Musical industry: Planning your tax
Musicians frequently face challenging financial times with fluctuating sources of income. Generally to begin with we should say that if you are willing to do the reading and alike to understand the rules and legislation around your tax, there is no requirement to use an accountant/registered tax agent. However this doesn't mean that you will maximise your claimable tax return or avoid trouble for ensuring an accurate report.
Kicking off: Business Structure
If you are intending to make a profit utilising your music then, unless employed by somebody, you will need an ABN. To register this you can pay a simple visit to the government website and start the application. There are various classifications for your business depending on how you operate, for example a solo artist is most likely going to be a sole trader for taxation purposes. For multiple people involved, such as a band, then you may desire to start as a partnership to avoid higher taxation costs, though depending on your situation it may end up better to eventually change to a company or trust, though we suggest this is something to ask us about in person so we can assess your position.
Once you have your business structure you should know the reporting periods so you can avoid fines for missing them. Sole traders are due the same time as individual tax returns, while companies and trusts have a quarterly BAS due.
Record keeping is key
In an industry that can sometimes be tough to get by in, with a fairly large amount of overheads that slowly accrue, you will need to keep accurate records to be able to maximise your tax return. Keeping your records neat can also be important on the dollar line as the small effort to keep it so will generally save you money since most accountants charge and hourly rate and will be able to complete your tax faster, and those with a fixed fee will generally base that on seeing a snapshot of how well or poorly your books are kept.
Now this may be a surprise to read, and certainly won't apply to everyone, but my friends who have been in the musical industry are actually really adept at keeping records, potentially a large part of their survival in the early stages may have gained that extra small cash flow to keep going. So if you are thinking that being a musician is a good excuse to say you can't keep records neat with numbers then you may wish to think twice, you may instead become a numbers master in years to come.
Having a specific business bank account can be a significant step into keeping your business accounts neat (yes you have a business now when you have gained that ABN). When you are paying and have the option of writing a note it can be tempting to write a funny description, though it will be valuable to provide a note, relevant name and or an invoice number. When you go to make claims in the future, as well as lodge your profits or losses you will need the accurate descriptions to be able to list the costs under your business. It is also always worth keeping the receipt or taking a photo of it to store safely away. As musicians those little costs you may claim could really add up, and in an often exploited industry, it can certainly have an impact on getting by. Records will need to be kept for five years in case you are audited, so the photo backups can be neat. For your excell sheet you may want to note the date of the invoice, a description, a category of the expense or income and the amount of GST.
The ATO app is a handy free storage for receipts and log books worth downloading as well. Setting this up will just save you time and make life easier.
A claim worth considering in particular is travel. As musicians it is likely that you do travel as part of your work, and sometimes with drums generally can be considered a large bulky item where you need to make the claim. To claim depreciation on your car and petrol you will need to keep a log book. The rates do vary though can be fairly generous when claiming these. There are two methods for claiming, and one is a set rate per km, the other a log book. Both of which need you retain a travel diary of dates, location and reasons for the travel (such as rehearsal, business meetings, travel days or alike).
The set rate per km is an eligible claim for up to 5,000 km without written substantiation. This method pays at 66 cents per kilometre currently, so if you are travelling from town to town performing then you should know from the experience of how long this is, that it will add up.
The other method of motor vehicle deductions is via a log book. A log book must be kept for a continuous twelve week period, and will be valid for a five year period. I bet that twelve week tour is sounding pretty good right about now. After the twelve week tour the percentage of business use will be calculated, and this will be applied to all motor vehicle expenses to decide what is deductible or unfair to claim. While it may be attractive to log every trip on a tour as business related while doing the books here, it is probably worth noting down your private ones clearly such as a trip to the store for snacks, as 100% claiming all the time may look a little unusual and is probably unlikely. The important thing is while it may not be the first thing in your mind, it is worth using the trip to keep the log accurate, something the driver can avoid in a ban.
An interesting point on this if you have a vehicle that has a carrying capacity of one tonne or more then you will not need to keep a log book, though you still will need to keep the receipts, always keep the receipts. More related though for you is that the vehicles that carry more than nine passengers (legitimately so more than 9 actual seats) are also classified as commercial vehicles. A commercial vehicle can though often be considered 100% deductible.
Special Professional Income Averaging Offset
Because the ATO is aware the fluctuations within and the difficult to predict nature of being in the music business there are some specific concessions available to assist. One such example of a special concession is the special professional income averaging offset. Given that one year may have no income and another excessive taxing without the offset, the offset allows something somewhat similar to an average of four years worth of income and a tax rate at that level. This will have a considerable impact for those who have more sporadic incomes. For example one year you may fall into a 25% tax bracket and the next below the tax threshold entirely.
Let's say you earned $100,000 in one year, and nothing in another, and only apply the rule to these two years to give a you a rough idea. $100,000 is taxed at 25% so would pay $25,000 in tax. The year you earn nothing naturally you would pay no tax. With the offset in place however your average income would be $50,000 across the two years. $50,000 sits in the 15% tax bracket, so you would instead be taxed at the rate you would have been if you earned $50,000 each year and thus be taxed 15% of $100,000 ($15,000 we all know yes). In this situation that is a $10,000 saving, though the variation could be a little more extreme than your personal one it does have a considerable impact.
Now we all know that when you are going out on a limb, such as starting a business, or in your case becoming an artist, you often have to utilise another income source to sustain yourself. Some people may work at a restaurant, others administration, but whatever it is you may be able to claim some of this tax for your 'day job' when trying to emerge in your 'night job' so to put it. Typically, losses generated by an individual or partnership business where the turnover is under $20,000 are not tax-deductible. Losses for these businesses usually are carried forward as loss into future years for tax purposes. However for specific industries you may be able to access the money earlier to maintain your cash flow.
If you earn less than $40,000 from other sources (the said 'day job' such as working as a waitress or waiter) and your losses come under a professional arts business, then you actually can claim the losses in the year you made the loss from your employed income source ('day job'). This can be valuable since often in the fledgling years working as an artist/musician you may face losses, and getting a tax refund from your other job, provided there is tax payable on the other job (because you are having to work too hard you have two jobs as a musician and another).
Typical Musical Artist Income sources
Advances and royalties – publishing, mechanical, etc.
CD/vinyl sales at gigs/online
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 five 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
Trademarks, registration fees, etc
Computer costs – printer ink, paper etc.
Domestic ground transport – taxi, public transport, parking, tolls, etc.
Stationery & postage
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 buying your manager’s team member 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.
Rent - 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.
Rehearsal room hire
Storage – for your equipment
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
It is worth noting that you need to be reasonable with how much you list as used as a percentage for your business for things like phone and internet. Even your accountant won't be able to justify something if it isn't true when the ATO comes knocking.
Also worth noting is that business expenses and tax deduction are different. You can't claim everything that is a business expense as a tax deduction. Further when you make many claims it is only on the percentage you would have paid for tax.
GST is something you will need to squirrel some funds away for. The payments are made quarterly when you pay your BAS and annual income tax bills.
Having a keen look at your cash flow will be essential in ensuring your costs don't bankrupt you before you even get to the second performance, even if the gross is a gain. Further before that you may want to be prepared for costs to appear and income to never eventuate given the industry sadly.
We appreciate that you love writing, performing and alike, rather than managing the tax. Thankfully a lot of this stress is something you can hand over to us as your accountants. If we can set you up correctly from the start, it will save you and us a lot of time when completing your taxation requirements, as well as likely allow you to make more and accurate claims.