The Federal Budget is less than a month from being announced, however it is becoming apparent the policy direction of the Turnbull government is moving towards granting tax concessions to business at the expense of time-honoured employee tax deduction rights.

2016 has already witnessed unruly speculation over broadening the base and/or rate of the GST; changes to the negative gearing rules; changes to the taxation of superannuation; and last week, a proposal to allow the States to levy income tax on their residents.

However, my prediction is for the Budget to place caps on the amount of deductions employees will be able to claim on their tax returns for items such as work-related travel and other deductions in order to pay for a company tax cut of 1.5% for large businesses. And there will probably be changes to negative gearing and the taxation of superannuation.
Most of these changes originate from the 2009 Henry Review, which conducted a thorough examination of Australia’s tax and transfer systems. Unfortunately, for political reasons, the Review has been cherry-picked by successive governments to plug what now appears to be a growing structural budget deficit.

Artists are typically self-employed – but does this mean they are really in business?

There is no statutory test to determine this question. The courts determine the existence of business on the facts of each case using a number of criteria such as profit motive, scale of activity, repetition, permanence of character, continuity and systems.

However, even if artists meet these criteria, they are not always able to control the method of payment for their services. Musicians touring overseas may be required to be put on the payroll of the production company rather than produce invoices through their ABN. From a tax perspective, their deductions will then be assessed differently because they are an employee instead of being in business. Should the amount of their deductions be capped at say $5,000 per year, the loss of tax concessions could be material.

Then there are the non-commercial loss rules that prevent artists in ongoing paid employment, such as teachers, from deducting losses from their exhibiting practices, should their PAYG employment income exceed $40,000. The ability to nominate deductions as work-related rather than non-deductible business outgoings will be curtailed if their employee deductions are to be capped.

Artists should look at the legal structures they use to carry out their activities should tax concessions be taken away. For example, it may be better to invoice clients through a company or a family trust. There are also finance implications because many artists receive business income into their personal accounts, so that banks will not assess credit applications for their practices. The result is an increased cost to the artist to reach new audiences, typically by using credit cards with very high interest rates.

Finally, it should be noted that still no decision has been made on continuing or abolishing the resale royalty scheme despite the review being completed almost three years ago. My last prediction for this year’s Federal Budget is for no further allocation of funds to allow the scheme to survive. Note that royalty income is not business income.