Original Article: http://apraamcos.com.au/news/2016/july/tax-a-comprehensive-guide-for-musicians-and-music-workers/
If you have been preparing your own tax return via myTax (formerly eTax) and are comfortable doing so, please note that there is no requirement for you to use an accountant / registered tax agent. It might not hurt to use their services to check you are doing everything correctly though. If you are a new band or act, it is highly advisable to see an accountant who knows how the music industry works, so you can be sure you’re maximising the deductions available to you when it comes to tax time.
Are you up to date with your tax returns? This question is becoming increasingly important, as the ATO is ramping up its program of finding those tax payers who are late lodging their tax returns. If you haven’t lodged any tax returns for one or several years, GET UP TO DATE NOW! If you are one of these people and you haven’t received a letter from the ATO yet, get up to date now so you stay off their radar. They are getting better at tracking information like this, and they will find out sooner or later.
Get a system in place that you understand and are comfortable with in relation to your record keeping. Keep it simple, and stay on top of it.
Good record-keeping is vital for a number of reasons. Firstly, most accountants charge an hourly rate – so the better organised your information is, the less time it will take them to prepare your work, and the less they will charge you. Also, the more organised you are, and the better systems you have in place, the more likely you are to keep on top of things. This will mean you won’t put doing your numbers for the financial year off, so you will lodge your tax return on time. I’ll say it again, the ATO is getting very strict on imposing penalties for late lodgement! So stay off their radar, or you will be fined.
The first thing I tell clients is if you haven’t got a specific band bank account yet, get one. If you receive all income and pay all expenses out of this one account, it will make your life so much easier when it comes to tax time – believe me. There will always be times when you have to pay cash for some items or put flights on a credit card, but try and reimburse all of these costs out of the band account. At the end of the financial year (or hopefully throughout it) you can use the income and expenses of this account to prepare your income and expenses summary.
A small hint: when paying for an expense and writing a note in the description, stick to invoice numbers and a relevant name. I know writing a humorous description is funny at the time, but 12 months later, when you may well really need that $400 deduction, your accountant will probably not let you claim ‘sex dungeon fees’ as a tax deduction!
The record-keeping requirements will vary depending on your structure and your business. Substantiation refers to the ability to ‘back up’ your income and expense claims. A summary, (whether it be in Excel, Google Drive or even handwritten) is great when it comes to preparing your tax returns. However, the original invoices are still required for the claim to be allowed, and should be kept for a period of five years after lodgement of the relevant tax return, in case of tax department audit.
Whatever format your income and expenses summary takes, it should ideally include the following:
If you have too many transactions to go through, and just not interested in doing this yourself or don’t have the time, maybe it’s time to think about hiring a bookkeeper. Bookkeepers don’t just keep track of your income/expenses and maintain it all in a neat & tidy format. They can also prepare & lodge your quarterly Business Activity Statement, maintain your payroll and liaise with your accountant. Most people in business agree – a good bookkeeper is money very well spent.
Other things to know:
From this financial year onwards, there are only two methods the ATO allows for claiming motor vehicle deductions. They are:
Another point to note with motor vehicles is that vehicles considered commercial in nature are generally 100% deductible, and don’t require a log book to be kept. Commercial vehicles include those with a carrying capacity of one tonne or more, and those that seat nine or more passengers.
Believe it or not, the ATO understands that the music business (and all artist industries) can be tough and unpredictable. In light of this, they offer some concessions to assist you along the way. There are also some general small business concessions available.
Special Professional Income Averaging Offset
The ATO acknowledges that artist income can vary quite significantly from year to year and this offset helps to stop you paying no tax in one year and then excessive tax the next. The actual calculation is quite complex, but essentially it takes an average of four years’ worth of artist income, and you then pay tax on that. So if you have steady years, the offset doesn’t have much of an effect, but if you have quiet years and then good years, you will see significant savings.
Typically, losses generated by an individual or partnership in business where the gross income (before deductions) is under $20,000 are not tax-deductible – this means that the losses are ‘quarantined’ and carried forward to be used in future years when the business generates profits. However, there are ways around this.
Assuming you earn less than $40,000 from other sources (e.g. working at a pub, reception work, etc.) and the loss has been generated by a Professional Arts Business (as is the case for a musician), then you can claim the loss as a deduction in the year you incur it. Why care? Typically, in the early years you’ll be making losses in your music business and working another job to pay the bills. This other job has PAYG tax being withheld by the employer and the ATO. If you can claim the loss from your music business, it works as a deduction against this other job, and you might be able to get a tax refund or at least reduce any tax payable.
The ATO has launched an app that is actually quite handy. It has a number of very useful features that include a log book and a method of storing and filing receipts for business expenses. I would recommend you have a look into this, as it can and will make your life easier.
The following is a list of some common examples of income & deductions in the music business:
*Please note that for things like phone and internet, you will need to provide your accountant with a reasonable business / music use percentage.
People start bands and writing and performing music because they love doing it. They very rarely love the accounting and tax side of things, but it is something that has be done as part of being in a band. There’s just no getting around it. If you set up good systems that you understand right from the start, and treat your band or yourself as a business, you will be well on the way to ensuring that you meet your tax obligations each year in a timely manner – so you can concentrate on what you started the band for in the first place!