From Summer 2005 newsletter

Summer 2005 Tax Updates

Remember: Membership of organisations such as the PSA supports your tax status as a professional artist!

After 7 years of consultation and negotiation with various arts organisations including NAVA, the Australia Council, the Arts Law Centre and our firm, the Tax Office has finally released its ruling on what constitutes "carrying on business as a professional artist". The ruling, known as TR 2005/1, lists in 44 pages and 151 paragraphs what the Tax Office considers to be the criteria to determine whether an artist is carrying on business or is merely a hobbyist.

This is a significant development because in the past attempts have been made by the ATO to deny tax deductions to some artists who were making losses from their art activities on the grounds that they were not carrying on business.

The ruling sets out a number of indicators which the ATO regards as relevant in determining whether artists are carrying on the business of an arts practice or not. These indicators are listed below. Even though an artist may not demonstrate that all the indicators are present, this does not necessarily knock him/her out of the professional category - it is merely an indication and each case will be determined on its merits.

The main indicators are confirmed as follows:

1. Whether the activity has a significant purpose or character?
   Is there an attempt by the artist to pursue the activity with a commercial intent?
2. What is the intention of the Taxpayer?
   Does the artist intend the art practice to be one of a profession which brings some remuneration or merely a hobby?
3. Profit Motive
   Does the artist have the intention to derive a profit from his/her activity? Is this intention borne out by their activities. It is not enough to merely state the intention, it must be demonstrated that the activities are capable of producing a profit. If this can be proven, then the fact that artists are incurring losses does not deny them the ability to claim that they are carrying on business.
4. Repetition and Regularity
   In order to confirm the commercial nature of an arts practice it is important to demonstrate regular activity and to show that the artist is creating art in a continuous and businesslike manner. This can be evidenced by the volume of work produced, regular studio hours, systematic approach to the production and exhibition of the work.
5. Is the Artist carrying on activities in the manner of others who are recognised as professional artists?
   This indicator revolves around peer recognition of the artist, academic qualifications, public recognition and membership of a professional body.
6. Organisation of activity in a businesslike manner.
   This indicator highlights the importance of the activity being organised in a systematic way. Books of account should be kept in an organised fashion, slide libraries and professional reference libraries maintained. There should also be an appropriate level of documentation and record keeping to substantiate business transactions.
7. Size or scale of activity.
   This criteria recognizes that not all businesses are large scale, and also acknowledges that many artists need to supplement their income from art related activities through full or part time work. Artists will also welcome acknowledgement that an artist can have a period of inactivity and still be considered to be carrying on a business.

The ruling presents numerous case studies which are very relevant to many artists and make interesting reading. For example, one video installation artist, who works in other media has been able to demonstrate enough indicators to prove that a professional business is being carried on, despite a lack of financial success.

Another example is given of a Solicitor (earning a reasonable income) who is also a visual artist (incurring losses) being able to prove a commercial purpose to his arts practice. He had exhibited his works, been reviewed and shown a degree of business organisation consistent with carrying on a business.

While this ruling is welcome and hopefully will lead to a better understanding by the ATO of artists' situations, there are still some concerns which have to be addressed. One of the main issues relates to the Non Commercial Losses Provisions. This denies a claim for losses from art related activities to artists earning over $40,000 from other sources unless certain stringent tests are passed. This ruling can result in a situation where an artist can be accepted to be carrying on business and yet be precluded from claiming their losses. So, it seems, the dialogue between artists and the ATO is destined to continue.