Preparing for Tax Time: Helpful hints for performing artists
There is a chill in the air, dark clouds build on the horizon, and a palpable sense of apprehension can be felt as we realise that it is that time of the year again… TAX TIME.
Like many aspects of life working as a performer, tax time can have its own unique challenges. Can you claim your gym membership? What should you be doing with Super? What if you earned basically nothing last year and $100k this year? Paying all that tax doesn’t seem fair.
To answer some of these questions and get some tax tips for artists, we sat down with Mark Chapman from H&R Block. Mark was a tax adviser for over 20 years, specialising in individual and small business tax. Mark has regular columns in Money Magazine and My Business magazine, he has written for a variety of national publications such as The Australian Financial Review, The Daily Telegraph, The Age and Business Spectator.
What can people do to be prepared for the end of the Tax Year?
Make sure your books and records are in good order and in particular, ensure that you have receipts/invoices, etc for any potentially tax-deductible items you have purchased during the year.
In terms of year-end tax planning, if you need to invest in any capital items (such as musical instruments, or a van or stage lighting) and you are in business on your account (rather than an employee), you might be able to claim an immediate deduction for any purchases costing less than $20,000 so if your cash flow permits now would be a good time to make that investment.
Now is also a good time to make tax deductible superannuation contributions before the new, lower cap is introduced on 1 July. From 1 July, you can only pay $25,000 per financial year in concessional (tax-advantaged) contributions; until 30 June, you can pay $30,000 (if you are 49 or younger) or $35,000 (if you are 50 or over).
As a Tax Agent, what can people do to help you get them the best refund?
Tax agents can take a lot of the pain out of getting your tax right. Using a tax agent helps you lodge an accurate return in which you claim everything you are entitled to and don’t under or over claim. Tax agents are often good at sniffing out those more unusual deductions that you might not have realised you were eligible for.
What are some of the biggest mistakes you see people make with tax?
There are lots of mistakes that people make. Some people overclaim for things that they simply aren’t entitled too (not always deliberately, tax law is complex and sometimes people don’t understand that a claim isn’t valid). Others underclaim because they aren’t fully aware of the things they can claim. Another mistake is to omit income.
This is very common amongst early lodgers (people who lodge straight after the end of the tax year) since a lot of the pre-filled information that the ATO provides isn’t yet available and taxpayers don’t notice that its missing – if you do that, you can end up with a “please explain” letter from the ATO, even though you relied on their figures!
Specifically for people working in the Performing Arts Industry, are there common misconceptions?
Because people in the arts tend to have fairly niche occupations, there is a misconception that some of the basic “tools of their trade” can’t possibly be deductible and that’s often not the case. For example, whilst most people can’t claim the cost of a musical instrument against their tax, a professional musician can. And if they are self-employed and the instrument costs less than $20,000, they might even be able to claim an immediate write-off against their tax, rather than depreciating it over several years.
What do people try and claim that they shouldn’t?
Provided what you’re claiming is linked to your income producing activity, it should be claimable. Where people can get into trouble is by claiming private or domestic expenditure, which is inherently not deductible. So if you do some work from home, make sure any claims you make in relation to home-based costs (such as utility bills) are in line with the amount of work that you do. If you’re employed, don’t try to claim the costs of driving from home to work. If you take a course, don’t assume that its tax deductible unless it’s directly related to what you are doing to earn an income now – courses that open up new opportunities in future aren’t deductible.
Are there items that people can claim that they don’t?
Given the inherently unique nature of many jobs in the performing arts, the type of work-related deductions tends to be quite unusual. When working out what you can claim, you simply need to remember the basic rule that if you incurred the expense in earning your income, it should be claimable. So, depending on what you do, you might be able to claim items as diverse as acting or stagecraft classes, costs of stage make-up, fitness or personal trainer expenses or the cost of buying or repairing musical instruments – none of which would normally be claimable by employees in more ‘mainstream’ occupations.
Long Term Tax Plans
Working in the Performing Arts can be feast or famine. Can you explain Income Averaging and when it is appropriate?
The main tax perk for people in the arts and sports world is income-averaging. Recognising that incomes in the arts can fluctuate widely over the course of the years, the ATO allows so-called “special professionals” to average their income so that they don’t pay excessive amounts of tax in the good years compared to the leaner years. Averaging is available where your income from qualifying activities first exceeds $2,500.
For the purposes of the income averaging rules, a special professional includes:
- Production Associate (ie, someone who provides artistic such as an art director, a choreographer, a costume designer, a director, a director of photography, a film editor, a lighting designer, a musical director, a producer, a production designer, a set designer and any person
- Sportspeople (but not coaches, trainers, umpires, referee sport, sports administrators and entrepreneurs, animal owners and trainers or golf caddies)
The income that’s included in the averaging rules includes:
- Prizes and rewards
- Income from endorsements, advertisements, interviews and commentating
- Royalties from copyright of a literary, dramatic, musical or artistic work
- Income from a patent for an invention
Employment income is usually excluded unless the contract for a one-off piece of work and not part of an ongoing engagement.
Income averaging works by applying a special rate of tax to the special professional income for the year which is above a 4-year average. There is no need to calculate this yourself. The ATO will calculate it for you. All you need to do is complete box Z at item 24 on your tax return.
Quite often people in our industry work as contractors rather than PAYG. What advice do you have for people in this situation in terms of their tax obligations?
Contractors typically don’t have tax deducted from payments made for their services so it’s essential that when you receive a gross payment for your services, you set aside a sum of money for the tax on that payment. The easiest way to do that is to have a separate bank account – purely for tax transaction. That way, you know that you’ll always have the cash to settle your tax liabilities and because that account is used for nothing else, there’s no risk of accidentally dipping into it to support your everyday spending. Remember also that if your turnover exceeds $75,000, you will need to register for GST and account for 10% GST on any payments you receive. Your invoices will need to include the 10% GST on top of your fee.
Contracting also means earning less superannuation. What are the issues to consider with superannuation and self contributions. Can these be tax deductible if made before the end of the financial year?
At present, the self-employed can generally make tax deductible superannuation contributions provided less than 10% of their assessable income comes from employment. That can be tricky where performing artists undertake partly contractor work and partly work as an employee. The good news is that from 1 July 2017, the 10% income restriction is being abolished, which will make it easier for those with a mixture of contract and employment income to provide for their super and will greatly increase the capacity for people to top-up their super fund, provided they don’t breach their concessional contributions cap ($25,000 from 1 July 2017).
Do you have any more advice for people working in our industry or more generally?
Start getting ready for tax time now and use an accountant to prepare your return; the whole process will be smoother and less stressful, the fee is tax deductible and you’re likely to end up with a bigger tax refund.
A big thank you again to Mark Chapman and H&R Block for talking to us. If you are looking for more general information you can check out the H&R Block Tax Tips and Guides.
If you are looking for a Tax Agent you can get in touch with H&R Block and find the closest office to you.