Edited version of private ruling

Authorisation Number: 1011648840776

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Ruling

Subject: Deduction - self education expense

Can you claim a deduction for the self education expenses you incurred while carrying on your art activity?

No.

This ruling applies for the following periods:

1 July 2008 - 30 June 2009

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You retired from your profession to pursue a professional arts career.

You provided a copy of your Curriculum Vitae (CV) which forms part of the facts of the ruling. Your CV sets out an extended period of involvement in art activity.

Your art activity started some time ago. You started working part time and studying art part time to pursue a career as a professional artist. A few years after you switched to full time art study. You then moved to Australia and exhibited for a short period. You produced modern, semi-abstract pieces but the demand was for landscape pieces. You returned to work in your profession while raising a family.

You later undertook art courses over a number of years at an art school to increase your skills. As set out in your CV you started to exhibit work again for sale at this time. Employment in your profession remained your main income earning activity. You later moved into combining your art expertise with your profession and set up a business.

You commenced a formal course for a Degree in Visual Arts.

You state that the course is likely to increase your income in this area as you will implement the skills and knowledge gained in the course in your current art activity and you have already noted improvements in your work.

You displayed a number of pieces of work in a couple of locations.

You had a high profile exhibition in an annual art festival.

You attempted to obtain a government grant to help with the exhibition costs but were unsuccessful. You achieved some sales which will be included in the 2011 tax return.

You document all your art. You keep records of your expenses. You have always included proceeds from sales of your art works in your income tax returns.

You do not have a formal business plan though you and your spouse are currently working on a plan to structure your exposure to gallery owners and the general public so that you can move to becoming an established artist.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You can not claim a deduction for the self education expenses as the expenses were not incurred in gaining or producing assessable income. Your activity does not amount to the carrying on of a business in the 2008-09 and 2009-10 income years.

Detailed reasoning

Deductions

Section 8-1 of the Income Tax Assessment Act (ITAA 1997) provides that you can deduct from your assessable income any loss or outgoing, to the extent that it is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot deduct a loss or outgoing to the extent that it is capital or of a private or domestic nature.

Self education expenses

Self education expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection with a taxpayer's current income producing activities be it from employment or from the carrying on of a business.

Carrying on a business as a professional artist

The Commissioners view on whether a taxpayer is carrying on a business as a professional artist is found in Taxation Ruling TR 2005/1. Paragraph 10 of TR 2005/1 states the courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby or a form of recreation.

No one factor is conclusive. The above indicators must be considered in combination and as a whole. The weighting given to each indicator may vary from case to case. Relevant indicators are discussed below.

Significant commercial character and profit motive

The courts have recognised the distinct nature of arts activities. Arts businesses typically have different characteristics to those found in other businesses. Art is not always produced with a pre-existing market in mind. 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. However, a professional arts business must be distinguishable from a hobby, pastime or recreation.

An immediate purpose of profit-making in a particular income year is not essential. As has been recognised in the context of professional sportspeople, the pursuit of excellence in a chosen field by a taxpayer may amount to the carrying on of a business.

Professional artists and sportspeople have the distinction of pursuing as a business that which many others undertake purely for personal pleasure. Therefore, such taxpayers must be able to distinguish themselves from enthusiastic amateurs. What distinguishes a professional artist or sportsperson is the direction of their artistic or sporting prowess towards commercial ends.

In the case of an arts business, where there is more variability between the cost of creating the art and its commercial value, it may often be difficult to assess whether a profit motive exists solely from whether a profit has in fact been made by the activity. Therefore, whether a taxpayer is engaged in the following kinds of activities will be relevant in ascertaining whether that taxpayer has a genuine intention to profit from their arts activities:

· endeavouring to bring the art work or service to relevant markets

· creating or enhancing industry contacts (for example gallery owners, art dealers, literary or performing arts agents, critics)

· offering art work for sale as well as actual sales of art work to the public

· through commission or consultancy

· related income seeking activities (other than direct sales) including applying for grants, awards, patronage, commissions, and so on

· making their art work accessible to the public through activities designed to raise the profile of the taxpayer as an artist; for example: publicly exhibiting art works; creating works for public performance, contributing written work for publication

· entering art competitions, residencies and award events

· undertaking research into the proposed arts business and consultation of experts (art experts or business advisers) prior to and during the activity, and

· reputation building as part of an overall intention to make a profit.

From the activities and the facts provided a genuine intention to make a profit has not been demonstrated. You did not make an active attempt to promote and build your reputation as a professional artist. You brought your art work to a very limited market, you did not actively advertise or market your work, you did not enter your works into competitions and you did not apply for industry or government grants to provide income support for your activity. This indicator has significant weighting in concluding whether your activity amounts to the carrying on of a business.

It is noted that you applied for a grant, obtained a high profile exhibition site and made sales from the exhibition, however this relates to this one income year. Overall, the indicators demonstrate a lack of genuine intention to profit from your art in the two income years.

Repetition and regularity of the activity

Repetition is the repeated application of the artist's skills to different pieces of work; this business indicator will be present in an arts business in the following ways:

· the artist practises their arts skills in the manner and for the time required to maintain a high professional standard

· the arts activity is conducted with sufficient regularity to demonstrate a commitment to engage in a business, not just indulge a hobby or pastime

· the artist regularly participates in activities designed to promote their art work and/or build their reputation as an artist. Depending on the type of art work involved, this can include such things as the setting up of a website to display their works; circulation of invitations to art openings or exhibitions; or entering art competitions, and

· the artist engages in a systematic application of their skills across a variety of artistic endeavours.

In your situation, your enrolment in the visual arts course demonstrates repetition and regularity in practising your arts skills.

However on the facts provided there was a significant lack of activity undertaken to promote and build your reputation as a professional artist. As a result, it is difficult to distinguish your activity from merely participating in a hobby or recreation.

Carried on and organised in a businesslike manner

Art activity is more likely to be a business where it is conducted by the taxpayer based on business methods and procedures of a type ordinarily used in the same kinds of arts activities that would commonly be recognized as being professional arts businesses. This business indicator may be demonstrated in a number of ways, for example:

· industry and peer recognition as an artist

· qualifications (or equivalent experience as apparent from an artist's portfolio or body of work) typical of those in the relevant industry sector

· public recognition as an artist (for example, is the taxpayer described as such in the media? Is their opinion as an artist sought by the public? Is their art work used by others as examples for teaching purposes?)

· meeting the eligibility and selection criteria for grants, awards and professional opportunities open to artists in the relevant industry sector

· reputation building in a manner consistent with others in the relevant industry sector

· methods of application and time commitment to activity consistent with others in the relevant industry sector

· obtaining the advice or services of an agent, manager, legal or financial adviser, if it is common in the taxpayer's industry sector

· good record keeping of sales, expenses, invoices, receipts and accounts

· presence of formal, written contracts to record agreements to supply art works or services

· a portfolio or other appropriate evidence of a body of work that demonstrates a record in the particular field

· membership of a recognised organisation or professional association

· maintaining insurance in respect of their arts products or performances for public liability where their work is being shown or performed

· advice from professional artists who have succeeded in their industry sector

· keeping relevant qualifications and skills up to date (for example, through taking relevant courses, subscription to journals, attendance at conferences), and

· systematic and researched attempts to bring the art work to suitable markets.

In your situation, there are elements of your activity that are carried on and organised in a businesslike manner. You keep good records of expenses and document all your work. However as discussed in conclusion to the above two indicators you did not undertake activity to promote and build your reputation as a professional artist. As a result, it appears you activity was minimally directed towards the commercial exploitation of your art skills.

Size or scale of activity

Most professional artists carry on their business as sole traders. This will often limit the size or scale of their activities. However, the Courts have recognised that a person can be carrying on a business in a small way.

The courts have also recognised that the nature of some businesses may be such that periods of business activity may be intermittent with long intervals of quiescence in between. This observation is especially relevant in the context of artists. Many artists will have periods of perceived commercial inactivity while they are engaged in the creative process. Or, to maintain the high professional standards required of a professional artist, many artists will devote substantial time to the maintenance and development of their artistic skills and experience by attending workshops, a master class or undertaking a residency.

Whether an arts activity is being carried on with sufficient size and scale so as to constitute a business may be demonstrated by the following:

· the activity and output must be beyond what is needed to meet the personal needs of the artist, and

· the volume of output must be sufficient to enable the taxpayer to be regularly bringing their work to suitable markets.

In your situation, it would not be reasonable to attribute the perceived inactivity to involvement in the creative process or the maintenance and development of your skills in the course of carrying on a business as an artist. Prior to undertaking the course you were engaged in full time employment for an extended period and not actively involved in art activity.

The history and development of your art skills and your involvement in art activity is noted. While you devoted significant time to your skills, including the visual arts course, by which your skills have been enhanced, your activities overall could not be said to amount to more than the vigorous pursuit of a hobby or recreation, which would not amount to the carrying on of a business in the income yeas. On the facts provided, your activities during that period appear to be only very minimally directed towards commercial exploitation of your works.

Note - Example 3 and 4 of TR 2005/1

Paragraph 99 of TR 2005/1 states that the examples are not meant to detract from our view that all the relevant indicators need to be considered when deciding whether an activity amounts to a business. This aside, the main factor distinguishing your activity from these examples is that you were not involved in significant reputation building activity in the years in question.

Conclusion

Your activity does not amount to the carrying on of a business in the 2008-09 and 2009-10 income years, as a result you cannot claim the self education expenses.

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