Tax for artists: Tips for a stress free tax return
The end of the financial year generally sends people a panic attack which makes them put off looking at their financial affairs for the past year. However, lodging a tax return can be a great way of getting money back as an artist, particularly if you work for yourself. Read on for a guide to a pain free tax return.
Back to basics
The Australian tax year runs from 1 July to 30 June and the due date for lodging your return is 31 October unless you use a registered tax agent. If you use a registered tax agent you can lodge later than 31 October, but you need to be registered as a client with that tax agent before 31 October to qualify. Australian tax residents are taxed on worldwide income which means that even if you work overseas, sell artwork overseas or perform overseas, the income will generally be taxable in Australia and needs to be reported in your Australian tax return. Your liability to pay tax on overseas income, however, will vary according to a number of factors and you should check the ATO website in the section “Working overseas - what you need to know”or seek professional tax advice if you have any issues in this regard.
A number of expenses relating to your arts practice can be claimed as a deduction thereby offsetting your assessable income. In order to make those deductions it is vital that you keep records and documents of those expenses. You are generally required to keep records relating to your tax return for a period of five years from the date the ATO issues your ‘Notice of Assessment’ which summarises your tax position for the previous year. As with most things, there are exceptions to this and these are set out on the ATO website under the heading “How long should you keep your records?” Credit card statements are acceptable records in place of receipts provided it states the supplier and date of purchase.
As of 1 July 2012, the tax-free threshold increased to $18,200 meaning that if you earned below this amount you are not required to lodge a tax return however, if you received a payment where tax was withheld you should lodge a return to recover the withheld tax that you are entitled to.
How will you be taxed?
In order to determine how the income you earn as an artist will be taxed, it is first necessary to determine how your income is earned. The income you earn will generally fall into one of the following three categories:
- Income earned from employment as an artist;
- Income earned from operating a professional arts business; or
- Income earned from an arts hobby.
Depending on your circumstances, you may actually fall into more than one of these categories. For example, you might be employed as a photographer for a newspaper and on weekends run a wedding photography business. The income earned from each category will need to be treated accordingly.
Employment as an artist
The taxation of 'employee artists' is not significantly different from other professions; your employer should be withholding tax, known as PAYG (Pay As You Go), from payments made to you and making compulsory contributions to superannuation on your behalf.
By 14 July each year you should receive a PAYG Payment Summary stating your taxable earnings and the amount of PAYG withheld for the previous financial year.
Generally, you are able to take a tax deduction for out of pocket expenses (i.e. your employer has not reimbursed the cost) to the extent that they are connected to your employment. For example:
- Motor vehicle expenses – you cannot claim the cost of travel from home to work, however you can claim the cost of travel between two places of employment.
- Self education expenses – for costs associated with courses directly related to your current line of employment.
- Work related development – including books, magazines, seminars, conferences and workshops.
- Tools and equipment (including computers) – purchases of tools and equipment under $300 can be deducted in the year of purchase, otherwise they will need to be claimed over a number of years (known as the “effective life” of an asset). The ATO publishes effective lives for a wide array of items.
- Home office expenses – if you perform work from home, you may claim a deduction for the costs you incur and for some depreciation against you equipment such as desks, computers and other business related assets.
For employee performing artists, the ATO has issued a specific ruling relating to the types of deductions that performing artists can make. Visit the ATO’s website for further information on the Taxation Ruling TR 95/20 – Income tax: Employee performing artists – allowances, reimbursements and work-related expenses (http://www.ato.gov.au/content/00313582.htm). The types of deductions employee performing artists can make include commissions paid to theatrical agents, coaching classes, fitness expenses, the costs of maintaining a photographic portfolio and film tickets directly related to your current work.
Operating a professional arts business
Are you conducting a hobby or operating a business?
This is a crucial (and often very difficult) question to answer. Obviously, if your primary income is derived from your arts practice, then you would be seen as operating a business. However, for many artists who conduct their arts practice as a side-line operation to their main source of income, the distinction between conducting a hobby and operating an arts business is often difficult to discern.
Where you are operating a business, your income and expenses are reported on your tax return. If your income outweighs your expenses you have made a profit from your business and you will be required to pay tax on that profit. Although profit is the ultimate goal of every business owner, this is not always the reality and many actually make losses (i.e. their expenses outweigh their income) especially when they are first starting out. If you are making a loss then you may be able to use that loss to reduce other income you have earned and therefore reduce the tax you are required to pay. However there are certain tests you must pass in order to do so.
The first test is to consider whether you really are in business or if you conduct a hobby. If the law deems that you are conducting a hobby, the income you earn and expenses you incur from that activity are not reported in your tax return. This makes things nice and simple as you do not need to keep any records, issue invoices, charge GST etc, but can be disadvantageous as you cannot use the losses to reduce the amount of tax you are required to pay on other income.
The ATO considers the following factors important in distinguishing a business from a hobby:
- Does your activity have a significant commercial purpose or character?
- Do you have more than just an intention to engage in business?
- Do you have a purpose of profit as well as a prospect of profit?
- Is there repetition and regularity to your activity?
- Is your activity carried on in a similar manner to other businesses in your industry?
- Is your activity planned, organised and carried on in a business-like manner?
- Does your activity have characteristics of size, scale and permanency?
- Would it be true to say your activity is really better described as a business, rather than a hobby or recreation?
No one factor is decisive, however each time you answer yes to a question it increases the chance that you are actually operating a business rather than a hobby.
So you have determined you are operating a business, what now?
Depending on your circumstances, your business may be required to undertake the following registrations:
- Business name registration - unless trading under your own name;
- Australian Business Number (ABN): You can apply online for free at www.abr.gov.au; and
- 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 than $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.
Non – commercial losses
As mentioned earlier, if you are in business you will be required to report your business income and expenditure on your tax return. However, being in business doesn’t automatically mean that losses from your business can be used to reduce your other income. You may actually be required to set those losses aside to be used to reduce business profits in future years. The non-commercial loss rules will determine whether your business losses may offset your other income.
You must first satisfy the income requirement. Your income for non-commercial loss purposes must be less than $250,000. This includes your:
- taxable income (ignoring any business losses);
- total reportable fringe benefits amount;
- reportable superannuation contributions; and
- total net investment loss.
If you meet the income requirement, you can offset a loss from a business against your income from other sources if the business also passes one of the business activity tests:
- the assessable income test - the business has assessable income of at least $20,000. Note: assessable income is the amount you earn before you take any costs/expenditure into account;
- the profits test - the business had a profit for tax purposes in three out of the past five years (including the current year);
- the real property test - the value of real property, or of an interest in real property, that you used in the business on a continuing basis was at least $500,000; or
- the other assets test - the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000.
If you do not meet any of the business activity tests, there is an exemption that applies to individuals carrying on a professional arts business:
- An individual carrying on a professional arts business may claim a loss from the business against assessable income from other sources in the same year if that other assessable income is less than $40,000.
It is important to define who is considered a professional artist for this exemption. For tax purposes professional artists are persons who carry on activities as either:
- an author of a literary, dramatic, musical or artistic work;
- a performing artist; or
- a production associate.
Income averaging is available to what the ATO deems ‘Special professionals’ and includes authors of a literary, dramatic, musical or artistic work, a performing artist or a production associate. For freelance workers this concessional tax treatment allows you to spread your income out over a period of five years. Tax is paid on all the income for a particular year however; the rate at which the tax is applied is based on what would apply if you had earned that income over the five year period.
1. Keep records of any expenses related to your arts practice in case they can be deducted
2. Consider if you are conducting a hobby or operating an arts business
3. Lodge your tax return on time. Penalties apply for late lodgement and you may be required to pay interest on any overdue tax.
Disclaimer: This article is intended as a general guide only. For specific advice on tax requirements contact a Registered Tax Agent.
- Taxation Ruling TR 95/20 – Income Tax: employee performing artists – allowances, reimbursements and work-related expenses
- ATO Taxation Ruling TR 2005/1 - Income Tax: carrying on business as a professional artist
- Income Averaging for special professionals