The Tax Headache: finding deductions

Dear Agony Aunt,

It’s that time of year when I’m having to assess my financial situation. What has triggered this question is a conversation I had at a party recently where another artist I talked to said we artists can claim our art practice expenses against all our forms of income not just from art sales. Is this true and if so, what sort of things could I claim? I’m an installation artist but also teach kids art classes locally and work in a café at weekends. Tax Timer Erskineville

Dear Tax Timer,

This is a very timely letter as we approach the end of the financial year. You definitely should go along to the Tax Time for Creatives workshop being offered by the IWCN at 6.00pm on Tuesday 4th June at the Marrickville Pavilion, in the Marrickville Library. It is free for all IWCN members. But to answer your questions, your informant is correct though it only applies to professional artists not ‘hobbyists’. In explanation I will be quoting from the Australian Tax Office (ATO) so forgive the formality of some of the language. The ATO’s rules determine what income tax concessions you are entitled to claim. For arts people, these rules are contained in the ATO ruling - TR2005/1 ‘Income Tax: Carrying on a business as a professional artist’.1 It applies to:
  1. an 'author of a literary, dramatic, musical or artistic work',
  2. a 'performing artist'; or
  3. a 'production associate'.
The ATO issued this ruling to clarify the difference between a ‘professional arts business’ and a ‘hobbyist’. Working out which category you fall into will depend on your demonstrating that you meet certain of the ATO’s criteria. It is not a pushover but it is well worth it. The key indicators used by the ATO to decide whether a taxpayer's activities amount to the carrying on of a business are:
  1. whether the activity has a significant commercial purpose or character;
  2. whether the taxpayer has more than just an intention to engage in business;
  3. whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
  4. whether there is repetition and regularity of the activity;
  5. 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;
  6. whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit;
  7. the size, scale and permanency of the activity; and
  8. whether the activity is better described as a hobby, a form of recreation or a sporting activity.
These criteria are more fully explained in the Ruling so you should check them out to decide how they apply in relation to your practice. This may seem very commercial in focus but the good thing is that the ATO recognises that, “people who engage in professional arts businesses are often motivated by creative purposes and the desire to influence public opinion. Art is not always produced with a pre-existing market in mind; rather, an innovative artist may have to create a new market for their work. For this reason, a large part of being in business as a professional artist may involve activities directed towards reputation building and audience/market creation.” This will give you an indication of the sorts of things you can claim for. It’s hard to be specific because artistic practice is so diverse. But for example it can include research costs, art materials and equipment, studio rent, fee to hire an exhibition/performance space and associated costs, insurance, freight and/or travel expenses, documentation, advertising across a range of media and so on. But as proof, it will be important to keep accurate and detailed records of all incomings and outgoings, which you may already be doing anyway. The reality is that many artists make a loss from their art activities and seek other sources of income in order to support their artistic practice. It sounds like you may fall into this category. If you run what can be proved to be a ‘professional arts business’ you can deduct losses from this arts business against income earned from other sources like your kids teaching and café work. To qualify for this concession you would have to be earning less than $40,000 from your non-arts business activities. If this non-arts income is more than $40,000, the standard ‘non-commercial loss provisions’ would apply. That means that you would have to meet the additional following tests for your losses to be tax deductible (you must meet the first criterion and at least one of the other four):
  • your income is less than $250,000
  • you have an assessable income from your arts activity of at least $20,000;
  • you have produced a profit in three out of the past five years;
  • you use real property or an interest in real property worth at least $500,000 on a continuing basis; or
  • the value of your other assets is worth at least $100,000 on a continuing basis (including equipment, stock, trademarks, patents, copyrights).”
If you want further user friendly explanations go to the websites of both NAVA and Arts Law As an extra for other people reading this, it may be of interest to know that there also are some additional rules for performing artists who are employees. In May 2007 the ATO issued a publication relating specifically to employee performing artists (NAT2325-6.2007). You can find it online here. 1 Getting this ruling was one of the achievements of the National Association for the Visual Arts (NAVA) won in 2005 after a 10 year campaign.