First published in ART+law newsletter issue June 2000.
Arts Law with other arts organisations intensively lobbied both the Government and opposition parties to amend the Bill by providing a specific exemption for “Professional Arts Businesses". These amendments have been agreed to by all parties.
Arts Law recommended amendments
Arts Law recommended the following definition: “professional arts practitioner” means an individual who carries on business (either alone or in partnership) as:
(a) the author of a literary, dramatic, musical or artistic work;
(b) a performing artist; or
(c) a production associate.
It should be noted that the definition of what constitutes a professional arts practitioner is very inclusive and farreaching in scope. This definition is linked to an already existing definition of “Special Professional” in the tax averaging provision of the Income Tax Assessment Act 1997 (section 405-25). It covers not only visual artists, but writers, playwrights, screen writers, film, TV and stage directors, performing artists (including actors and dancers), multimedia artists, choreographers, musicians, and composers. It also extends to those providing artist’s support and production support to film and the performing arts, such as costume designers, directors of photography, editors, etc.
Arts Law, with the support of the National Association for the Visual Arts (NAVA), the Australian Society of Authors (ASA) and other arts organisations, proposed two alternatives for consideration.
Alternative 1: that an individual who carries on a legitimate business as an artist be exempted from the legislation.
We proposed the insertion of a new provision as follows:
"The rule in section 35-10 does not apply to a business activity for an income year carried on by you as a professional arts practitioner."
Alternative 2: that an individual who carries on a legitimate business as an artist be included in the $40,000 exemption currently restricted to primary producers.
Although not our preferred alternative, our second proposal was to include professional practicing artists in the $40,000 "other income" exemption, provided that the exemption is linked to the Consumer Price Index to preserve its effectiveness in years to come.
Changes could be made to section 35-10(4) as underlined:
(4) The rule in subsection (2) does not apply to a business activity for an income year if:
(a) the activity is a primary production business or a business as a professional arts practitioner; and
(b) your assessable income for that year (except any net capital gain) from other sources that are not primary production businesses or business as a professional arts practitioner is less than:
(i) for the income year commencing 1 July 2000, the amount of $40,000; and
(ii) for the income year commencing 1 July 2001 and subsequent income years, the amount of $40,000 adjusted annually for the movement in the Consumer Price Index, as determined in writing each year by the Commissioner.
The Government did not wish to provide for any special exemptions for any such special interest groups in the Bill, despite that fact that Bill already provide a specific exemption for primary producers. The Government was also of the view that the Bill’s in built Commissioner’s discretion safeguarded against any unfair consequences suffered by a particular industry. Arts Law did not find either of these reasons satisfactory.
Current position of artists
Professional Arts Practitioners are in business. Business is defined in section 995(1) of the Income Tax Assessment Act 1997 as "any profession, trade, employment, vocation or calling.”
Section 8-1 of the Income Tax Assessment Act allows a person to deduct allowable expenses in determining their tax income.
"You can deduct from assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."
In 1996-1998, the ATO reviewed its treatment of visual artists for taxation purposes, focussing on whether visual artists that incurred losses in their arts business were carrying on business or a hobby or non-commercial activities. The ATO conducted interviews with various visual artists at its Bankstown office. During the course of one interview with a film producer who make short documentary films, the ATO officer stated: “Well, it is not exactly Crocodile Dundee, is it?” In another interview with a painter, the ATO officer stated: “Why don’t you just paint landscapes? People would buy those.”
After two years of intensive lobbying by Arts Law, NAVA and the Australia Council, the ATO finally agreed in 1998 that artists could be “carrying on a business” for the purposes of the tax legislation even if they did not make a profit. The ATO now recognises that artists can be carrying on a business even though their primary motivation is to create or produce unique artistic works rather than purely to make money. Indeed, they recognised that artists can be in business without producing profits for a considerable period of time. Guidelines were developed to ensure that a distinction could be drawn between professional practicing artists (ie. carrying on a business) and people conducting arts activities as a hobby.
It should be noted that the agreement reached with the ATO was in relation to whether an artist was carrying on a business. The issue arose because generally visual artists make losses from their arts activity. The end result of the arrangement was to acknowledge that the artists were in business and therefore they could claim their losses against other income.
The Integrity Measures Bill
The proposed legislation totally undoes this arrangement. The Bill introduced integrity measures relating to losses arising from non-commercial business activities. Its key feature is a set of objective tests to establish whether or not a loss from a business activity is deductible or whether it is to be deferred to a later time when the business finally comes into profit.
The four tests are as follows:
1. assessable income of more than $20,000;
2. profits earned in at least 3 out of the 5 previous years;
3. value of real property used in conducting the business activity (excluding land on which the residence is situated, and adjoining land) is more than $500,000; or
4. value of other business assets (excluding motor vehicles) is more than $100,000.
Almost all artists carrying on a business will not satisfy the 4 specific tests. Tests 3 and 4 are generally irrelevant in their circumstances. Accordingly, only tests 1 and 2 will need to be considered. Most professional art practitioners are earning less that $20,000pa. The Australia Bureau of Statistic's Artwork: A Report on Australians Working in the Arts shows that the medium annual income for professional art practitioners is around $20,000 and for some arts professional such as dancers, the medium income is as low as $12,000 per annum. The report further quotes the medium component of income earned by arts professionals from arts practice (as opposed to their other employment) as averaging $9,400pa. It should also be noted that it may take many years for arts professional to begin returning a profit.
Commissioner’s discretion
There is also a discretion or "safeguard test" which the Commissioner may exercise to exempt an individual from the operation of the legislation:
(a) where circumstances are outside the control of the taxpayer (examples used are floods and droughts - again, focussing on primary producers);
(b) where the business has only just commenced and because of its nature, the four given tests have not been satisfied and an objective expectation can be made as to when the tests will be satisfied. (Again, the ATO uses a “primary production” example of a tree farmer. Therefore, the discretion will operate until such time as it would be reasonable for the trees to be sold.)
This so-called safeguard test is unlikely to assist artists. Even if he wanted to, the Commissioner could never exercise his discretion in favour of an artist. Firstly, very few circumstances relevant to an artist’s business activities are outside their control. The terminology used is "flood and drought" and other natural disasters. It is extremely unlikely that a failure to make a profit in any year due to lack of market recognition of the artist's work will qualify under this discretion.
Secondly, the second limb of the discretion requires an objective expectation to be made as to when (in our circumstances) tests 1 and 2 can be satisfied. Item 35-55(1)(b) is designed to allow a lead time for a business to make a profit, provided that they can demonstrate "objectively" and with the support of "independent sources" that "within a period that is commercially viable for the industry concerned" that activity will either meet one of the exceptions or will make a profit. It is almost impossible to objectively assess when and if an artist is going to become successful or to state what is a reasonable period of time for this to occur in any arts industry. Artists are not tree farmers and it is unlikely that the Commissioner would exercise his discretion under any of these guidelines.
Primary producers exception
In addition, the Bill also provides an exception for primary producers (item 35-10(4)) where their assessable income from that year from other sources (ie. not the primary production business) is less that $40,000. Like primary producers, Arts Law argued that "Professional Arts Practitioners" must be included as additional specific exemption under item 35-10(4). At the very least, professional arts practitioners should be given parity with primary producers.
Exemption for professional arts business
Seeing that these new objective test would be proved impossible for part-time arts professionals, Arts Law and others rallied to lobby the government and position parties.
At the outset, Senator Bob Brown of the Greens proposed amendments to exempt professional artists from the Bill but also included a second choice along the lines of the exemption given to primary producers. Senator Aden Ridgeway drafted Democrats amendments, exempting "professional arts practitioners" subject to the threshold test of $40,000 as set for primary producers. The Hon. Duncan Kerr, Shadow Attorney General and Shadow Minister for the Arts, stated "the Labor Party will support amendments extending the primary producers exemption to individual artists allowing them to offset genuine art practices losses against a second income up to $40,000". Due to the multilateral support for such amendments with the Opposition parties in the Senate, the Federal government gave in principle support to the Democrats amendments.
The Bill is due to be passed and will include a specific exemption for "professional arts business". The definition of "professional arts business" is the definition provided by Arts Law for "professional arts practitioner".
The Bill now reads as follows:
(4) The Rule in subsection (2) does not apply to a business activity for an income year if:
(a) the activity is a primary production business, or a professional arts business; and
(b) your assessable income for that year (except any net capital gain) from other sources that do not relate to your activity is less than $40,000.
(5) A professional arts business is a business you carry on as:
(a) the author of a literary, dramatic, musical or artistic work; or
(b) a performing artist; or
(c) a production associate.
The Government would not index the income threshold of $40,000 nor would it agree to three yearly reviews of the threshold. It did however promise in a letter to the Democrats that they will monitor the appropriateness of the threshold as it will other thresholds set out in the Income Tax Act.
Conclusion
This is a major victory for the arts. Arts Law estimated that approximately 80,000 professional arts practitioners would be affected by Bill. Without the exemptions, professional arts business would have one of three choices:
1. go on the dole and concentrate full-time on their arts activity; or
2. go to work full-time and reduce the amount of time spent on their arts activity; or
3. stop their arts activity altogether.
This Bill, even with its new exemption for professional arts businesses, will continue to have an extremely negative impact on Australia’s knowledge economy by severely hindering the development of small to medium enterprises creating intellectual property, thus restricting Australia’s ability to compete in the international marketplace. It should be noted that the largest subsidy to cultural life in Australia does not come from Government funding or corporations or patrons but from the individual professional arts practitioners themselves through their unpaid labour.
These amendments to the proposed bill have narrowly avoided a cultural diaster. Australia urgently needs to develop cultural and economic policies that promote and support cultural and arts producers. The television, film, multimedia production, book publishing, music publishing and recording, arts and cultural industries all form the basis of the knowledge or information economy.
Arts Law strongly urges the Government to examine new means of developing and promoting creative industries and to implement further tax exemptions and incentives to support and promote the arts and creative industries. Arts Law will continue to push for full exemption for "professional arts businesses", removing the threshold test. Precedents worthy of study include Ireland where artists are exempted from paying income tax on income earned from the publication, production or sale of original and creative work such as books, plays, musical compositions, paintings and sculpture. Now, there’s an incentive to create.
Arts Law with other arts organisations intensively lobbied both the Government and opposition parties to amend the Bill by providing a specific exemption for “Professional Arts Businesses". These amendments have been agreed to by all parties.
Arts Law recommended amendments
Arts Law recommended the following definition: “professional arts practitioner” means an individual who carries on business (either alone or in partnership) as:
(a) the author of a literary, dramatic, musical or artistic work;
(b) a performing artist; or
(c) a production associate.
It should be noted that the definition of what constitutes a professional arts practitioner is very inclusive and farreaching in scope. This definition is linked to an already existing definition of “Special Professional” in the tax averaging provision of the Income Tax Assessment Act 1997 (section 405-25). It covers not only visual artists, but writers, playwrights, screen writers, film, TV and stage directors, performing artists (including actors and dancers), multimedia artists, choreographers, musicians, and composers. It also extends to those providing artist’s support and production support to film and the performing arts, such as costume designers, directors of photography, editors, etc.
Arts Law, with the support of the National Association for the Visual Arts (NAVA), the Australian Society of Authors (ASA) and other arts organisations, proposed two alternatives for consideration.
Alternative 1: that an individual who carries on a legitimate business as an artist be exempted from the legislation.
We proposed the insertion of a new provision as follows:
"The rule in section 35-10 does not apply to a business activity for an income year carried on by you as a professional arts practitioner."
Alternative 2: that an individual who carries on a legitimate business as an artist be included in the $40,000 exemption currently restricted to primary producers.
Although not our preferred alternative, our second proposal was to include professional practicing artists in the $40,000 "other income" exemption, provided that the exemption is linked to the Consumer Price Index to preserve its effectiveness in years to come.
Changes could be made to section 35-10(4) as underlined:
(4) The rule in subsection (2) does not apply to a business activity for an income year if:
(a) the activity is a primary production business or a business as a professional arts practitioner; and
(b) your assessable income for that year (except any net capital gain) from other sources that are not primary production businesses or business as a professional arts practitioner is less than:
(i) for the income year commencing 1 July 2000, the amount of $40,000; and
(ii) for the income year commencing 1 July 2001 and subsequent income years, the amount of $40,000 adjusted annually for the movement in the Consumer Price Index, as determined in writing each year by the Commissioner.
The Government did not wish to provide for any special exemptions for any such special interest groups in the Bill, despite that fact that Bill already provide a specific exemption for primary producers. The Government was also of the view that the Bill’s in built Commissioner’s discretion safeguarded against any unfair consequences suffered by a particular industry. Arts Law did not find either of these reasons satisfactory.
Current position of artists
Professional Arts Practitioners are in business. Business is defined in section 995(1) of the Income Tax Assessment Act 1997 as "any profession, trade, employment, vocation or calling.”
Section 8-1 of the Income Tax Assessment Act allows a person to deduct allowable expenses in determining their tax income.
"You can deduct from assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."
In 1996-1998, the ATO reviewed its treatment of visual artists for taxation purposes, focussing on whether visual artists that incurred losses in their arts business were carrying on business or a hobby or non-commercial activities. The ATO conducted interviews with various visual artists at its Bankstown office. During the course of one interview with a film producer who make short documentary films, the ATO officer stated: “Well, it is not exactly Crocodile Dundee, is it?” In another interview with a painter, the ATO officer stated: “Why don’t you just paint landscapes? People would buy those.”
After two years of intensive lobbying by Arts Law, NAVA and the Australia Council, the ATO finally agreed in 1998 that artists could be “carrying on a business” for the purposes of the tax legislation even if they did not make a profit. The ATO now recognises that artists can be carrying on a business even though their primary motivation is to create or produce unique artistic works rather than purely to make money. Indeed, they recognised that artists can be in business without producing profits for a considerable period of time. Guidelines were developed to ensure that a distinction could be drawn between professional practicing artists (ie. carrying on a business) and people conducting arts activities as a hobby.
It should be noted that the agreement reached with the ATO was in relation to whether an artist was carrying on a business. The issue arose because generally visual artists make losses from their arts activity. The end result of the arrangement was to acknowledge that the artists were in business and therefore they could claim their losses against other income.
The Integrity Measures Bill
The proposed legislation totally undoes this arrangement. The Bill introduced integrity measures relating to losses arising from non-commercial business activities. Its key feature is a set of objective tests to establish whether or not a loss from a business activity is deductible or whether it is to be deferred to a later time when the business finally comes into profit.
The four tests are as follows:
1. assessable income of more than $20,000;
2. profits earned in at least 3 out of the 5 previous years;
3. value of real property used in conducting the business activity (excluding land on which the residence is situated, and adjoining land) is more than $500,000; or
4. value of other business assets (excluding motor vehicles) is more than $100,000.
Almost all artists carrying on a business will not satisfy the 4 specific tests. Tests 3 and 4 are generally irrelevant in their circumstances. Accordingly, only tests 1 and 2 will need to be considered. Most professional art practitioners are earning less that $20,000pa. The Australia Bureau of Statistic's Artwork: A Report on Australians Working in the Arts shows that the medium annual income for professional art practitioners is around $20,000 and for some arts professional such as dancers, the medium income is as low as $12,000 per annum. The report further quotes the medium component of income earned by arts professionals from arts practice (as opposed to their other employment) as averaging $9,400pa. It should also be noted that it may take many years for arts professional to begin returning a profit.
Commissioner’s discretion
There is also a discretion or "safeguard test" which the Commissioner may exercise to exempt an individual from the operation of the legislation:
(a) where circumstances are outside the control of the taxpayer (examples used are floods and droughts - again, focussing on primary producers);
(b) where the business has only just commenced and because of its nature, the four given tests have not been satisfied and an objective expectation can be made as to when the tests will be satisfied. (Again, the ATO uses a “primary production” example of a tree farmer. Therefore, the discretion will operate until such time as it would be reasonable for the trees to be sold.)
This so-called safeguard test is unlikely to assist artists. Even if he wanted to, the Commissioner could never exercise his discretion in favour of an artist. Firstly, very few circumstances relevant to an artist’s business activities are outside their control. The terminology used is "flood and drought" and other natural disasters. It is extremely unlikely that a failure to make a profit in any year due to lack of market recognition of the artist's work will qualify under this discretion.
Secondly, the second limb of the discretion requires an objective expectation to be made as to when (in our circumstances) tests 1 and 2 can be satisfied. Item 35-55(1)(b) is designed to allow a lead time for a business to make a profit, provided that they can demonstrate "objectively" and with the support of "independent sources" that "within a period that is commercially viable for the industry concerned" that activity will either meet one of the exceptions or will make a profit. It is almost impossible to objectively assess when and if an artist is going to become successful or to state what is a reasonable period of time for this to occur in any arts industry. Artists are not tree farmers and it is unlikely that the Commissioner would exercise his discretion under any of these guidelines.
Primary producers exception
In addition, the Bill also provides an exception for primary producers (item 35-10(4)) where their assessable income from that year from other sources (ie. not the primary production business) is less that $40,000. Like primary producers, Arts Law argued that "Professional Arts Practitioners" must be included as additional specific exemption under item 35-10(4). At the very least, professional arts practitioners should be given parity with primary producers.
Exemption for professional arts business
Seeing that these new objective test would be proved impossible for part-time arts professionals, Arts Law and others rallied to lobby the government and position parties.
At the outset, Senator Bob Brown of the Greens proposed amendments to exempt professional artists from the Bill but also included a second choice along the lines of the exemption given to primary producers. Senator Aden Ridgeway drafted Democrats amendments, exempting "professional arts practitioners" subject to the threshold test of $40,000 as set for primary producers. The Hon. Duncan Kerr, Shadow Attorney General and Shadow Minister for the Arts, stated "the Labor Party will support amendments extending the primary producers exemption to individual artists allowing them to offset genuine art practices losses against a second income up to $40,000". Due to the multilateral support for such amendments with the Opposition parties in the Senate, the Federal government gave in principle support to the Democrats amendments.
The Bill is due to be passed and will include a specific exemption for "professional arts business". The definition of "professional arts business" is the definition provided by Arts Law for "professional arts practitioner".
The Bill now reads as follows:
(4) The Rule in subsection (2) does not apply to a business activity for an income year if:
(a) the activity is a primary production business, or a professional arts business; and
(b) your assessable income for that year (except any net capital gain) from other sources that do not relate to your activity is less than $40,000.
(5) A professional arts business is a business you carry on as:
(a) the author of a literary, dramatic, musical or artistic work; or
(b) a performing artist; or
(c) a production associate.
The Government would not index the income threshold of $40,000 nor would it agree to three yearly reviews of the threshold. It did however promise in a letter to the Democrats that they will monitor the appropriateness of the threshold as it will other thresholds set out in the Income Tax Act.
Conclusion
This is a major victory for the arts. Arts Law estimated that approximately 80,000 professional arts practitioners would be affected by Bill. Without the exemptions, professional arts business would have one of three choices:
1. go on the dole and concentrate full-time on their arts activity; or
2. go to work full-time and reduce the amount of time spent on their arts activity; or
3. stop their arts activity altogether.
This Bill, even with its new exemption for professional arts businesses, will continue to have an extremely negative impact on Australia’s knowledge economy by severely hindering the development of small to medium enterprises creating intellectual property, thus restricting Australia’s ability to compete in the international marketplace. It should be noted that the largest subsidy to cultural life in Australia does not come from Government funding or corporations or patrons but from the individual professional arts practitioners themselves through their unpaid labour.
These amendments to the proposed bill have narrowly avoided a cultural diaster. Australia urgently needs to develop cultural and economic policies that promote and support cultural and arts producers. The television, film, multimedia production, book publishing, music publishing and recording, arts and cultural industries all form the basis of the knowledge or information economy.
Arts Law strongly urges the Government to examine new means of developing and promoting creative industries and to implement further tax exemptions and incentives to support and promote the arts and creative industries. Arts Law will continue to push for full exemption for "professional arts businesses", removing the threshold test. Precedents worthy of study include Ireland where artists are exempted from paying income tax on income earned from the publication, production or sale of original and creative work such as books, plays, musical compositions, paintings and sculpture. Now, there’s an incentive to create.
