You are an artist, but are you in business?

Like an antidote to the tik tok scandal, where, at the tail end of the pandemic, the ATO gave out or lost billions of dollars in false GST refunds, attention has turned to the very definition of whether certain taxpayers – namely artists – are really in business.

 

This is not as straightforward a question to answer as it may appear and has serious implications for being able to continue to use your ABN, claim income tax deductions, benefit from rebates of GST and access interest-free ATO payment plans.

 

The concept of an artist being in business is contradictory in many ways. The creation of artistic work is meant to be free of the usual mundane commercial considerations of non-creative enterprises, but from a taxation perspective all businesses benefit or suffer from the same rules.

 

Creative businesses may be square pegs in a round hole, however the following indicators of being in business apply to them as much as anyone else:

  • profit motive
  • scale of activities
  • business plan
  • commercial character
  • system and organisation
  • temporal contexts

 

Artists need to demonstrate that eventually they will make a living from their practice. When the GST laws were introduced into our tax system over 25 years ago, the ATO conducted field interviews with artists to establish whether they had a profit motive, which only proved how little the ATO knew about the arts. Little has changed in the intervening time period.

 

Receipt of income is important. Claiming expenses as an artist year after year will not be viewed favourably if no income is ever declared. Sometimes a choice will eventuate as to whether income is paid to an artist as a salary or wage with PAYG tax deducted or as business income. Proving the profit motive indicia is helped by choosing the latter over the former.

 

Your scale of activities refers to how busy you are in running your practice. If you do not have much in the way of income, this can be proven with records of meetings and phone logs. You are meant to have regularity of activity when you are in business. This means constantly working on your artistic practice, rather than turning your attention to it only when time permits – or as John Lennon said, while you are busy making other plans

 

Having a business plan is important to demonstrate that you are monitoring the ongoing viability of your enterprise. It is not necessary to employ a consultant to write up a plan. You could have a document that sets out the goals you wish to achieve and the ways that these goals will be achieved.

 

The commercial character will be proven when you do succeed in your ventures. This is easier for established artists because they already have audiences willing to support new outputs of work. For emerging artists, this indicia may not be relevant. Creating works with a commercial character is exactly not what consumers expect of young and daring artists.

 

System and organisation describe the infrastructure developed around a business, such as premises, staff, websites, marketing and the like. The more developed these systems are, the more likely they are to indicate a business operation. Clients selected for information reviews by the ATO as to whether they are in business or not should expect to have their social media and websites examined as part of this process.

 

Temporal contexts are relevant only so far as to explain why changes occurred in an artist’s way of conducting their affairs in a particular period. A good example is the pandemic and the way it forced artists to adapt to artificial conditions like not being able to perform in public.

 

Occasionally it is better to be seen as not being in business by the ATO to avoid having to pay tax on one-off gains like art prize winnings or to be forced to return COVID grants to State governments for breaching public health guidelines. The above indicators are all relevant to adopting this opposite view.

 

If you feel you are not in business, but have earned income outside your day job, it is recommended you complete a ‘statement by supplier’ form rather than provide an invoice to receive payment.

 

The consequences of being found not to be in business as an artist, when you need to show that you really are in business, can be serious. Apart from not being able to use your ABN, losses made by professional artists can be held non-deductible against other income and the ability to claim GST credits taken away.

 

More recently, the ATO is using a viability of business metric to decide whether they will support a payment plan to repay tax debts. These payment plans are interest-free if all the conditions of the plan are met. If your arts business is held not to meet the above criteria, it could find itself deemed a commercial risk by the ATO and not eligible for an interest-free payment plan. It appears this change of policy is also linked to an announcement by the Treasurer late last year to not allow deductibility of certain ATO interest changes.

 

My advice to limit artist exposure to such consequences are two-fold:

  1. declare all of your income, include cash payments; and
  2. strive to make sales of at least $20,000 per year.

 

Item 2 is one of the so-called non-commercial loss tests set out at Division 35 of the Income Tax Assessment Act 1997. Known as the turnover test, counting commissions deducted from your sales might mean the difference between passing or failing this test. At law, sales of art on consignment to galleries are fully counted as belonging to the artist, even though commission is deducted before they are paid.

 

It could assist in not having to rely on one of the other tests, particularly the arts business test, which could lead you into a conversation with the ATO over whether or not you are actually in business.

 

And that will not exactly be talking poetry with the tax man.

 

Artwork image: Harold David, Of a Feather (2024)
foxgalleries.com.au/harold-david