The Professional Musician

We cannot tell you how many times (suffice to say – too many) a band has either made or destroyed an evening/function/corporate event, and in doing so has either reaped the rewards or caused irreparable damage not only to themselves and their act, but more-so the live music industry.

In holding events ourselves and by working with venues we have come up with a list that hirers and event co-ordinators consider as the “bare minimum” expectations from bands/musicians, and over the course of this series of blogs we will discuss these under six headings, they are:

1. The Professional Musician is Never Late;
2. The Professional Musician is Always Prepared;
3. The Professional Musician Uses Discretion;
4. The Professional Musician is an Ambassador of Music;
5. The Professional Musician is Musically Educated;
6. The Professional Musician Realises that His/Her Job is No Excuse for a “Rock n’ Roll Lifestyle”.

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

Part Four: Implementation of Administration Controls

Good administration and business controls are key

Regardless of your profession, the ATO takes a negative view of disorganised administration, and you may quickly find yourself categorised as a “hobby/pleasure activity” if you do not comply with ordinary commercial principles.   A businesslike manner will be demonstrated by the presence of factors such as:

·       good record keeping of sales, expenses, invoices, receipts and accounts;

·       presence of formal, written contracts to record agreements to supply art works or services;

·       a portfolio or other appropriate evidence of a body of work that demonstrates a record in the particular field;

·       use of an accountant, lawyer, business manager, agent or other appropriate source of commercial expertise;

·       membership of a recognised organisation or professional association;

·       presence of a written business plan (that is, a written description of the intended future direction of the business and how that future direction will be realised), perhaps developed in consultation with the taxpayer's accountant or manager;

·       maintaining insurance in respect of their arts products or performances for public liability where their work is being shown or performed;

·       renting exhibition space, use of publicly funded exhibition space, or use of public space for other types of public presentation (if appropriate, depending on the type of arts activity being carried on);

·       advice from professional artists who have succeeded in their industry sector;

·       keeping relevant qualifications and skills up to date (for example, through taking relevant courses, subscription to journals, attendance at conferences);

·       systematic and researched attempts to bring the art work to suitable markets; and

·       use of traditional business structures (like companies, trusts or partnerships). Lack of use of such a structure however is merely neutral in deciding whether an arts activity is being carried on as a business, as many professional arts businesses are carried on by artists individually as sole traders.

For further information please feel free to contact us at Financial Control and Management.

Part Three: Demonstrating Intention To Profit

Demonstrating intention to profit from arts activities

Further, the ATO recognises that in the case of an arts business, which is a notoriously high risk commercial activity where there is more variability between the cost of creating the art and its commercial value, it may often be difficult to assess whether a profit motive exists solely from whether a profit has in fact been made by the activity. Therefore, further activity tests are applied to determine whether a taxpayer has a genuine intention to profit from their arts activities, these being:

·       endeavouring to bring the art work or service to relevant markets ;

·       creating or enhancing industry contacts (for example gallery owners, art dealers, literary or performing arts agents, critics);

·       offering art work for sale as well as actual sales of art work to the public;

·       offering expert services through commission or consultancy;

·       related income seeking activities (other than direct sales) including applying for grants, awards, patronage, commissions, and so on;

·       making their art work accessible to the public through activities designed to raise the profile of the taxpayer as an artist; for example: publicly exhibiting art works; creating works for public performance, contributing written work for publication;

·       entering art competitions, residencies and award events;

·       undertaking research into the proposed arts business and consultation of experts (art experts or business advisers) prior to and during the activity; and

·       reputation building as part of an overall intention to make a profit.

The ATO further recognises the potential for arts businesses to have periods where minimal or no income is produced, and it recognises this business indicator in the following ways: 

·       the artist practises their arts skills in the manner and for the time required to maintain a high professional standard;

·       the arts activity is conducted with sufficient regularity to demonstrate a commitment to engage in a business, not just indulge a hobby or pastime;

·       the artist regularly participates in activities designed to promote their art work and/or build their reputation as an artist. Depending on the type of art work involved, this can include such things as the setting up of a website to display their works; circulation of invitations to art openings or exhibitions; or entering art competitions; and

·       the artist engages in a systematic application of their skills across a variety of artistic endeavours.

As an “arts business” however you must be concerned with the view of the ATO in borderline cases.  In such cases it will be necessary for a taxpayer to be able to demonstrate regular attempts to promote themselves and their artwork to the public, for the purpose of finding or creating markets for their artwork.

For further information please feel free to contact us at Financial Control and Management.

Part Two: Distinguishing an Art Business from other Businesses

What distinguishes ‘art businesses’ from other businesses?

The ATO has recognised that art businesses, because of the nature of art activity, typically have different characteristics to those found in other businesses. For example professional arts businesses are often motivated by creative purposes and the desire to influence public opinion and a large part of being in business as a professional artist may involve activities directed towards reputation building and audience/market creation. 

However, as with all professions a professional arts business must be distinguishable from a hobby or recreation, and over the years the courts have established and applied the following indicators to be relevant to the question of whether a taxpayer's activities amount to the carrying on of a business, these being:

·       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 businesslike 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.

For further information please feel free to contact us at Financial Control and Management.

Part One: Definitions

What is a ‘professional artist’?

As with all business ventures, the ATO really has the first and last word on what principles are to be applied in determining whether an artist is carrying on business as a 'professional artist’.  Without trying to overcomplicate the issue, the law is set down by the Income Assessment Act 1997 (ITAA 1997), and specifically relates to:

·       S 6-5

o   Income according to ordinary concepts, because it has been earnt in the ordinary course of carrying on such a business;

·       S 8-1

o    whether a loss or outgoing has been necessarily incurred

·       Division 35

o   Whether a deferment of losses applies

·       Ss35-10(4)

o   Whether the second arm of the exception concerning a 'professional arts business'

For the purposes of definition ss35-10(5) provides the definition of “professional arts business” activities as either

·       an author of a literary, dramatic, musical or artistic work;

·       a performing artist; or

·       a production associate.

For further information please feel free to contact us at Financial Control and Management.

Performing Artists, The ATO and Your Rights and Responsibilities

Over the course of a five part series we will give an overview of the current ATO legislation as it applies to performing artists, the “business of art” and the minimal expectations from an administrative perspective.

Whilst taxation is not what some would call exciting, it permeates all facets of society, including us with a creative soul, and it is vital for your business’s success to understand your rights and responsibilities in relation to the ATO and specifically TR 2005(1).

Why you should read this series:

·       to be a performing artist and not create an “arts business” around this activity is doing yourself a disservice;

·       if you can legitimately show that your “arts business” is designed “for-profit” then you have available to you a number of range of options which you otherwise would not;

·       if you already have an “arts business” are you meeting commercial practices requirements as stipulated by the ATO?

For further information please see: http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20051/NAT/ATO/00001>

Part One: Definitions

Part Two: Distinguishing an Art Business from other Businesses

Part Three: Demonstrating intention to profit

Part Four: Implementation of Administration Controls

Part Five: Real Life Case Example