A guest article by music/arts accountant Scott Maughan with reference to AMIN’s Tax Pack prepared by Ben Fletcher.
Tax: the very word is enough to make many musicians eyes glaze over. Unfortunately, if you’re receiving an income from music (woohoo!), preparing your yearly tax return is a horrifying necessity. But we’ve got you covered. The below article by guest author Scott Maughan is a fantastic, comprehensive tax guide specifically for musicians at tax time. Read on to find out everything you need to know about record-keeping, what items you can claim as tax-deductible, and how to prepare your tax return! Take it away, Scott!
Tax: A Comprehensive How-To Guide For Musicians And Music Workers
The following is a simple guide on how to approach the upcoming tax season, so you can be ready for the new financial year that starts on July 1. It outlines what you need to prepare in order to get your tax return done, and my advice on how best to do it.
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. This will allow you to have all of your income and expense information ready when June 30 rolls around, so you can get your tax return out of the way, focus on making music and not worry about tax.
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 twelve 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 5 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:
- Date of invoice
- Description of invoice
- Category of income or expense
- Amount (If GST registered you will need to show gross, net and GST amounts)
If you have too many transactions to go through, am 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, but 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:
- Travel ! Fact : Most musicians travel for work. Fact: Most musicians keep terrible records whilst on the road. Depending on your structure, the ATO allows a rate per day deduction and these rates can be quite generous, but to be eligible, you must keep a travel diary. It must include the following information:
- Reason for being in that location on that day (e.g. meeting, rehearsals, gig, travel day, etc)
From this financial year onwards, there are only two methods the ATO allows for claiming motor vehicle deductions. They are:
- Set rate per km – this is the simplest method. It allows you to claim up to 5,000 km without written substantiation, using a cents per km travel rate established by the ATO. For the 2016/17 financial year, this has been set at 66 cents / km. That being said, if audited, you will be asked to at least explain how you worked out the kms travelled for the year – so keep this in mind.
- Log Book – a log book is kept for a continuous period of 12 weeks, and is valid for a period of 5 years. The log book documents all travel in the vehicle in question, and at the end you’ll have a business use percentage. This percentage is then applied to all motor vehicle expenses to see what is deductible and what is not. For this reason, it makes sense to create the log book during a period when you are doing a lot of work-related driving.
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 9 or more passengers.
If you’ve come this far you might find our dedicated Music accounting and tax course of interest…
Taxation measures for the musician
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 4 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 App
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.
Music Business Taxable Income & Deductions
The following is a list of some common examples of income & deductions in the music business.
Taxable Income Sources for Musicians
- Advances and royalties – publishing, mechanical, etc.
- Live performance
- Synch licensing
- CD/Vinyl sales at gigs/online
Deductions Tax Guide for Musicians
- Assets – Generally, those under $1,000 are deductible in the year of purchase. For this financial year, you can write off assets costing up to $20,000 immediately. If you haven’t depreciated any assets before, make a list of items purchased, the date purchased and the cost for each item going back 5 years, as you can still include these in your tax return and claim a deduction.
- Stage clothes / Costumes – Note that this relates to costumes only. Just because you wore those black jeans at a gig doesn’t mean they are deductible. It needs to be show/stage specific.
- Education – Music courses, singing lessons, small business courses etc.
- General business expenses
- Bank charges
- Accounting fees
- Legal fees
- Bookkeeping fees
- Trademarks, registration fees, etc
- Phone *
- Internet *
- Computer costs – printer ink, paper etc.
- Domestic ground transport – taxi, public transport, parking, tolls, etc.
- Stationery & postage
- Workers compensation
- Income protection
- Public liability
- Management Commission
- Meetings – catering a business meeting is deductible if the meeting is held at your office / house / manager’s place of business and is consumed at that place. Getting lunch or having a coffee out at a café or bar isn’t deductible. Also note that alcohol is never deductible unless it is a gift (e.g business your manager’s receptionist a bottle of wine for her birthday is okay, but the bar tab after a gig is not)
- Motor vehicle – it is generally a good idea to keep all receipts in relation to your motor vehicle in addition to a valid log book. This gives you an option to claim either cents / km or the log book method.
- Promotion – advertising, CDs, website costs, facebook etc
- Recording costs – studio hire, producers, engineers etc
- Reference / research expenses* – anything you may draw inspiration from. Might include concert tickets, CDs, records, DVDs, magazines, books, pay TV, theatre tickets, etc.
- If you‘re renting your home and don’t claim rent elsewhere (e.g. studio) then you can claim a % of your rent and utilities (electricity and gas). The percentage is based on the floor space and how much is dedicated to your music business. A sketch of the floor plan will help here.
- Studio hire.
- Rehearsal room hire.
- Storage – for your equipment
- Tour costs
- Flights, accommodation, visas, meals & incidentals whilst away from home, etc
- Musicians, lighting, sound techs, guitar techs, FOH, tour manager, door / merch person.
- Advertising, venue hire, travel insurance
- Car hire and petrol, freight costs, backline hire
- Agent commission
*Please note that for things like phone and internet, you will need to provide your accountant with a reasonable business / music use percentage.
- Be aware there is a difference between a business expense and a tax deduction. Just because something is an expense of the business, doesn’t mean the tax department will allow you to claim a tax deduction for it. A good example of this is buying drinks at gigs.
- The general thing to know is there needs to be a direct “nexus” between the expense and the income received. Going overseas to check out other bands doesn’t directly link to income earned, but travelling for a tour does.
- Everyone talks gross, but you really need to know about net. Be aware that a $100,000 tour deal, after commissions, insurance, venues, travel costs, sound, lighting, crew etc might become a $10,000 deal (or even a loss) in the blink of an eye. Being aware of the true costs involved in your business will help you to run your business more effectively.
- Put money aside for tax (both GST and income tax). Set up a separate savings account, and put the GST you receive on income, as well as a reasonable percentage of your gross income, into this savings account. That way, when it comes time to pay your quarterly BAS or your annual income tax bill, you’ll have the money set aside.
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!
Thank you to Music Industry Inside Out mentor Scott Maughan for this article.
Members can also view Scott’s videos within the following courses: