The Australian taxation landscape has shifted significantly over the past decade and many artists remain unaware of the tax consequences and potential benefits of the current taxation regime. For the purposes of taxation, artists can be split into three basic groups: operators of professional arts businesses, employee artists and hobbyists. Whilst the taxation of 'employee artists' does not differ significantly from other professions, the classification of an artist as either an operator of a 'professional arts business' or a 'hobbyist' is key to unlocking the correct tax treatment and potentially accessing income tax concessions.
Carrying on 'professional arts' business
In January 2005 the Australian Tax Office (ATO) issued tax ruling TR2005/1 'Income Tax: Carrying on a business as a professional artist'. The ATO issued the ruling to clarify the categorisations of 'professional arts business' and 'hobbyist'.
The distinction between the two is crucial as hobbyists are not required to report income or claim any deductions in relation to their activities. On the other hand, subject to a variety of tests, carrying on a professional arts business may give the opportunity to claim losses incurred.
In accordance with TR2005/1, to qualify as a professional arts business the following indicators must be considered:
- whether the activity has a significant commercial purpose or character – this indicator comprises many aspects of the other indicators;
- whether the taxpayer has more than just an intention to engage in business;
- whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
- whether there is repetition and regularity of the activity;
- whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
- whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit;
- the size, scale and permanency of the activity; and
- whether the activity is better described as a hobby, a form of recreation or a sporting activity.
Further information regarding the indicators may be found on the ATO website under TR2005/1.
Should your activities qualify as a professional arts business and not a hobby, it is important to consider which business structure the activity will be conducted in.
The main structuring options available include trading as a sole trader, a partnership, a company, an incorporated association or a trust. The majority of professional artists (earning under $80,000 per annum) trade under a sole trader structure due to the lower annual compliance costs.
It is important to note that each structure has its benefits and consequences and further advice should be sort in relation to each specific circumstance from the Arts Law Centre, a qualified lawyer or your local tax adviser.
You may also wish to refer to Business Structures and Governance: A Practical Guide for the Arts which can be purched through Arts Law.
Depending on your circumstances, your business may be required to attend to the following registrations:
- Business name registration: Available through the department of fair trading/consumer affairs in your state or territory.
- Australian Business Number (ABN): All Australian business must have an ABN. You may apply online for free at www.abr.gov.au.
- Goods & Services Tax (GST): If your annual gross income (from your business activities) exceeds $75,000 per annum, you are required to be registered for Goods & Services Tax (GST). You may choose to register voluntarily if your income is lower that $75,000 per annum, however this will often result in higher compliance costs. For further information regarding GST, visit www.ato.gov.au.
If your business employs other individuals, additional registrations such as workers compensation insurance, superannuation and PAYG Withholding may also be required.
If you are only engaged in artistic practice as a hobby, it is likely that none of the above registrations are required.
Non-commercial loss concessions
Assuming your activities are classed as a 'professional arts business' you may be eligible for an exemption from the 'non-commercial loss rules'.
The non-commercial loss exemption allows professional artists to deduct losses from their professional arts business against income earned from other sources. To qualify for this concession, artists must be carrying on a 'professional arts business' and have other (non-professional arts business) income of less than $40,000 (excluding any net capital gains).
John is a professional musician running a professional arts business. As the income from his business fluctuates he also works as a waiter, earning $35,000 p.a. For the year ended 30 June 2007, John earns $10,000 in income from gigs and has $15,000 in allowable deductions relating to that income. Because John's income from other sources is less than $40,000, John qualifies for an exemption from the 'non-commercial loss' rules. This means that the $5,000 loss made from his professional arts business can be offset against his waiting income of $35,000, resulting in a taxable income of $30,000.
Should the artist's other income exceed $40,000, the standard 'non-commercial loss provisions' will apply. These standard provisions require that the tax payer pass one of the following tests for the loss to be deductible:
- have an assessable income from the activity of at least $20,000;
- have produced a profit in three out of the past five years;
- use real property or an interest in real property worth at least $500,000 on a continuing basis; or
- use other assets worth at least $100,000 on a continuing basis.
Further information on non-commercial losses can be found by searching for 'Non-commercial losses essentials' on the ATO webpage (www.ato.gov.au).
Common deductions for employee performing artists
In May 2007 the ATO issued a publication relating specifically to employee performing artists (NAT2325-6.2007). This document is available online at www.ato.gov.au and provides a useful guide for completing individual income tax returns for employee artists.
Some of the deductions included in the publication are as follows:
Agent's fees: You can claim a deduction for commissions paid to theatrical agents. You cannot claim a deduction for upfront or joining fees.
Audition expenses: You cannot claim a deduction for the cost of preparing for or attending auditions, as they are incurred in getting work rather than doing work.
Coaching classes: You can claim a deduction for the cost of classes taken to maintain existing specific skills or to obtain work-related specific skills. You can claim a deduction for the cost of lessons to acquire specific skills for use in a particular role or performance.
Fitness expenses: You can claim a deduction for fitness expenses if you are required to maintain a very high level of fitness and physical activity is an essential element in your work – for example, as a trapeze artist. You cannot claim a deduction for the cost of maintaining general fitness or body shape.
Travel: You can claim an income tax deduction for transport expenses where the following conditions are met:
- you incur transport expenses in travelling directly between the two places of work;
- the purpose of the travel between workplaces is to also earn assessable income at the second place (note that travel to auditions is not deductible);
- at the time of the travel the income earning activities at the first workplace had not permanently ceased; and
- the individual does not reside at either place.
Depreciation: You may claim deprecation on the business portion of any capital expenditure incurred (e.g. computers, musical instruments, etc).
Photographs: You can claim a deduction for the cost of maintaining a photographic portfolio for publicity purposes. You cannot claim a deduction for the initial cost of preparing the portfolio.
Theatre and film tickets: You can claim a deduction for the cost of theatre and film tickets if the show has a content directly related to your current work. You cannot claim the cost of tickets for shows you attend for general interest, entertainment or other private purposes.
Please click here to view/download a summary table in PDF format.
Michael Dean is a member of the Institute of Chartered Accountants.