In a weird turn of events, tax has never been so vital for creative practitioners and arts organisations. Recent months have been a crash course in finances, and the end of the financial year is another round of necessary but tedious rules and regulations.
Still, and as always, creative businesses and professionals are in an interesting position with regards to deductions, as many of us are individuals, small businesses, AND professional artists. It’s super important to double-check all of your supposed deductions with your accountant or directly with the ATO, as there is an awful lot of surprisingly grey area around some claims.
The ATO is trying to help with a Fast and Easy Tax Essentials, available here:
Here’s the quick guide to new things to watch out for in 2020.
Assessable income is best described as the kind of income that attracts a tax responsibility. This usually means any kind of money associated with your professional work, including wages and money paid through an invoice, AND JobKeeper. If you have been claiming JobKeeper, you will need to report that on your Income Tax Return, and your tax bill could be higher than expected. Even more reason to maximise your deductions and reduce that naughty bill!
If you received early access to your super this year under the special arrangements due to COVID-19, any amounts you’ve withdrawn from super under this program are tax-free and you do not need to declare them in your tax return.
To find out more about assessable income:
You can claim a deduction for most expenses you incur in running your business as long as they are directly related to earning your assessable income.
You can watch the ATO’s Income tax deductions webinar about the principles of income tax deductions that apply to all businesses.
Remember the three golden rules for claiming your business expenses:
- The money must have been spent on your business (not exclusively a private expense).
- If it is for a mix of business and private use, only claim the portion that is related to your business (this is called apportioning).
- You must have records to prove it – digital records are fine, but you’ll need paper copies of original receipts as well.
For example, you can claim a deduction for a laptop if you bought it for your business – just claim for the proportion of business use (not private use) and keep your receipt. The percentage that you choose is up to you, but if asked you’ll need to prove why you chose this percentage. Most people base their percentage on use – for example, if you use your laptop 80% of the time for business purposes, you can claim 80% of the cost of the laptop.
You can claim a deduction for most expenses you incur to run your business, as long as they directly relate to how you earn assessable income. This is true for sole traders, partnerships, and companies – but the generosity of deduction may vary.
Running your business from home
If you run a home-based business or work from home, you may be able to claim:
- occupancy expenses – such as mortgage interest or rent, council rates, land taxes, house insurance premiums (this is only available if you have a separate room or workshop);
- running expenses – such as gas and electricity, phone, decline in value of plant and equipment, decline in value and cost of repairs to furniture and furnishings, cleaning.
One of the easiest ways to claim working from home is the Fixed Rate Method, which is a deduction based on all of the running expenses that you might have:
- Work out how many hours you spend on average in your home office over a four week period (using a diary or calendar as a representative guide of the pattern) OR over the whole year (you’ll need records to show your hours)
- Multiply that amount by 52 cents per hour.
For example, Fred works at home for 20 hours per week, for 48 weeks of the year. His Fixed Rate would be 20 x 48 x .52 = $499 deduction.
More generous deductions are available for the period 1 March to 30 June 2020 – this is called the Short Cut Method and is a deduction of 80 cents per hour.
Use the ATO’s Home office expenses calculator page to help you work out the amount you can claim as a tax deduction for home office expenses. If you own your home, talk to your accountant about any potential Capital Gains Tax issues.
If you travel for work, you can claim deductions on transport such as airfares, train, bus or taxi fares – as long as you are travelling from one place of work to another. Travel from home to work doesn’t count (unless you maintain a home office).
For overnight travel, the rule for claiming expenses is:
- one night or more – keep written evidence of all expenses;
- six or more consecutive nights – keep a travel diary recording all the particulars of the business activities you undertake.
Check out the Australian Taxation Office (ATO) Business travel expenses information.
Motor vehicle expenses
Do you have a car you only use for business or travelling from one place of work to another? Claiming expenses and how you calculate them will depend on:
- your business structure (i.e. sole trader, company, partnership or trust);
- the type of vehicle;
- how the vehicle is used.
Go to the ATO’s Motor vehicle expenses page to learn more.
Paying Other People
As a business owner, you can generally claim a tax deduction for any money that you pay to other people in the form of salaries, wages, and invoices.
You can also claim a tax deduction on any super contributions that you make (on time) to a complying super fund for those people. If you’re a sole trader, you can usually claim a deduction for your own super contributions in your personal tax return as well.
Find out more on the ATO’s Salaries, Wages and Super page to learn more.
Repairs and maintenance
You can claim a deduction for repairs and maintenance on your business assets, including:
- painting, plumbing, and other repairs;
- repairing electrical appliances and technological gear;
- repairing machinery.
For more information visit the ATO’s Repairs, maintenance and replacement expenses page.
General operating expenses
Operating expenses are the costs you incur in the everyday running of your business, such as:
- purchases of trading stock (if you sell product), and delivery charges;
- advertising, marketing, promotion and sponsorship expenses;
- small value mobile phones and tablets;
- legal expenses;
- internet usage;
- bank fees and charges;
- costs for running a commercial website – and so much more!
You can generally claim a deduction for most operating expenses. Check out the ATO’s Other operating expenses page for a full list you can claim information.
Under the instant asset write-off for this year, eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use. In previous years, and from 1st July 2019 to 11 March 2020, the instant write-off threshold was $30,000.
From 12 March 2020 until 31 December 2020 the instant asset write-off threshold is now $150,000. In other words, any eligible expense or deductible thing that you buy for your business is a total tax deduction up to $150,00. No more depreciation!
Other Resources for Deductions
Check out these other resources for more lists of deductions for creatives:
- ETAX ACCOUNTANTS – Tax Deductions for Freelancers
- MICHAEL FOX – Top 10 tax claims for artists and creative professionals
- MUSIC INDUSTRY INSIDE OUT – A Comprehensive How-To Guide For Musicians And Music Workers
- ELECTRA FROST – Fictions (and facts) about Deductions
Business or Hobby? from www.business.gov.au
It’s important to understand the differences between a hobby and a business for tax, insurance, and legal purposes.
Key questions to consider:
- Is the activity being undertaken for commercial reasons?
- Is your main intention, purpose, or prospect to make a profit?
- Do you regularly and repeatedly undertake your activity?
- Is your activity planned, organised and carried out in a businesslike manner?
If you answered yes to most of these questions, you’re likely to be running a business, although it depends on your individual circumstances. The ATO website provides further questions, information and examples to help you understand the differences between a hobby and a business – or you could try out this not fun quiz to find your own answers!
To get an answer specific to your circumstances, you can:
- talk to a legal, accountant or business adviser in your area who can help you decide whether you’re running a business or a hobby.
- get a private ruling from the ATO, which will provide an answer that protects you from penalties and interest.
If you’re curious about the root of all these rules, and you have a spare couple of hours, you can find out all the original material here:
- TR 2005/1 – Income tax: carrying on business as a professional artist
- TR 95/20 – Income tax: employee performing artists – allowances, reimbursements and expenses
- TR 98/14 – Income tax: employee journalists – allowances, reimbursements and deductions
We highly recommend the examples… “Jennifer has been painting for several years. She is employed as a public servant, but works on her art in her spare time…Jennifer does not make any concerted efforts to sell her artworks!”
Time to get organised!
If you’re looking for an accountant that specialises in the creative industries, check out our Groovy Accountants. This free listing allows you to check them out – we don’t necessarily endorse them, but we do recommend you give them a call and find out more for yourself.
If you think it’s time to try out Cloud Accounting, there are lots of options including the more famous (and expensive) methods such as Xero and MYOB. We recommend Rounded, which is an Australia-owned small business that provides cloud accounting for sole traders and freelancers, with a mission to help creatives, You can try them for free for a month by clicking here! And you can watch a webinar about the platform here.