements entered into, but this is unlikely to be common. Tax relief
may be available either by way of an expenses claim in the case of sportswear or by way of
capital allowances if equipment is provided.

England
In the English Premier League, football players may include in their contracts with their
teams provisions which provide for the exploitation of image rights which may or may
not necessarily include the rights to sponsorships and endorsements. Generally players let
the club use their image under license in exchange for an annual payment.
It has been reported that this payment goes into the player's 'image company', many of
which are based offshore, prompting investigations by the UK Inland Revenue Board as
the money may be finding its way back to the players as a tax-free bonus disguised as
income.
At times, players may reserve the right to exploit their image rights to endorse products
themselves. For example, Fernando "El Nino" Torres has a boot-sponsorship deal with
US sporting goods giant, Nike, whereas his team Liverpool is sponsored by their German
rival, Adidas.
Unquestionably, sports personalities and other celebrities seek to protect the value in their
image rights through various legal mechanisms, rooted in the belief that these are
legitimate proprietary rights derived from their own name, likeness, personal attributes,
style characteristics, nicknames or slogans associated with them.
There is no legislation in the United Kingdom which recognizes a statutory right of an
individual to control the commercial use of his image.
The primary basis for the commercial exploitation of an individual's image lies in the
contract. In sponsorship and endorsement deals, the personalities grant an exclusive
license to the advertiser to enhance the reputation of their products or goods due to the
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TAX ISSUE IN SPORTS

association with the star while they are compensated through royalty payments for the
right of the advertiser to exploit their image.
Fees or royalties received in relation to the use of image, name or logo, count as taxable
income. Usually services are provided as well in which as event costs associated with
their provision may be deducted in arriving at the profit from the sporting activity. In the
case of an employed sports person carrying on self-employed activities outside the
employments, care is required in connection with ownership of image rights since
employer may argue that such rights in connection with duties for the club belong to it.
exploited by the individual and taxed under the more favorable self-employed rules or
through a personal service company.

VAT IN SPORTS (England);


The liability of a taxpayer in this regards can be determined by a persons domicile, it is
where an individual belongs rather than where he is resident at any time. Certain income
of individual resident but not domiciled in the UK, etc will not be liable to UK tax unless
remitted back to UK. If income is not remitted back to UK then it is not taxed.
A resident sportsman earning income from abroad enjoys no special reliefs from UK tax
whether employed or self-employed. He may have exposure to tax overseas since
generally the double tax treaties which the UK has negotiated with foreign countries do
not provide relief for sportsman and entertainers.
For the taxation of earnings; particular sports rules may dictate the way in which the
sportsman pays tax. Hence in professional football in England the rules of Premier and
Football League and the Football Association specify a standard form of agreement for
professionals that must be entered by the sportsman. This contain terms relating to the
expiry of contracts, earning, and out-of-pocket expenses. Football rules effectively means
that professional footballers as employees. Often, other professional team sports have
similar provisions.
Self-employed requires the individual to be independent of the person engaging him.
Typically the status will apply to sports where the individual competed on his own and
not as part of a team. This generally accepted by HM Revenue & Custom but the
situation may be determined under the contractual relationships specified under the
sports governing body rules. Most sports people participating in team sports who are
remunerated will be regarded as employees because of the element of control required by
the team club. Where they also have external commercial income, their tax affairs are
likely to be complex as well.
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TAX ISSUE IN SPORTS

Inspectors of HMRC are often keen on sports. In addition to their personal interest in
sport, tax authorities have formalized their approach to dealing with it. Thus for example
a special unit in HMRC Special Civil Investigation Office deals with professional sports.
Tax is an issue for professional and amateur clubs. If sources of income are within the tax
statutes, whether for corporation tax or VAT purposes, they will be taxable no matter how
the organization is run or the income is applied. Even relatively casual fund-raising, such
as dinner dances, beer and jazz festivals run to raise funds for the club can be subject to
tax. Exception to this rule are where the organization is a charity or community amateur
sports club for which tax exemptions are available.
Where sports person works outside UK, since there may be a requirement to register
overseas for VAT or the equivalent sales tax. There are also special rules where royalties
are paid from a transfer or assignment of a copyright or from the granting of a license to
use a copyright.
Sponsorship also a difficult area and should be distinguished from true donations for VAT
purposes. A sponsorship arrangement will usually be evidenced by a contract and great
care is required to ensure that the sports person does not lose out from a VAT perspective.
There should be an appropriate VAT clauses in such contracts. It should be remembered
that it is the individuals responsibilities to charge VAT if he or she should be registered
and is providing a taxable supply. Failure to charge VAT will mean the cost will be picked
up by the sports person not the customers or clients.
Governing bodies and leagues may have rulings from HMRC regarding income received
centrally from sponsorship, broadcasting and other commercial agreements. Such income
on distributions to sports clubs may be outside the scope of VAT.
Sponsorship income is normally received in the expectation of doing something in return
eg advertising. In those instances, VAT should be charged by the club to UK supplies of
sponsorship. However, where sponsors belong outside the UK, the supply may be VAT
free. Sponsorship may include an element of business entertainment eg hospitality. In
such circumstances the VAT incurred by the sponsor will not be recoverable as business
entertainment. Goods and services may be provided free of charge under a value-in-kind
agreement, ie the club receives goods or services in return rather than payment. For VAT
purpose, this arrangement results in both parties making supplies and VAT must be
accounted for on the full value of those supplies by both parties as a general rule. This is
often overlooked by sports clubs and sponsors alike.

TAX ISSUE IN SPORTS

Sports clubs may incur overseas VAT costs eg travel and accommodation as result of
tours, European or international matches. It may be possible to recover such VAT under
special refund procedures. Subject to certain conditions, VAT incurred in other countries
can be refunded periodically, provided the sports club is not registered or liable to be
registered for VAT in those countries.
Many individuals help out at clubs and players can play for the love of the game.
Expenses payments are made to cover genuine travel and other expenses and HMRC may
agree that individuals play for the love of the game. In this event, it will not regard them
as employees because no money is made out of their participation. Football has agreed
this approach with HRMC in relation to non-contract players in semi-professional
football. However this will only succeed where there is no contract of employment with
the player concerned and the payments do no more than reimburse actual costs computed
on reasonable basis. Leading individuals in particular sports will be taxed on their
earnings from those sports but the many who participate as leisure, pursuit or hobby will
often escape tax.

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