by Delia Browne
Former Executive Director of the Arts Law Centre of Australia
First published in IF magazine, September 2000.
Tax is a subject that possesses dismally low box office appeal, but, while it may not be sexy, it is worth taking seriously.
You might be tempted to ignore the implications of the new tax regime that came into effect on 1 July, 2000, but doing so could be costly. If you do not have (or do not provide) an Australian Business Number (ABN) for goods or services you supply, payments made to you may be subject to the new Pay As You Go (PAYG) withholding tax of 48.5%. PAYG could affect all those currently operating as independent contractors such as freelance scriptwriters, costume designers, composers, crew members, producers and actors - a substantial proportion of the film industry.
What is the ABN?
One of the key components of the Federal government's new tax system is the introduction of the ABN. The ABN is intended to be the Federal government?s single business identifier for an enterprise.
Broadly speaking, all business entities - whether a freelance contractor (such as a set designer, editor or composer), partnership (independent film producers or a band), association or company - will need to be able to supply an ABN for their business dealings. This makes registration a requirement for virtually everyone other than wage or salary earners. The key word is "enterprise" and the bottom line is that if you are running a "business", you need to register for an ABN, regardless of whether or not you have to also register for the GST.
How do I get an ABN?
An ABN will be issued to entities (individuals or organisations) which satisfy the definition of carrying on an enterprise. An enterprise includes any activity done in the form of a business, venture or concern in the nature of a trade, and the activities of various religious, charitable, or government entities.
Incorporated entities and those satisfying the requirements for GST registration will automatically be entitled to an ABN. However, sole traders and freelance contractors, who are not incorporated, have to satisfy the Commissioner of Taxation that they are "carrying on an enterprise" in order to be entitled to an ABN. An ABN can be withheld if, in the ATO?s opinion, you are not carrying on a business or the activity being engaged in is determined to be a "hobby".
The ATO definition of "enterprise" specifically excludes:
- hobbies and private recreational pursuits; and
- any activity done by an individual or a partnership without reasonable expectation of profit or gain The second exclusion presents a potential problem for filmmakers who support themselves by means other than their filmmaking. Many filmmakers record losses for a considerable time before (hopefully) achieving widespread recognition and commercial success.
At this stage it is not clear on what grounds an ABN may be refused. However, in the event that your application is unsuccessful, not having an ABN means that all businesses purchasing your services may be required to deduct 48.5% PAYG withholding tax from their payment.
Once you have an ABN, make sure it is included on all your stationery, invoices and accounting systems.
What is Pay As You Go?
PAYG began to operate from 1 July 2000. It replaces a range of tax systems and is essentially a withholding tax system that applies to payments made on or after 1 July 2000. Where services are provided to an entity which has not supplied an ABN, the payer is obliged to deduct 48.5% and pay it to the ATO.
PAYG means that unless the person supplying a service (such as a set designer, lighting technician, editor or director) can provide an ABN then PAYG will apply. PAYG will apply to:
- payment for work and services;
- retirement amounts and annuities;
- a payment arising from an investment where the payee/recipient does not quote a TFN or an ABN; and
- payment of royalties.
Alternatively the person providing the service may be engaged as an employee, complete an Employment Declaration form and be subject to employee tax provisions.
What does Pay As You Go mean for filmmakers?
- you are a screenwriter who has entered into an option agreement that entitles you to a $5,000 option fee. If you do not supply an ABN the filmmaker will be required to deduct $2,425 PAYG withholding tax from the payment.
- you are a freelance actor and you have invoiced the producer for your fee of $1,000. Unless you supply an ABN the producer is required to deduct $485 PAYG withholding tax from your fee.
- you are producing a short film, and you have succeeded in obtaining government funding of $20,000 for the project. Without an ABN, the funder is required to deduct $9,700 PAYG withholding tax from the grant.
- you are a director entitled to a royalty payment of $10,000. Unless you have an ABN, the producer is entitled to withhold $4,850 PAYG tax.
When and how do you Pay As You Go?
Under the PAYG system artists in business will be required to lodge monthly or quarterly Business Activity Statements (BAS) specifying the gross income for the previous quarter and the income tax payable. The tax payable is calculated on the tax rate applicable on the previous tax return. Arts Law recommends that you obtain specialist advice for your particular circumstances from your tax advisor.
For further information check out "Your Number is up: ABN, PAYG and the GST", "GST 2000 - This is not a dress rehearsal", "GST - A hazard for the arts" and Tax Update and the ATO's website at www.ato.gov.au or call the ATO on 132 860.
