Arts businesses are not quite like most businesses. They typically have minimal income or losses in their early years, and fluctuating income. Sometimes, accountants and ATO officers who are unfamiliar with the characteristics of arts businesses regard low income as a sign of a hobby. Unlike businesses, hobbyists are not entitled to an ABN, they cannot claim their expenses nor can they carry forward their losses to offset future income.
It can be very disadvantageous for a professional artist to miss out on the claims they are genuinely entitled to. So it is important for artists to understand what “carrying on a business” means for tax purposes, and how to show evidence of their business activities if the ATO ever cancel their ABN or disallow their expenses / losses.
At Electra Frost Accounting, we’ve been working with artists for 20 years and can advocate for their businesses. If their business shows losses (higher expenses than income), it doesn’t immediately mean they are not commercially viable. There is no income level or profit requirement to be “carrying on a business”. If an artist can demonstrate some “profit motive” by their activities, if they are promoting themselves, if they’re qualified and recognised as an artist, and keeping good accounting records then they are most likely “in business”.
We recently amended a few tax returns for an artist whose suburban accountant had decided not to claim the Arts Business Exception (under Div 35 ITAA 1997) for her. We fixed her tax returns to claim her losses and got her back several thousand dollars in tax refunds that she was entitled to. It’s been nearly 15 years since the ATO issued the ‘Artists’ Ruling’ (below), yet some accountants still do not recognise loss-making artists as being real businesses!
See Taxation Ruling TR 2005/1: Income tax: carrying on business as a professional artist. (we suggest scrolling down to the Examples for an easily digestible overview)
… because of the nature of art activity, arts businesses typically have different characteristics to those found in other businesses. For example, 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.
Hobby vs Business – The Low Down
This information applies to ALL business activities, not just arts businesses. Refer to the Examples in Tax Ruling 2005/1 (PDF) for more information in relation to artists.
It is important to understand the differences between a hobby and a business for tax, insurance and legal purposes among other things. For one thing, there will be certain tax and other obligations that start once you are in business.
However it’s a myth that there is a dollar threshold to be in a business (some people can have very expensive hobbies). What matters is whether, as a whole, your activity is “commercial”, with an aim to make a profit. Once you are in business, there are dollar thresholds that can affect what you can claim for tax purposes.
Characteristics of a business
There is no single factor that determines if you are in business, but some of the factors you need to consider include:
- You’ve made a decision to start a business and have done something about it to operate in a businesslike manner, such as
- registered a business name, or
- obtained an Australian business number (ABN).
- You intend to make a profit or genuinely believe you will make a profit from your activity (even if you are unlikely to do so in the short term).
- You repeat similar types of activities, and the size or scale of your activity is consistent with other participants.
- Your activity is planned, organised and carried out in a businesslike manner. This may include:
- keeping proper accounting records and documentation
- having a separate bank account for business
- operating from dedicated premises
- having licenses or qualifications
- having a registered business name.
If you aren’t in business yet, it is important to keep these factors in mind as your activities change or grow, so you’ll know when you need to register for tax and other business responsibilities.
Characteristics of a hobby
It is generally accepted that a hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. With a hobby:
- you achieve personal enjoyment and satisfaction
- you can gift or sell your work for the cost of materials
- you can do it in your own time or when people contact you
- you don’t have the reporting obligations of a business.
If you determine your activities are a hobby then you do not have any additional tax or reporting obligations. However if your activity is a hobby you may need to meet certain requirements to transact with a business. When making a purchase a business generally collects the seller’s ABN. If the seller can’t provide an ABN, then a business must withhold the top rate of tax from the payment for any total more than $75 for tax purposes.
Since you’re not in business and therefore not entitled to an ABN, you need to provide justification that the payer need not withhold tax. This can be done by providing the payer with a “Statement by a supplier” form.
Changing status changes obligations and opportunities
Income-earning hobbies can sometimes grow into businesses, so it’s important to monitor any change in income or practises so that you’re aware of your obligations before they happen.
Once your hobby or preliminary activity becomes a business, you may need additional licences and permits specific to your type of business. For example, if you’re running a home-based business, you may need council approval to operate from your residence depending on the type of business.
But being a bona fide business also means that you will have access to many more tax deductions and other concessions than would otherwise be the case. We can advise you on this if and when that time comes.
This information is only general in nature. For further advice regarding your business status, accounting requirements and tax obligations, please do not hesitate to contact us.