KP Brady Ch
JE Stewart M
DJ Trowse M
No. 2 Board of Review
K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)
The taxpayer, a clerk employed with the Australian Public Service, had also been engaged for some years in activities associated with the entertainment industry. The questions for determination in these references are whether the activities undertaken during the years 1980, 1981 and 1982 constituted the carrying on of a business, and, if so, whether various outgoings incurred in those pursuits are deductible in terms of sec. 51(1), 53 and 54, or alternatively sec. 124M of the Income Tax Assessment Act 1936. With the taxpayer's consent, all references were heard together.
2. The taxpayer had demonstrated from an early age an active interest in popular music and the playing of a range of musical instruments, and it seems that by 1977 his skills had progressed to such a stage that he was able to find part-time employment in a band. The income from that source, the expenses attaching thereto and depreciation of equipment were brought to account in the preparation of the 1978 and 1979 income tax returns, and it appears that the Commissioner accepted those items in ascertaining the taxpayer's taxable incomes for those years.
3. In December 1978, the taxpayer, with the assistance of a loan from a finance company, purchased an electronic synthesizer at a cost of approximately $2,500, and it seems that since then he has specialised in the performance of that instrument. The depreciation schedules annexed to the returns indicate that ancillary equipment had also been acquired, and our calculations reveal that the total amount expended on all units was in the region of $7,000.
4. Within the first month or so of the 1980 year of income, the taxpayer concluded that the level of earnings received from the band work was inadequate and that greater rewards might be gained from the creation and marketing of his own compositions. He followed those directions during all of the years under review in the hope of being awarded a contract with either a recording or publishing company. During that period, the taxpayer engaged in the writing of lyrics, the composing of supporting music, and the rehearsal and recording of those works with a succession of bands which had been formed for those specific purposes. We mention that the electronic synthesizer was central to all of the material produced. The evidence indicated that there were ``many'' compositions developed over the three year period, and that a selection of those works had been taped and forwarded to a number of recording and publishing companies for assessment. According to the taxpayer, a favourable response could have resulted in the acquisition of fame and fortune, and it does appear that one of the companies approached did, initially, demonstrate a keen interest in one of the songs and that the aspirations of the taxpayer came close to realisation. Unfortunately, no final offer was forthcoming.
5. Whilst the taxpayer did not seek official copyright registration over the lyrics and musical compositions, he took the trouble of swearing an affidavit that all the works specified in the affidavit were his own original compositions. Apparently that measure would be of assistance in the restraint of others from the use of his material.
6. One of the bands formed to express the taxpayer's style of music rendered 13 performances during the 1981 year, and in that regard it received payments totalling $2,150, of which the taxpayer's one-fifth share as a member of the group amounted to $430. Furthermore, it seems that the taxpayer accepted a position with another band for a two week period in the 1982 year and that the acceptance resulted from the expectation that such participation would extend his range of contacts within the industry. The total sum received from that involvement and also the giving of solo performances during that same year amounted to $240.
7. Whilst the degree of activity varied from time to time in accordance with the particular tasks being undertaken, it seems reasonable to conclude that the taxpayer spent 10 to 20 hours per week when composing and at least 20 hours per week on those additional occasions when he was either rehearsing or performing with musical groups.
8. The details of the transactions emanating from the activity during each of the years under review are as follows:
1980 1981 1982 Gross Receipts Nil $430 $240 ---- ---- ---- Expenses $ $ $ Depreciation 1,412 1,110 870 Interest 516 516 258 Insurance 81 81 86 Repairs 29 - 38 Miscellaneous expenditure 200 300 60 Motor vehicle expenses - - 989 Photocopying - - 24 Advertising - - 152 Video tapes - - 71 Audio tapes - - 64 Equipment hire - - 45 Telephone - - 10 Postage - - 6 Electricity - - 83 ------ ------ ------ $2,238 $2,007 $2,756 ------ ------ ------ Net Loss $2,238 $1,537 $2,516 ------ ------ ------
In those same years the taxpayer had also made subscription payments to the Musicians Union of Australia of the following amounts:
$ 1980 ................................ 58 1981 ................................ 62 1982 ................................ 62
The Commissioner in raising the relevant assessments disallowed the claim for losses and also reduced the claims in each of the years for subscriptions to an amount of $42 by applying the provisions of sec. 73(3). The taxpayer maintained that he was carrying on business as a musician in each of the years in question and that, accordingly, the amounts received from that source constituted assessable income, whilst the associated outgoings, including the subscriptions in excess of $42, were deductible in terms of sec. 51(1), 53 and 54. Alternatively, the taxpayer contended that the expenditure incurred was an allowable deduction under sec. 124M, which appears in the Act under the heading of Div. 10B - Industrial Property.
9. The main thrust of the Commissioner's submission was that the musical activities undertaken by the taxpayer did not amount to the carrying on of a business inasmuch as they lacked any significant commercial purpose and, furthermore, those actions represented no more than an extension of his personal and long-time interest in music and should be regarded as the pursuit of a pastime.
10. Despite the Commissioner's urgings that the taxpayer had failed to discharge the onus of establishing quantum for some of the minor items of expenditure, we accept the taxpayer's sworn testimony that the amounts were outlaid for the reasons stated. The motor vehicle expenses claimed in the 1982 return related to a station wagon purchased in that year and used predominantly in the transportation of his equipment to various venues. In the circumstances of this case, we believe that it is appropriate to accept the quantum of the claim where an approved rate per kilometre has been applied to the relevant distances travelled.
11. In determining whether a business is being conducted, attention should be focused on the nature and extent of the activities as well as the purpose of the individual engaging in them. The criteria to be applied in cases of this kind was outlined in the joint judgment of Bowen C.J. and Franki J. in
Ferguson v. F.C. of T. 79 ATC 4261 at pp. 4264-4265 in the following terms:
``There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.''
In the present matter, the absence of profit could possibly create the impression that the activities lacked a significant commercial purpose or character (see
Thomas v. F.C. of T. 72 ATC 4094 at p. 4099), and yet we are satisfied that on the balance of probabilities the taxpayer possessed an expectation that profit would eventually be earned and that the methods employed by him were directed more to the making of profits than deriving pleasure.
12. Not only, in our opinion, were the activities undertaken on a continuous and repetitive basis, but they were carried on without interruption throughout the whole of the three year period. Furthermore, we are of the mind that the activities were organised in a businesslike manner and, to paraphrase the words used by Lord Clyde at p. 542 in
I.R. Commrs. v. Livingston & Ors. (1927) 11 T.C. 538, the operations involved in the venture were of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made. Finally, it appears to us that the taxpayer devoted considerable time and effort to the activities in question and, having regard to his financial circumstances, that the capital employed was substantial.
13. All of the above factors when taken together enable us to conclude that the taxpayer was carrying on a business in each of the three years under review as opposed to the Commissioner's contention that such activities amounted to no more than an indulgence in a hobby or pastime. Consequentially, the amounts received by the taxpayer in the 1981 and 1982 years represent assessable income, and the outgoings incurred during each of the three years, including the balance amounts paid for subscriptions and also depreciation of equipment, are permissible deductions under sec. 51(1), 53 and 54.
14. In the course of proceedings, the taxpayer made a passing reference to the possible application of the provisions contained in Div. 10B - Industrial Property. However, we consider that the fact situation existing in these references is such that those provisions are of no assistance to him.
15. For the reasons detailed above, we find in favour of the taxpayer and direct that the assessments before us be varied as under:
- (1) Year ended 30 June 1980 - allow the loss of $2,238 and also the balance of the amount paid for subscriptions, i.e. $16.
- (2) Year ended 30 June 1981 - allow the loss of $1,537 and also the balance of the amount paid for subscriptions, i.e. $20.
- (3) Year ended 30 June 1982 - allow the loss of $2,516 and also the balance of the amount paid for subscriptions, i.e. $20.
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