Part Five: Real Life Case Example

Real life example of application of the tax law in relation to an ‘arts business’

The following is a case example of a situation you may indeed find similarities with:

Case R96 84 ATC 637 - public servant and musician

The taxpayer was a clerk employed by the public service. During the tax years in question, the taxpayer engaged in the writing of lyrics, the composing of supporting music and the rehearsal and recording of those works with a succession of bands and incurred losses from this activity in each of the years. One question for decision was whether the taxpayer was carrying on a business as a musician.

The Board of Review made a number of findings of fact, including that the taxpayer's activities were undertaken on a continuous and repetitive basis, without interruption throughout the years in question. The taxpayer devoted considerable time and effort to the activities and having regard to his financial circumstances, the capital employed was substantial. The activities were organised in a businesslike manner and the operations involved in the venture were of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.

The Board of Review held that the taxpayer was carrying on a business in each of the income years under review in their final finding (at ATC 640):

...the absence of profit could create the impression that the activities lacked a significant commercial purpose or character (see Thomas v. FC of T 72 ATC 4094 at 4099), and yet we are satisfied that on the balance of probabilities the taxpayer possessed an expectation that profit would eventually be earned and that the methods employed by him were directed more to making profits than deriving pleasure.

If in the above case, had the taxpayer not been able to produce adequate evidence of standard business control measures, an ongoing verifiable history of continued professional minded conduct, the result may have been vastly different, and the taxpayer may not have been able to claim the deductions they did.

To discuss further please do not hesitate to contact us at Financial Control and Management