Note: this article was published in 2001. Since then the threshold for compulsory registration for GST and the marginal tax rates have changed. See ato.gov.au/business/gst/registering-for-gst/
The introduction of the Goods and Services Tax in July 2000 heralded a fundamental change to the tax system. Since its introduction the GST has been a source of constant inquiries from callers to the Arts Law Centre of Australia. To assist artists we approached Steven Miller from Steven J Miller and Co. Steve is an accountant with close links to the arts community and has been a generous supporter of the Arts Law Centre of Australia for some time. We asked him common questions that artists have regarding the GST. His answers will help artists (and lawyers alike) to remove lingering confusion about how the GST affects them and their arts practices.
1. When should an artist apply for an Australian Business Number?
The ABN is important for identification purposes under the PAYG system. Since 1 July 2000, if an artist does not quote his or her ABN on invoices provided to other businesses, the service requirer may be required to deduct a withholding of 48.5% (the top marginal tax rate plus the medicare levy) from payments made to the artist.
The ABN is also the GST registration number if an artist is required to be registered for GST.
When an artist applies to the Australian Taxation Office for an ABN they will be required to prove that they are carrying on an enterprise. Only individuals, companies or partnerships operating an enterprise (a business that is a significant commercial undertaking operated with a view to making a profit) will be entitled to obtain an ABN.
2. When should an artist register for the GST?
An artist must register for the GST if their current annual turnover is $50,000 or if their projected annual turnover is $50,000 or more. In effect, the artist is required to assess the level of their turnover on an ongoing monthly basis. They will need to look at the past 12 months as well as the next 12 months, each month, to determine whether they have a requirement to register.
Annual turnover is income from the carrying on of the artist's enterprise, it does not include salary and wage income or personal investment income eg., dividends, interest or investment property rent or activities that are considered to be hobbies.
3. Should an artist register for GST if the annual turnover from their enterprise is less than $50,000?
Generally, I would suggest that an artist probably would not register for GST because of the administrative requirements of preparing quarterly Business Activity Statements (BAS) and retaining and keeping safe the GST collected.
In my opinion, there would be limited circumstances where an enterprise with annual turnover of less than $50,000 would register for the GST:
- When the enterprise wants access to input tax credits (the GST embedded in your purchases) because it plans to spend a significant amount on capital assets. A purchase of plant costing $110,000 would cost $100,000 if the enterprise was registered for GST because it would be entitled to an input tax credit on its quarterly BAS.
- Where it is perceived that GST registration is advantageous from a marketing perspective eg., Two artworks are hung side by side, both carrying a price of $1,100, however, one work is by a GST registered artist and the other is not registered. A business buyer who is registered for GST may choose to buy the artwork by the GST registered artist because of the input tax credit of $100. In effect, the GST registered artist's work will cost the buyer $1,000 whereas the unregistered artist's work will cost $1,100.
In reality, artworks are purchased because they appeal to the buyer and accordingly, this issue should not present a threat to an unregistered artist, however, I feel the point needs to be made.
4. If an artist supplies work to a gallery on a consignment basis how should GST be calculated and when should it be paid?
Where goods are supplied on a consignment basis there will only be an obligation to collect the GST when the goods are eventually sold.
The timing of the payment of the GST will depend on whether the artist is registered for GST and on what basis, accruals or cash.
If the artist is an accruals GST taxpayer, he or she will be required to remit the full amount of GST in the quarter the artwork is sold, even if the purchaser is given terms in which to pay for the work.
An artwork has been held on consignment by a dealer since June 2001 and is sold for $3,300 in September 2001. The buyer is given 3 months to pay ($1,100 in September, $1,100 in October and November 2001) and the artist is registered for GST on an accruals basis. Even though the artist has not received full payment for the artwork by the end of September 2001, the artist, as an accruals GST taxpayer, is required to include the full sale of $3,300 in his or her September 2001 Quarter BAS and pay the ATO the GST of $300 (1/11th of $3,300).
If the artist is a cash based GST taxpayer, the GST is attributed to the quarterly tax period in which the artist becomes aware that any consideration for the sale of the artwork has been received. Using the above example, the artist would include a sale of $1,100 in his or her September 2001 quarter BAS and a sale of $2,200 in his or her December 2001 quarter BAS. The ATO would accordingly receive $100 GST in the September 2001 quarter BAS and $200 in the December 2001 quarter BAS.
5. If an artist has an agency agreement with a Gallery does the Gallery charge GST on the commission for the sale of the artworks?
It must be remembered that if an artist has an agency agreement with a Gallery, the obligation to pay the ATO the GST collected still falls on the artist (assuming of course that the artist is registered for GST). The gallery will issue one of its tax invoices (displaying the gallery's ABN) when the artist's work is sold.
The gallery will charge and deduct its commission including GST (if the gallery is registered for GST and in nearly all cases it will be) from the sale of the artist's work.
The gallery will provide the artist with sufficient information to fulfil his or her GST obligations.
- Details of the sale and the amount of GST collected. The agent may provide the artist with a recipient produced tax invoice or a copy of the tax invoice they raised and provided to the buyer.
- A tax invoice for the gallery's commission including GST based on the sale price (exclusive of GST).
- Payment in relation to the sale ie., the sale proceeds including GST less the agent gallery's commission including GST.
A gallery makes a sale in September 2001 of an artist's work for $2,200 cash ($2,000 + GST of $200) and charges a 30% commission on the sale. The gallery would provide the artist with details of the sale, a tax invoice for its commission for $660 ($2000 x 30% = $600 + 10% GST of $60 = $660) and a cheque for $1,540 ($2,200 – $660).
The artist would include in his or her September 2001 BAS sales including GST of $2,200, purchases including GST of $660 and pay to the ATO a cheque for $140 for the net GST due ($200 – $60) by 28 October 2001.
6. Is GST payable on the fees earned in tendering for a Public Art Commission? What about prize money earned in art competitions?
The answer to the first question is 'Yes' unless the work is for export to an overseas buyer or if the artist is not registered for GST. A public commission is a taxable sale for GST just the same as a sale through a gallery or directly to a buyer.
Prize money, like grants or subsidies is only subject to GST when they are paid without strings or conditions attached to them. If the prize is for the purchase of the artist's artwork entry it would be a taxable sale or if the artist was required to do something in return for the prize eg., advertise the award over the next year. Of course, if the artist is not registered for GST there will be no obligation to pay GST, however, be aware that a taxable art prize may push the artist's annual turnover over the $50,000 threshold and force registration.
Given that the circumstances of each case are different it is important that artists seek advice when the occasion of the prize arises so that he or she can treat it correctly for GST purposes.
7. What suggestions do you have for artists when preparing Business Activity Statements (BAS)?
When each BAS is completed artists should be aware of the components of the BAS that are required to be completed. It may be that there is more than one area to complete and remit tax for. Generally, an artist will complete the GST disclosures but it is possible that an artist will need to pay PAYG instalment tax and remit PAYG withholdings from payments made to employees. I realise that most artists do not employ staff but it is likely that a PAYG tax instalment is required if the artist operates a profitable enterprise.
Black ink should be used when completing the BAS and boxes should be completed with a '0' if activities are Nil, otherwise the ATO may think that the artist has neglected to complete the BAS in full.
In my opinion, artists should always use the actual method for calculating their GST obligations, using the ATO's GST calculated amount may result in an underpayment of GST.
Artists should make sure that the GST is paid and that the BAS is lodged on time, failure to lodge a BAS within the required period may result in the levying of a penalty of up to $1,100 per form. Further, failure to pay GST and instalment/withholding amounts will accrue a general interest charge, currently 11.95% per annum.
8. How can software, like MYOB (Mind Your Own Business) be used to simplify the preparation of the BAS?
I find that if artists create tax codes for private transactions (PRI), internal or bank transfers (TRF) these codes will isolate these amounts from N-T transactions and they can quite easily be ignored when the GST Summary report is printed. All transactions using these codes will be totalled and reported separately.
Artists should also create a 'GCA' tax code for GST on capital acquisitions. This will separate these purchases from GST purchases for BAS reporting.
Artists should also print a GST exception report and detailed (cash or accruals depending on how you are registered) GST report whenever a BAS is prepared. The exception report will itemise those transactions that have not been given a tax code, generally wages and salaries. If there is something reported that should have had a tax code it is quite easy to go back and amend the transaction.
The GST detailed cash or accruals report will allow a more detailed review of the GST, N-T, GCA and PRI transactions. Make adjustments where necessary.
9. Finally, what suggestions do you have for the tax effective operation of artists' practices?
If artists are registered for GST they must have a tax invoice for all taxable purchases (except those small items under $55 including GST) to claim a GST input tax credit and to claim a tax deduction. If an artist is not registered for GST they do not have the capacity to charge GST or the ability to obtain a refund of the GST embedded in their purchases. If they are unregistered for GST they will still be entitled to a tax deduction on the full cost (inclusive of GST) of all purchases of goods and services, assuming they are costs necessarily incurred in earning their income and not private in nature.
Therefore, regardless of whether an artist is registered for GST there will always be a need to have systems in place that enable the acquittal of his or her taxation responsibilities.
It is essential that artists use accounting software or manual records that account for all income and expenses. If the number of business transactions is limited, a manual recording system will suffice, however, where there are a number of transactions combined with GST registration it is highly likely that MYOB or similar software is required.
- Artists should record small expenditures, generally under $10, in their diary if they do not obtain a receipt eg., parking meters, bridge tolls, magazines, stationery etc. Although businesses are not subject to the same level of substantiation as employees, artists still need to have evidence of any payments for goods or services.
- If an artist uses his or her motor vehicle for business purposes and the business travel is greater than 5,000 kilometres per annum, it is advisable that a 12 consecutive week logbook is prepared. Where the business travel is less than 5,000 kilometres per annum a claim may be based on a cents per kilometre rate as advised by the ATO.
- Artists should also prepare a list of the artworks on hand for sale at 30 June of each year. The stock listing should include all works for sale and each work should be costed to determine the total value of works on hand at the end of each year.
The value will be the lower of cost and net realisable value. Cost will be the cost of materials eg., materials, paint, framing etc and will NOT INCLUDE the artist's time in producing the work (unless of course the artist paid someone else to produce the work for them). If the realisable value of the artwork is less than cost, artists should use this figure as the artwork's value for stock valuation purposes.
- Sales and supplier invoices should be filed in date or cheque number order, it will be easier to check information and to access details in the event of a GST or tax audit.