So, you have just landed your first professional sports contract and you are on top of the world, “king of the hill, top of the heap” to use the words of the famous Frank Sinatra song. There are so many things that you plan on doing with the big money you will receive from your sports contract, but paying taxes is not one of them!
You do not have the least idea how taxes work, so you are not concerned with them… Well, we are here to offer a friendly warning and a few words of advice: Athletes, just like everybody else are liable to pay taxes too! What makes the case of athletes special, is the possibility of having substantial earnings in a very short period of time and thus incur substantial tax bills before they become aware of how the taxation system affects them.
And because it is not what you earn that counts but what you keep after taxes, which is the real money that you can spend, reinvest or give away to improve the lives of others, we want you to become aware of the various types of taxes that can affect you and introduce you to some basic concepts which will help you become proactive in your tax affairs and hedge against unpleasant tax consequences.
Let’s take a look at the different types of taxes so that you understand that taxes affect you in so many different ways and on a daily basis. There are two types of taxes – direct taxes and indirect taxes. If a tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax. If the tax is levied on the price of a good or service, then it is called an indirect tax e.g. sales tax.
Taxes have two components: the tax rate and the tax base. The tax base is the amount on which the tax is calculated (i.e. income amount, acquisition cost of real estate, or amount of sale). The tax rate is a percentage, fixed or progressive, which when applied to the tax base, results in the tax liability.
I know that all of the above are new to you and perhaps totally scary! But, there’s some good news as well. With some proactive and proper tax planning you can optimize your overall tax cost and have some level of certainty as to the amount of your final annual tax bill. You should be aware though, that tax planning is a fully customized process because it caters to each person’s specific needs that are determined by his facts, circumstances and intentions. There is no ‘one-size-fits-all’ approach to this, so the tax planning of your teammate does not apply to you and you need your own bespoke planning on the merit of your own facts.
It is very important that you become aware of the difference between tax avoidance and tax evasion. Tax avoidance is the legal use of tax laws to reduce one’s tax burden. Tax planning is the legal process of arranging your affairs to minimize your tax liability. There is a wide range of tax reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax evasion. Tax evasion on the other hand is the illegal non-payment or underpayment of tax. Tax evasion entails deliberately misrepresenting your state of affairs to the tax authorities whether this means declaring less or no income or overstating deductions. This carries serious penalties which may include criminal prosecution.
Therefore, proper tax advice is recommended to be sought before entering into any substantial revenue generating transactions. Athletes playing in more than one country or state, may have to appoint competent tax professionals in various jurisdictions where they earn income in order to take care of their tax affairs along with the proper preparation and timely filing of the athlete’s tax returns. By appointing competent tax professionals you ensure that:
- You are not missing out on deductions that would lower your taxes;
- You keep sufficient documentation / evidence in case of a tax audit;
- You lower the risk of penalties and mistakes; and
And a final word of warning: Athletes are obliged to ensure that their tax position is correctly assessed and paid, no matter in how many countries or states they have competed during a tax year. The burden of tax compliance is on the athlete, no matter how many advisors the athlete employs. The athlete is the one responsible to prove that he has been compliant with tax laws. And, in case of a tax advisor mishap in the handling of the athlete’s taxes, it is the athlete who has to show that he has not been negligent in handing the responsibility of his tax affairs to somebody else!
We are here to help you deal with all this taxation jargon. For more information on how taxes affect Money Smart Athletes you can contact us at [email protected].