For esports business owners or professional players who pay more attention to being in the game than meeting their tax obligations, be warned. The saying there’s nothing more certain than death and taxes conveys a fundamental truth that you ignore at your peril, if you fail to understand your tax obligations.
And not just here in Australia. All the countries you operate or compete in have tax laws that demand your attention.
I’ve identified THREE tax matters that need to be taken seriously by esports players, teams and business owners alike. These are matters that need your close attention sooner rather than later.
The truth is, most esports businesses aren’t paying a great deal of attention to tax and I can understand that. Tax isn’t particularly exciting compared to building a reputation in this new and fast-paced business sector. On the other hand, the consequences can be serious if you ignore your tax obligations.
In March, I attended the EGGA Conference and there was a lot of talk about esports as an industry wanting to be considered with the same high esteem afforded traditional sports organisations, teams and professionals. But does that also include how they are taxed?
In any new business sector, it takes a period of time for industry associations, business owners and tax authorities to work out how legislation applies to circumstances that don’t quite line up with the traditional formula. While it remains to be seen how things will pan out, for the moment, esports organisations need to meet their tax obligations in accordance with the existing rules.
All business owners, including those in the esports need a formalised business structure. This is the case whether you are operating as a sole trader (a gamer), partnership (part of a team) or a fully fledged business entity like a company or trust.
Setting up the correct business structure is dependent on your own set of circumstances. A business structure may be used to separate your business financial affairs from your private financial affairs. This means a legal challenger or debtor who wants to settle a business dispute or debt will be unable to claim your private home or personal savings as restitution.
It’s also important to understand that the pace of change in the esports ecosystem could mean that within a very short period of time a fledgling sole entity or small partnership can morph into a much larger business. With far larger tax commitments and greater exposure to threats, the larger business would require a different, more advanced, business structure.
#2 Professional Gamers & Teams:
As a business owner, you will need to manage your team members differently from a tax perspective according to whether they meet the ATO definitions of an ‘employee’ or ‘contractor’.
For an employee, you’ll need to manage PAYG withholding obligations and pay super guarantee contributions (currently 9.5%) to their super fund, as well as meet other obligations such as Work Cover. Be mindful that a contractor may have super obligations and work cover obligations as well. This area is not simple and will need review on a case by case basis.
For a contractor, you’ll need to treat them as a debtor. They will need an ABN and may be required to be GST registered. It’s crucial you check their ABN registration on the ATO website (www.abr.business.gov.au) prior to paying their invoices.
Should you wrongly assume that someone you are paying is a contractor, when they are in fact an employee by the ATO’s definition, you could find yourself significantly out of pocket.
That is, if the individual you’ve been paying as a contractor is not a contractor in the ATO’s view, the ATO may seek the payment of all employee obligations from you. This is because, by definition, it’s your responsibility for withholding tax and paying the 9.5% super guarantee amount as well.
#3 Tax on Prize Money:
It’s important to understand that prize money may be income, which means a portion of your winnings will need to be paid as tax. For professional gamers, should you fail to pay the tax component as you go, or you don’t pay tax on your prize money at all, you’ll very likely find yourself on the wrong side of the tax authorities. Not only will you have a large tax bill to pay, but a fine as well.
As a business or enterprise, you’ll need to ascertain whether you’re required to pay income tax and GST on your prize money. The benefit of knowing is that you can then be confident that any future ATO audit will not result in additional tax liabilities.
Your next step…
These three matters and a range of additional tax issues will vary from country to country to create significant administrative complexity when it comes to your tax obligations. The point is, your tax needs to be organised from the moment you start up your esports business. If it’s not, I advise you to make this a top priority.
Being aware of and meeting your obligations will allow you to plan your tax commitment, apply valid deductions to minimise your tax so you only pay what’s legally required. Planning will help you to avoid bill shock and cashflow problems.
Being tax wise will also help you to avoid costly audits, fines and adverse PR. Business owners who defraud the tax office (even if it’s unintentional) can find themselves at the centre of a reputation damaging media storm for tax avoidance or wrongfully paying players from which you may never recover. There’s no doubt you’ll need professional advice, and the fees you pay will be worth every cent to keep you on the right side of the authorities.
Yep… death and taxes. Or for esports business owners who fail to act… death by taxes.
For business advice committed to helping you to survive beyond the initial hype and mature into a sustainable and valuable esports business, contact me on email@example.com
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This information (including taxation) is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Make Cents Accounting strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.