Edited version of your written advice

Authorisation Number: 1012832953072

Date of advice: 3 July 2015

Ruling

Subject: WorkCover

Question 1

Are you carrying on a professional arts business prior to XXXX?

Answer

No.

Question 2

Are you carrying on a professional arts business for the XXXX financial years?

Answer

Yes.

Question 3

Does Division 35 of the ITAA 1997 apply to defer your losses in the XXXX financial years?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2001

Year ended 30 June 2002

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on

1 July 2000

Relevant facts and circumstances

You are a professional with a specific artistic focus.

You began to exploit your skills by publicly displaying your art and making your work available for sale after completing your diploma.

In XXXX you resumed your full time job for financial security.

While working you continued with your profession as follows:

• Images were taken after working hours on weekends and holidays

• four to six hours a week were spent scanning, editing, organising and cataloguing the images

• Reading and researching related subjects was approximately three to five hours per week.

During the time when you were still working your specific focus lead to staggered and minimal sales.

In XXXX, you had sufficient financial resources and ceased working and directed all time and resources towards your profession.

To ensure there is a stable flow of income, and to build a customer base and create brand awareness, you do not restrict the types of work undertaken.

The main sources of income from XXXX onwards are generated by various business types.

Your income in XXXX is greater than $40,000.

You do not satisfy any of the four tests set out in Division 35 of the ITAA 1997 in the XXXX years.

Relevant legislative provisions

Division 35 of the Income Tax Assessment Act 1997

Subsection 35-10(4) of the Income Tax Assessment Act 1997

Reasons for decision

Your activity will only be potentially subject to the provisions in Division 35 of the ITAA 1997 if it is carried on as a business. If your activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997.

Whether a business is being carried on depends on the large or general impression gained (Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators, and some of the cases in which they have been applied, are discussed in some detail in Taxation Ruling TR 97/11.

The question of whether a person is carrying on a business as a professional artist is fully discussed in Taxation Ruling TR 2005/1 (TR 2005/1).

For the purposes of TR 2005/1, the definition of a professional arts business includes activities as an author of a literary, dramatic, musical or artistic work. The ruling recognises that there are special factors affecting artists. However, a professional arts business must be distinguishable from a hobby or recreation.

The factors for consideration when making the determination are:

• 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;

• whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators. The business should be carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and that the taxpayer's involvement in the activity is capable of producing a tax profit.

Professional artists, in particular, must be able to distinguish themselves from enthusiastic amateurs by directing their artistic abilities towards commercial ends.

Intention of the taxpayer

The taxpayer should be able to demonstrate an intention to derive assessable income from the business activity. A taxpayer should also be able to demonstrate that appropriate activities have been carried out by that taxpayer, or on the taxpayer's behalf, to allow this to occur.

Profit motive

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business, that is, from the carrying on of a business of that taxpayer.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. It is recognised in TR 2005/1 that the pattern of repetition exhibited by other businesses may not be present to the same degree in an arts business. However, for arts activities to constitute a business, the activities should be carried out an overall regular basis through the repeated application of the artist's skills and regular attempts to promote themselves and their art work to the public.

Organisation in a businesslike manner

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If someone else carries out the activities on the taxpayer's behalf, there should be regular reports provided to the taxpayer on the results of those activities.

Size or scale of the activity

The business should be large enough to make it commercially viable. The courts have recognised that a person can be carrying on a business in a small way. However, TR 2005/1 states that 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.

Not a hobby or recreation

There is a hobby when

• it is evident there is no intention to make a profit from the activity

• losses are incurred because the activity is motivated by personal pleasure, rather than the taxpayer also being driven by the desire to commercially exploit their artistic skills

• there is no plan in place to demonstrate how the taxpayer intends to make a profit from their art work

• sales are made to friends and relatives, not the general public, and

• there is an intention by the taxpayer to carry on a hobby or a recreation rather than a business.

Question 1

In your case, prior to XXXX, we do not believe that you are carrying on a professional arts business. A majority of the above factors point to your activity being considered to be a hobby rather than a business. Your activity is conducted on a small scale, does not have a commercial character and is not generating regular revenue. As such, your activity is regarded as being a hobby prior to XXXX.

Therefore, any income earned will not be considered to constitute assessable income in your hands. Consequently, you will not be entitled to claim deductions for any expenses that you incur and nor will you be able to claim depreciation for any equipment used in this activity.

Question 2

In XXXX, you ceased your employment to pursue this profession full time. We believe that you commenced a professional arts business at this point. The size and scale of your business increased and you began undertaking a variety of work with the view to making a profit.

Question 3

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

• you satisfy the income requirement and you pass one of the four tests

• the exceptions apply

• the Commissioner exercises his discretion.

Subsection 35-10(4) of the ITAA 1997 states that the rule in subsection 35-10(2) does not apply to a business activity for an income year if:

(a) the activity is a primary production business, or a professional arts business and

(b) your assessable income for that year (except any net capital gain) from other sources that do not relate to that activity is less than $40,000.

Assessable income consists of ordinary income and statutory income without allowing for any deductions. Whereas, your taxable income is assessable income minus any deductions. In this case, your assessable income for that year (except any net capital gain) from other sources that do not relate to your activity is more than $40,000. Therefore, the exceptions do not apply.

As the exceptions do not apply, the Commissioner has not exercised his discretion and you do not pass any of the four tests, Division 35 of the ITAA 1997 will apply and you will need to defer your losses for the 20XX and 20YY financial years.