Edited version of your written advice

Authorisation Number: 1051274915493

Date of advice: 29 August 2017

Ruling

Subject: Non-commercial losses.

Question 1

Is your assessable income from employment at a relevant centre from a source that relates to your professional arts business for the purposes of Section 35-10 (4) of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Are you entitled to apply your loss from your professional arts business in the 2017 income year?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You have an degree in Performing Arts.

You have a professional arts business as a performing artist - X

Your business activities resulted in a loss in the 2017 income year.

You produced a small amount of your business income by providing services to your employer on two separate occasions under your ABN.

You are also a member of a band which you perform with and manage.

The band operates as a partnership (the partnership) and you will receive a distribution in the 2017 income year.

You have an agent who organises work for the band. Your parent has also helped organise some appearances for you and your band using contacts.

You have another agent who also arranges work for you.

You co-present on a radio station in an unpaid capacity.

You are employed in two roles- Y and Z

You were originally employed in a traineeship which you obtained by applying for the position advertised by your employer.

After completion of the traineeship you continued to do Y work for your employer on a casual basis before taking up your position as Z.

You earned approximately $50,000 in employment income in the 2017 year.

Your main role as a Y and Z includes acting/ performing for the production of promotional and educational material.

You are employed under a Specialist Agreement- Employee (the agreement).

The agreement provides the following relevant details:

● Item H of the agreement specifies that you are an employee.

● Item I of the agreement specifies that you will be paid an hourly rate of $XX

● Item C of the agreement provides your duties under the agreement

You provided a copy of an email (the email) in support of your application. The email is addressed to all employees regarding a workplace group.

You provided a link to a social media event page for an event hosted by your employer that you participated in, in 2014 in support of your application.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Section 35-10

Reasons for decision

Question 1

Is your assessable income from employment at a relevant centre from a source that relates to your professional arts business for the purposes of Section 35-10 (4) of the Income Tax Assessment Act 1997?

Summary

Your employment income is from a source that does not relate to your professional arts business. The income from your employment will be taken into account in determining whether the non-commercial loss rules apply.

Detailed reasoning

Division 35 of the Income Tax Assessment Act 1997 (ITAA) prevents losses from non-commercial business activities being offset against your other assessable income in the year the loss is incurred. The rules in Division 35 of the ITAA only apply where a business is being carried on.

You can not deduct a business loss in the year that it arises unless:

● your business activity meets one of the four tests (and for the 2009-10 and later income years, the income requirement is also satisfied).

● you come within the Exception; or

● The Commissioner exercises discretion in relation to your business activity.

If you are not allowed to apply the loss in the income year in question, the loss will be deductible from your assessable business income in the next year in which the business activity is carried on, provided that the deferral rules allow the loss to be deducted in that year.

Exception

Section 35-10(4) of the ITAA 1997 provides that if you have a loss from a primary production business or a professional arts business, and the total of your assessable income from sources unrelated to that business is less than $40,000, you can offset your losses against your other income in the year that you incur the loss.

Paragraph 90A of TR 2001/14 Income tax: Division 35 – non-commercial business loses (TR 2001/14) explains that if you derive assessable income from other sources that do relate to your business activity, it will not be taken into account in determining if the $40,000 threshold is met.

Determining whether the source of income is related to your business activity

Paragraph 90B of TR 2001/14 explains that determining whether the source of assessable income relates to a business activity is a matter of overall impression. It requires an association or connection between the two but the required extent of that association or connection will depend on the purpose and context of the provision in question (see Tooheys Ltd v. Commissioner of Stamp Duties (NSW ) (1961) 105 CLR 602, Secretary, Department of Foreign Affairs and Trade v. Boswell (1992) 36 FCR 367).

The purpose and context of subsection 35-10(4) do not suggest that any indirect or less than substantial connection between the two will be sufficient. Rather, they point to the relationship between the business activity and the source of the other income needing to be more than a remote one.

In the case of Spriggs v. Federal Commissioner of Taxation, Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148 (Spriggs), the High Court found that each taxpayer, who was a professional sportsman, carried on a business of commercially exploiting his sporting prowess and reputation for profit and that employment with a club was part of that business.

The High Court said that whether, in relation to any sporting artistic or professional activity, an individual is carrying on a business that includes employment activities as opposed to pursuing activities of unrelated income derivation depends on a 'wide survey and an exact scrutiny' of the individual's activities. It indicated that the contractual framework under which an individual carries out their income earning activities, and the synergy or connection between the various activities, would be relevant in deciding this.

TR 2001/14 provides an example (Example 4A) at paragraphs 133A to 133F.In this example, Eric has carried on a professional arts business for some years. Eric’s professional arts business has made a loss in the year in question.

During the income year Eric was also employed as a lecturer in art at a tertiary institution. Eric's assessable income for the income year from employment as a lecturer was more than $40,000.

Eric’s conditions of employment required him to undertake suitable research on an ongoing basis. This requirement could be met by the production and exhibition of works as a professional artist.

Eric satisfied the research requirement by continuing to carry on a business as a professional artist.

In this example, Eric's employment, as a source of assessable income, is only indirectly and less than substantially related to his professional arts business:

● whilst the activities conducted by Eric as part of the professional arts business may be relevant for employment purposes, the employment is not relevant for the purposes of the professional arts business;

● different types of contract are used in the production of the assessable income from the two different sources, with different terms and conditions;

● different assets are used in producing the different types of assessable income;

● the nature of the income from the two sources is different (on the one hand, salary or wages are derived under a contract of service; on the other hand, business income from the sale of art is derived under contracts for the sale of goods); and

● the level of risk attaching to whether income will be derived from either source is different and unrelated.

As a matter of overall impression, the assessable income from Eric's employment is from other sources not related to his professional arts business.

Eric’s situation is distinguishable to that of the taxpayers in Spriggs. Unlike the arrangements in Spriggs, Eric's contract of employment is solely a contract of employment between the taxpayer and the tertiary institution. It is not a broader contract involving additional parties that provides for the carrying on of other income-producing activities as well as the employment activities. There is no necessary connection effecting a clear 'synergy' between the employment as an art lecturer and the conduct of the professional arts business.

Eric’s employment income is therefore taken into account in determining whether the $40,000 threshold in subsection 35-10(4) is exceeded.

Application to your circumstances

Your business

You conduct your business activity as a X. You also perform with and manage a band. You have described your main business activity as “Musicians and Entertainers” in your last three income tax returns.

You obtain work in your personal capacity through a manager and sometimes by networking or utilising contacts. You obtain work for your band through a manager.

You and your band are paid by your various clients in accordance with the terms negotiated. You receive payment in relation to your work with your band by distribution from the partnership it is operated through.

Your employment

You obtained employment with your employer by applying for an advertised position.

Your income from Y duties is not considered to be from a source related to your business income. The major source of your employment income is as Z. You have described your main salary and wage occupation as “Actor” in your last X income tax returns.

Your agreement with your employer specifies that you are an employee. You are paid wages at an hourly rate under the agreement.

Under the agreement your duties in this role are: preparing for, rehearsing and facilitating Z.

The agreement is silent on matters which do not relate strictly to your employment duties.

You provided a copy of an email containing an invitation to join a workplace group. The email states that no experience is necessary and the invitation is open to everyone.

We do not consider that the open invitation to all staff participate in a workplace group is of itself sufficient to support a finding that your employment activity is ‘related’ to your performing arts business.

The fact that you provided your services to your employer on two occasions in the 2017 income year for which you were paid under your ABN highlights the distinction between your duties in your employment and your personal endeavours in your performing arts business.

Your unpaid appearances on a radio station, while relevant to your business activities, are not relevant to determining whether your employment is related to your business.

You have not provided details of the terms of your engagement for your performance in your employer’s event. This event took place in the 2014 income year and is not considered relevant to your business and employment activities in the 2017 income year.

Conclusion

Your case is similar to the example of Eric provided in TR 2001/14. As a matter of overall impression the source of your employment income is indirectly and less than substantially related to your professional arts business:

● The activities you conduct in your performing arts business may be relevant for employment purposes, but your employment is not relevant for the purposes of your performing arts business;

● Different skills are generally used in producing the different types of assessable income. In your role as Z you are required to perform or act in front of camera, whereas you describe your performing arts business as ‘musician or entertainer’ in your income tax returns and you mainly derive income by X either with your band or alone;

● Different types of contract are used in the production of your assessable income from the two different sources, with different terms and conditions. In your business endeavours, you are paid under the terms of agreement or contract negotiated either by yourself, your parent or by an agent, and which may vary from client to client. In your employment you are contracted under an agreement described as ‘Specialist Agreement- Employee’. The agreement specifically defines your relationship as one of employment and sets out your specific duties in relation to that employment as the preparation for, rehearsal and presentation of Z.

● The nature of the income from the two sources is different. You are paid wages at an hourly rate in relation to your employment and you are paid in accordance with the terms of negotiated contracts using your ABN in your performing arts business. You are paid via partnership distribution for work related to your band.

● The level of risk attaching to whether income will be derived from either source is different and unrelated.

Your situation is distinguishable to that of the taxpayers in Spriggs. Unlike the arrangements in Spriggs, your contract of employment is solely a contract of employment between yourself and your employer. It is not a broader contract involving additional parties that provides for the carrying on of other income-producing activities as well as the employment activities. There is no necessary connection effecting a clear 'synergy' between the employment as Z and the conduct of your performing arts business as a X.

We do not consider that your employment is sufficiently related to your business activities for the purposes of Section 35-10 (4) of the ITAA 1997. While your background and qualifications may have assisted you in gaining employment, a qualification, background or interest in a particular field is a common requirement in gaining employment in many industries.

Accordingly, the income from your employment will be taken into account when considering whether the $40,000 threshold has been exceeded in the 2017 income year.

Question 2

Are you entitled to apply your loss from your professional arts business in the 2017 income year?

Answer

No

Detailed reasoning

You are not entitled to apply the loss from your performing arts business in the 2017 income year because your assessable income from other sources is more than $40,000.

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