Artists business fact sheets: Start-up your practice!

Written by: Evan Lowenstein

Over the years Lowensteins have been called on to advise on the necessary steps artists must take to start their own businesses and the particular issues that affect their industry.
To that end we have decided to prepare a series of ‘Fact sheets’ that encapsulate basic information on how to start an arts business and, once started, how to successfully run this endeavour.
In this edition of the Newsletter we will outline the steps that artists need to take to ensure that they are making tax claims as a ‘business’.
Many young artists, who show in the gallery system, may only have one or two shows a year and so in order to supplement their income, they may have a part-time or full time job.
For many years, the Australian Tax Office (ATO) took the view that artists who were supplementing their income with part-time or full time employment income and were incurring losses from their arts practice were ‘hobby’ artists and therefore they were not entitled to claim expenses incurred to produce their work. The ATO’s position manifested itself in a number of audits and investigations in 1987. The ATO found it difficult to understand that artists, who were losing money from their artistic endeavours, could be considered a bona fide business.
Through meetings with senior tax officials and submissions, Lowensteins was at the forefront of the battle to ensure the ATO saw sense and understood the tax aspects of the working artist.
Eventually in 2005, as a result of the cooperation between Lowensteins, NAVA, the Arts Law Centre of Australia and the Australia Council, the ATO released a ruling which laid out the criteria for artists to be considered to be ‘in business’.
This set the ground rules whereby both the ATO and the taxpayer could be confident that if the ruling was followed, then no misunderstanding would arise.
The main criteria that the ATO set out was that in order to be considered to be a ‘business’ three to four main tests had to be passed by the artist:

1. Intention of the artist

The intention of the artist has to be one of a significant commercial purpose, simply put this answers the question, ‘Has the artist the intention of making a living from artwork sales?’

• It is well understood that there is the need for the artist to supplement artistic income by other means, but the fact that there may not be a profit does not prevent the artist from being in business.
• So long as there is some degree of commerciality, then that should satisfy the ATO.
• The degree of commerciality could be seen, practically speaking, as relating to the effort in seeking and selling art in galleries, whether commercial, artist run spaces or other venues and would extend to online activities.

2. Profit motive

The profit motive whereby the artist seeks to make a living from the artwork sales is an important factor.
However, it is recognised in this ruling – which is so very important to understand – that even ‘though there may not actually be any sales or profit, so long as the artist is demonstrating other business-like factors, then this does not mean that the artist isn’t ‘in business’.

3. Activity consistent with the intention

The artist has to show their intention to make a living in tangible ways. It is simply not enough to declare that they are in business to make a profit, they need to demonstrate that the intention is borne out by their actions.

4. Business indicators

There is a whole host of business-like indicators and the main ones are listed below:

Attempts to market the artwork

This is an important factor in that it ensures that the artist is making as much effort as they can to show and sell their work in commercial galleries, ARI’s, group shows, shops, online and anywhere that they can seek out sales. Again, lack of success is no obstacle so long as there is a consistent effort being made to put work ‘out there’.

Infrastructure

This refers to the physical work space and whether there is a dedicated artist’s studio with all equipment and materials necessary to show that a business is being carried on.

Portfolio

The artist needs to show that they have prepared a body of work. They will normally show this to a gallery or interested purchaser of their work.

Qualifications

Although not vital, having the necessary qualifications does demonstrate that this is their career and life choice.

Keeping skills up to date

This is always important to be up to date with new development and to be engaged in professional development. Course fees are also deductible.

Website

Always an important tool used by people to show that they are professional in what they are doing and that they have a track record of shows or work that they have made.

Record keeping

This is also an important indicator that shows the degree of seriousness and professionalism. Whether the artist is registered with the ATO for an ABN and GST is also an important consideration (Read more about record keeping in the next Newsletter).

Contracts where applicable

As accountants we urge clients that there should be contracts between artists and the people for whom they are working, whether galleries or commissioning parties. The contract sets out the rights and obligations of both sides and is certainly demonstrative of a business; and that the artist is engaged in a professional relationship. It is important to note that not all of these factors have to be evident in order to prove the existence of a business, so long as there is the general feel of a commercial arts practice being carried on, that should be sufficient for the ATO.