Photo by Free To Use Sounds on Unsplash
Tax time, for anyone working in the arts, is a headache – even the most organised of us.
Knowing what you can and cannot claim, chasing up that all-important receipt you put in a safe and secure place and subsequently can’t find, even just finding the time to sit and work through your annual tax return – it’s all a chore.
Which is why having expert advice from people who are as familiar with the arts and cultural sector as they are with taxation legislation is invaluable.
In this ArtsHub special report we speak with several tax experts about the biggest arts blunders they’ve experienced and the way they solved the problem.
TAXES ARE FOR ALL YEAR ROUND, NOT JUST FOR
‘One of the biggest fails in achieving the best tax outcome is not having the information or substantiation in place to prove your claims,’ explained Matthew Tucker from Creative Crunchers.
‘Thinking about your art practice from a tax point of view is not just an exercise for the month of June – it’s a daily exercise all year round. By training yourself to think about your substantiation and claims all the time, it not only improves your ability to capture everything, it also makes the whole process much easier on you, as everything becomes habit; second nature. The whole thing just becomes far less painful.’
Read: The symbiosis between artist and accountant at tax time
GET YOUR HEAD OUT OF THE SAND
‘The simplest tax fail is putting it off – that is not a solid plan,’ says Lauren Thiel, owner of The Real Thiel.
‘Most people who come in have multiple years to do – at least one, if not two. One time it was seven – that is way too many! I couldn’t even lodge them online because they were so old. So I think the biggest tax tip is don’t bury your head in the sand – it doesn’t go away. Just call and get help. You can do a payment plan if you owe tax – just get it done.
‘The other tip would be not keeping good records throughout the year. That’s why you hate tax time. It’s because you put it all in July. If you spread it out throughout the year, you just hit “send” on that spreadsheet in July and you know that it is all ready to go.
‘For me, it is all about being organised and asking for help when you need it. That is literally what we are here for. No-one expects that you have to do this by yourself. We are the professionals; we’re here to help with this and you should ask for help if you need it. If you don’t like your accountant – then find someone else,’ Thiel asserted.
Read: This dancer became an accountant to help other creatives
‘I had a client in the music industry who hadn't done their employment and sole trader tax returns for over 15 years and had crippling anxiety about it,’ said Caroline Brosnan from Creative by Numbers.
‘They left it until they actually had a case officer assigned at the ATO before they came to me for help. I had to personally liaise with the ATO on the returns and we only had a very short window to act. Despite this, once we got started and broke it down bit by bit, the client realised it was not as scary as they thought and we managed to lodge all 15 returns with minimal stress.
‘We even managed to successfully reverse $5000 of penalties. We did all that for under $1000. The client was very happy and has since been back each year and always on time!' Brosnan enthused.
Read: Making tax time stress free
DIRECTOR BLUNDERS, KEEPING CASH FLOWING AND... YOUR COMPANY BOAT
‘A few scenarios spring to mind [in regards to “tax fails”] and these are unfortunately more common than we'd like,’ said Oceans Accounting’s Holly Shoebridge.
‘For artists who are directors of their own company, it's important for them to understand the laws and regulations about how they draw funds from the company. It is recommended they work closely with their accountant to manage the additional responsibilities in a proactive manner. For example, the ATO have strict rules on how a director can draw funds from a company, which are different to a sole trader who can take funds as they like, because there is no separation of entity from themselves. Whereas a company is a separate entity from the artist and has its own set of compliance obligations.
‘To put it simply, a company director can only take funds via a wage, dividend or loan. We have seen quite a few cases where directors were not aware of these requirements and had drawn funds from the company to the value of anywhere from tens of thousands to hundreds of thousands of dollars over a period of several years. Due to the separation of entity between the artist from the company, the artist is often unaware that they need to repay those funds to the company.
‘A quarterly check-in with their accountant can help to alleviate these situations. The potential ramifications if not caught in time or properly managed, can result in penalties from the ATO, hefty and unexpected tax bills, retrospective interest payments to the company if funds are treated as a loan and a detrimental impact to cash flow for a period of time ranging anywhere from months to years until fully recovered – depending on the extent of the drawings,’ Shoebridge explained.
‘We have also seen expense claims for motor vehicles and even boats that had been put through as 100 per cent business use without having any kind of usage logbook on file. For all motor vehicles, and if you are lucky enough to own a boat, a usage logbook must be kept on file to prove the business usage if ever questioned by the ATO. Particularly to prove claims of 100 per cent business usage!
‘Cash flow is a common hurdle and can be the make or break of a business. Especially when it comes to managing quarterly GST and annual income tax bills. We have seen clients managing very successful businesses but not putting aside a portion of their takings for income tax payable at year end, or for quarterly PAYG-W and GST compliance.
‘Unfortunately, this can result in a business owner getting to BAS or tax time and having thousands of dollars in GST payable, PAYG-W payable or income tax payable but no cash reserves to pay it. The ATO do work with clients to organise workable payment plans, but these often have interest applied and do have quite an impact on cashflow ongoing. A chat with an accountant to start, or a regular quarterly check in can help to effectively manage cash flow and build reserves,’ Shoebridge said.
Read: Don't get caught in a rip this financial year
KNOW IF YOU'RE A SPECIAL PROFESSIONAL
When it comes to tax fails, specialist accountant Electra Frost from Electra Frost Accounting said one of the biggest errors she’s seen people make is: ‘Missing out on special professional income averaging in the early years of their arts and screen industry careers.
‘Most new clients that we identify as “special professionals” have previously dealt with accountants who were unaware of this tax concession. Or they didn’t understand how to interpret the tax law to define someone’s obscure arts or film industry activities as being eligible.
‘You can’t amend a tax return two years after lodgement, and it’s sad to find out you lost $20,000 or more in tax rebates.
‘It’s important to identify each year in which your income earnings activities are defined as “special professional” under Division 405. We discuss the artistic aspects of your jobs and other factors. Getting onto the system in the first year that you qualify, and staying on the system, ensures that you don’t miss out in the good years.
‘Income averaging works by taxing higher than average eligible income at concessional rates. So, for example, if your prior four years’ average income is nil or under the tax-free threshold you could end up paying no tax on annual earnings that would normally be taxed at over 30 per cent.
‘Screen industry professionals and prize-winning artists and authors typically enjoy big tax breaks when their income spikes. New clients who are several years behind with their tax returns are sometimes pleasantly shocked by the outcome,’ Frost added.
Read: Avoiding tax drama while working overseas
LODGE ON TIME AND ASK QUESTIONS WHEN YOU’RE NERVOUS
Of course, prizes should not be an excuse to avoid paying your return. ‘I have a client who avoided lodging her tax returns for 23 years after winning an art award because she was worried about paying tax on the prize,’ said Michael Fox, the Principal of Michael Fox Arts Accountant and Valuer, and the Director of Fox Galleries.
‘This is an extreme example but the way to avoid falling into the same trap is to talk to an arts tax specialist as soon as possible if you have tax concerns. My client actually did not have to pay much at all on that 1995 residency. There were many deductions she was able to claim that she was not aware of and, after examining the facts, half the taxation of the art award was able to be deferred to the following year. But after not lodging the 1995 return, my client then fell behind on lodging all the subsequent years. However, you can submit tax returns out of sequence and come back to the non-lodged return later.
‘The most important thing is to lodge your return on time, even if you do not have all your receipts. You are allowed to amend a return two years after lodging as a right, so don't stress out about not claiming all you can on the first attempt,’ said Fox.
Read: Claiming art purchases on your tax
KNOW YOUR NECESSARY EXPENSES
‘The top tax fail we have seen is artists claiming for expenses that aren’t allowable deductions (such as movie/theatre tickets, home office, motor vehicle, etc.) for that taxpayer. We always discuss deductions with our clients, in particular artists to ensure that they are aware of their obligations and where expenditure is an allowable deduction and where it is not,’ said Frank Bombaci, CA, JP, Manager, Business Services, Steven J Miller & Co Chartered Accountants.
‘We have seen many cases where we have saved clients from spending money on expenses that they later found out from us are not deductible. It seems that certain artists will spend money on items on the basis that they believe it is tax deductible, but then realise that it isn’t a necessary expense after all when they don’t receive a tax benefit,’ he said.
Read: Three tips for a stress-free tax return
FORGET FRIENDLY ADVICE – GO PRO
When it comes to tax everyone has an opinion but not all opinions are useful. Many artists rely on advice from friends or family but unless they know tax law they could be opening you up to risks.
It's a situation Saul Markunsky, Director of In The Picture, has seen many times. 'One of the worst disasters that can happen is when clients take advice from friends. Everyone has an idea what they think is tax deductable and they like to share this information,' Markunsky told ArtsHub.
Of course the consequences can be dramatic. Marunsky said: 'When they do their tax on their own and make ridiculous claims the tax office will audit them. These disasters are difficult to fix after the fact. It is important that you have a professional look at what you are claiming to check if they are allowable and to see if you have claimed everything that is allowable.'
Read: Income averaging equals big savings
Disclaimer: This article is of a general nature only. Individuals deciding what to do with their tax return should consult an accountant or financial advisor for specific advice relevant to their own situation.