"VBF" and Commissioner of Taxation
[2005] AATA 226
•17 March 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 226
ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2002/249
TAXATION APPEALS DIVISION
Re: "VBF"
Applicant
And: COMMISSIONER OF TAXATION
Respondent
ADMINISTRATIVE APPEALS TRIBUNAL N° VS2002/37—38
Sitting as Small Taxation Claims Tribunal
Re: "VBF"
Applicant
And: COMMISSIONER OF TAXATION
DECISION
Tribunal: Mr E. Fice, Member
Date: 17 March 2005
Place: Melbourne
Decision:The Tribunal sets aside the decision in matter number VT2002/249 in respect of the 2000 tax year and remits the matter to the respondent for assessment of allowable deductions for the 2000 tax year.
The Tribunal certifies that the proceedings have terminated in a manner favourable to the applicant in matter number VT2002/249.
The Tribunal affirms the decision in matter number VS2002/37‑38 in respect of the 1998 and 1999 tax years.
(sgd) Egon Fice
Member
TAXATION – nature of business activities - carrying on business as a professional artist – whether activities commercial or hobby in nature - whether applicant entitled to deductions
Income Tax Assessment Act 1997
Ferguson v Federal Commissioner of Taxation 79 ATC 4261
Glennan v Commissioner of Taxation (2003) 53 ATR 101
Hope v The Council of the City of Bathurst (1980) 144 CLR 1
Stone v Federal Commissioner of Taxation 2003 ATC 4584
Woods v Deputy Commissioner of Taxation 99 ATC 5306
REASONS FOR DECISION
17 March 2005 Mr E. Fice, Member
1. The applicant's taxation returns for 1998, 1999 and 2000 were amended by the Commissioner of Taxation ("the Commissioner") as a result of the applicant lodging a voluntary amendment request on 28 August 2001. The applicant objected to the amended assessment on 26 November 2001. By notice dated 8 August 2002, the Commissioner advised the applicant that each of his objections in respect of the taxation years 1998, 1999 and 2000 had been disallowed in full. The applicant's appeal is in respect of each of the three taxation years in issue.
2. The applicant was represented by Mr A. Abbott, a chartered accountant, and the Commissioner was represented by Mr C. Sievers of counsel. The Tribunal had in evidence the documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the T‑documents), as well as exhibits A1 to A28 tendered on behalf of the applicant.
BACKGROUND
3. The applicant said he lived in Sydney between 1989 and 1991, where he became involved in the art community - participating in painting, performance, fashion design and contributing to various art installations in respect of the Sydney art community. At the time, the applicant was a full‑time sales assistant and store manager for a number of fashion boutiques. He was later appointed to the position of store manager where he was in charge of takings, stock ordering, presentation and sales targets. He was involved, with his employer, on overseas trips, participating in buying merchandise for the purpose of retailing.
4. In 1992, after returning to Melbourne from Sydney, the applicant completed short courses in fashion design, life drawing and fashion illustration at Prahran Technical College. According to the applicant, those courses taught him how to mould his creative ideas into an art form. Inspired by fashion labels such as Mambo and Galaxy, the applicant began to create collages; an abstract art form comprising juxtaposed photographs and other objects, glued onto the pictorial surface. Having created a sufficiently large portfolio of work, the applicant approached an art gallery and was invited to participate in an exhibition at Kirkcaldy Davies Gallery. That exhibition ran for 3 weeks and the applicant sold 4 pieces of art, for a total price of approximately $1000. He used that money to pay for laminating, preserving and mounting his collages, and paying a 20 per cent commission to the Kirkcaldy Davies Gallery owners.
5. Encouraged by his result at the Kirkcaldy Davies Gallery, the applicant enrolled in a six‑week course with the Melbourne School of Fashion and was awarded a Diploma of Fashion on 9 December 1993. The course involved subjects such as history of art and fashion, marketing, merchandising, selling, management, establishing a fashion business and writing a business plan.
6. At about this time, the applicant worked part‑time at stores such as Georges, David Jones and Figgins, where he intended to establish himself in the retail buying area of the industry. He was not successful. He then commenced work with Telstra in 1995 as a full‑time employee. However, while working at Telstra, he continued to work on his portfolio of collages. He intended to develop his ideas for use on T‑shirts, home decorations and textiles. He did not intend to continue to work for Telstra on a full‑time basis, but hoped to gain financial backing from family and friends in order to establish himself as an artist.
7. In 1997, the applicant purchased a computer in order to transfer his collages into a graphic format, so that he could alter and manipulate the images and take out any imperfections. He obtained a bank loan to purchase the computer. He was also able to utilise the computer to catalogue the collages he had created.
8. The applicant sought the advice of an accountant in respect of conducting a business as a graphic artist. His sister purchased a software program, Adobe Photoshop, to enable him to transfer the collages onto the computer. He also purchased a digital scanner in about November 1998 and a compact disc burner in June 1999. The CD burner enabled him to store the images that he had created and to show them to various persons who might be interested. He taught himself how to use the technology in his spare time and he scanned approximately 150 of his collages onto his computer.
9. The applicant worked from home, but said that he used the sitting room exclusively to show off his works to those persons who might be interested in them.
10. In his spare time, the applicant attended galleries and exhibitions, as well as business offices, seeking opportunities to exhibit, hire or sell his work. He also explored the possibility of printing his work on various mediums.
11. In March 1990, the applicant hired a portion of gallery space at the Aardwolf Gallery, at a cost of $280 for the week, where he exhibited a number of his works. Ms Andrea Nicholson, a fashion designer who has worked extensively in the fashion industry for more than 30 years, viewed the applicant's collection at the Aardwolf Gallery and approached him to print his images on T‑shirts, which she intended to sell from a retail store in Prahran. The applicant printed his images onto T‑shirts provided by Ms Nicholson and they were displayed in her store to be sold on consignment. They were sold under the applicant's own label. Only two T‑shirts were sold.
12. In 1999, the applicant also appointed a professional public relations consultant, Mr Jono Francisco. The applicant paid Mr Francisco for his services which consisted of writing press releases, an article for a magazine and a radio interview.
13. Between February and March 2001, the applicant was employed by Tonic Product Development Pty Ltd in order to use his artistic designs on packaging. He was paid $15 per hour for his services.
14. Overall, the applicant has only had limited success in his artistic endeavours with the sale of two collages, two T‑shirts and three unframed laminated collages.
PARTIES' CONTENTIONS
15. In essence, the Commissioner has disallowed the applicant's deductions claimed during the tax years 1998, 1999 and 2000 because, although he may have had an intention of carrying on a business at some point in time and of making a profit from his artistic activity, during the years in question, the activity constituted a hobby. It was not commercial in nature and conducted on a very small scale, there being no repetition and regularity of sales activities and no prospect of profit.
16. The applicant contended that, in each of the years in question, the expenses he incurred in the pursuit of his graphic art activities were incurred by him in gaining or producing his assessable income. Accordingly, the expenses were allowable deductions under s 8‑1 of the Income Tax Assessment Act 1997 (the Act). The applicant submitted that the amounts in question are: $4707 for the 1998 year; $7607 for the 1999 year, and $13,853 for the 2000 tax year. The applicant also contended that, if the entire sums claimed are not allowable deductions under the Act, then some portion of those sums is deductible.
17. Mr Sievers submitted that the applicant was at no stage carrying on the business of a graphic artist, although, if in fact he was doing so, it was only carried out in the final tax year in question. Mr Sievers further submitted that to conduct a business activity on a reasonable scale, the applicant needed the scanner and CD burner and it was only after the applicant obtained this equipment that it could be said his activities became commercial.
18. Mr Sievers submitted that the volume of activity in itself is not sufficient to disclose a commercial purpose as there needed to be something to show for that activity. He also submitted that a lack of sales is a very relevant factor and sales of product to relatives and friends, or very small commercial sales, do not amount to a commercial activity. He submitted that an expectation of sales is not sufficient to convert what was not a commercial activity into one which is of that character. He also submitted that an expectation of substantial future sales is not sufficient to convert, what was in fact a hobby or recreation, into a commercial activity. Mr Sievers contended that the major activities which might support the applicant's claim only took place in the last year in question. He submitted that nothing that the applicant did between the years 1993 and 1998 would establish that the activity was carried out on a commercial scale. It was essential that, in order to conduct his activity commercially, the applicant utilise his scanner and CD burner. It was during the final year of assessment that the exhibition at the gallery took place and that the applicant became involved in commercialising his activities.
CONSIDERATIONS
19. The parties have not requested that the Tribunal determine the amount of the allowable deductions in each of the taxable years, if it should find in favour of the applicant. Rather, the parties requested that the Tribunal decide only whether the applicant carried on the business of a graphic artist in each of the years under consideration.
20. Section 8‑1 of the Act provides:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b)it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or
(d)a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5.
(3) A loss or outgoing that you can deduct under this section is called a general deduction.
For the effect of the GST in working out deductions, see Division 27.
21. On 12 January 2005, the Commissioner issued a Tax Ruling, TR2005/1, which deals specifically with the subject "carrying on business as a professional artist". The Tax Ruling is not law, although it is administratively binding on the Commissioner. The preamble to TR2005/1 refers to the distinctive nature of the arts profession and provides guidance on the principles to be applied in determining whether an artist is carrying on a business as a professional artist. A professional artist is defined in the Ruling as a person who carries on activities of the type referred to in the definition of "professional arts business" in s 35‑10(5) of the Act; that is, activities as either:
…
(a)the author of a literary, dramatic, musical or artistic work; or
(b)a performing artist; or
(c)a production associate.
There seems to be no argument that, if the applicant is carrying on a business, then it is in the nature of artistic work and, therefore, the Tax Ruling is appropriate guidance in this case. The Tax Ruling applies to years of income commencing before and after its date of issue.
22. The Tax Ruling recognises that, due to the nature of art activity, art businesses, typically, have different characteristics to other businesses. It also recognises that art is not always produced with a pre‑existing market in mind, but rather an innovative artist may have to create a new market for his or her work. For this reason, the Tax Ruling states that a large part of being in business as a professional artist may involve activities towards building a reputation and creating an audience or a market.
23. The unique features of arts activities have been recognised by the courts, although they have also indicated that a professional arts business must be distinguished from a hobby or recreation. In Ferguson v Federal Commissioner of Taxation 79 ATC 4261 at 4264‑4265, Bowen CJ and Franki J said:
There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances he held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.
24. The Tax Ruling describes the well‑known indicators relevant to the question of whether a taxpayer's activities amount to the carrying on of a business (see tax Ruling TR97/11). The Tax Ruling repeats those indicia and then discusses the factors in the context of determining whether an arts activity will amount to the carrying on of a business. The indicators are:
(a)whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;
(b)whether the taxpayer has more than just an intention to engage in business;
(c)whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
(d)whether there is repetition and regularity of the activity;
(e)whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
(f)whether the business activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
(g)the size, scale and permanency of the activity; and
(h)whether the activity is better described as a hobby, a form of recreation or a sporting activity.
25. In Woods v Deputy Commissioner of Taxation 99 ATC 5306 at 5311 his Honour Mr Justice Sackville said:
…
The question of whether a particular activity constitutes a business depends upon an assessment of the relevant facts and involves matters of fact and degree: Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 (Hill J)…No one factor is decisive and many elements may have to be considered: Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261 (FC)…per Bowen CJ and Franki J. It is to be borne in mind, however, when weighing the relevant factors, that there is usually a distinction between the pursuit of a pastime, even if the pursuit is vigorous, and the carrying on of a business: Martin v Federal Commissioner of Taxation…(1953) 90 CLR 470, at 479, per curiam.
It was also noted by the Full Court of the Federal Court in Stone v Federal Commissioner of Taxation 2003 ATC 4584 that no single factor is determinative, but rather all of the indicators must be considered. Whether a business is being carried on is dependent upon the overall impression gained after looking at the activity as a whole and at the intention of the taxpayer undertaking it. Also, it is possible for a person to carry on a business as a part‑time sideline to that person's main activities (Ferguson v Federal Commissioner of Taxation). Therefore, the fact that the applicant was employed by Telstra during the years in question does not necessarily impact on the applicant's claim that he was, at the same time, carrying on a business as a graphic artist. The applicant admitted that he was not carrying on the business of a graphic artist prior to 1997. This is despite the fact that he devoted considerable time to the activity of producing collages and compiling a body of work in preparation for, according to the applicant, the commercialisation of his activities.
26. After the applicant purchased his computer equipment in 1997, a scanner in November 1998 and a CD burner in June 1999, he claimed that the direction of his activity had changed, and that he now sought to establish himself as a commercially viable business. After the applicant had scanned about 150 of his collages onto his computer system, he was able to manipulate the product which allowed it to be used in a variety of commercial applications. He displayed his works at his home office and he made extensive approaches to a variety of commercial outlets in order to have his works displayed. He also hired a gallery for 1 week in order to run an exhibition of his works and he entered into a joint venture with Ms Nicholson where his images were used as "iron‑on" transfers on T‑shirts which were displayed at Ms Nicholson's retail outlet for sale.
27. The applicant also obtained accounting advice and applied for a sales tax exemption. He registered for GST and lodged two business activity statements.
28. In August 2000, the applicant was invited by the Redheads Matches Company to produce an original work of art, which he did. The finished work was printed onto canvas and was exhibited for two weeks at the Southgate shopping complex. Furthermore, in 1999, the applicant engaged the services of a public relations consultant to promote his activities. His artistic skills were also utilised by Tonic Product Development Pty Ltd to decorate the packaging used on its products.
29. The intention of the taxpayer must be determined objectively, having regard to all the surrounding circumstances. There is no question that the applicant by 1997 displayed an intention to commercially exploit his works. All of the steps taken by the applicant from 1997 to 2000 are strongly indicative of the applicant's intention to commercially exploit the skills he had developed, particularly after he was able to transfer his artistic works onto his computer. The applicant's activities after 1997 were not merely preliminary, as that preliminary work had already been conducted prior to that date. In my opinion, there is no doubt that the applicant's artistic endeavours, at least since 1997, had a significant commercial purpose or character.
30. Whether or not the applicant intended to profit by his activities must be determined on an objective basis (Hope v The Council of the City of Bathurst (1980) 144 CLR 1). It is not enough that the applicant asserts that he had a profit motive in conducting his art activities. The fact that the prospect of turning a profit may be slim does not prevent a finding that the activity constitutes the carrying on of a business (Glennan v Commissioner of Taxation (2003) 53 ATR 101). The fact that a business may not make a profit in the short term does not indicate a lack of a profit motive. Provided the taxpayer has an intention and expectation, on objective grounds, that his or her activities will eventually become profitable, a profit motive will exist. As is stated in Tax Ruling 2005/1, an arts business is a notoriously high risk commercial activity where there is often a greater discrepancy between the cost of creating the art and its commercial value, and it is often difficult to assess whether a profit motive exists solely from whether a profit in fact has been made by the activity. The Commissioner goes on to suggest in the Tax Ruling that the following activities are relevant in ascertaining whether the taxpayer has a genuine intention to profit from arts activities:
· endeavouring to bring the art work or service to relevant markets…;
· creating or enhancing industry contacts (for example, gallery owners, art dealers, literary performing arts agents, critics);
· offering art work for sale as well as actual sales of art work to the public;
· offering expert services through commission or consultancy;
· related income seeking activities (other than direct sales) including applying for grants, awards, patronage, commissions, and so on;
· making their art work accessible to the public through activities designed to raise the profile of the taxpayer as an artist; for example: publicly exhibiting art works, creating works for public performance, contributing written work for publication;
· entering art competitions, residencies and award events;
· undertaking research into the proposed arts business and consultation of experts (art experts or business advisers) prior to and during the activities; and
· reputation building as part of an overall intention to make a profit.
31. When the applicant's activities are compared with the list set out above, it is evident that, at least after 1999, the applicant's activities, in the main, exhibited most of the indicia required to determine objectively that he had a profit motive. He did attempt to find markets for his artworks. He pursued gallery owners and other persons in the arts community for the purpose of establishing a name for himself as a graphic artist, and he offered his artworks for sale, managing, albeit on a very small scale, to sell some of those works. He publicly exhibited his artworks and utilised the services of a public relations consultant for the purpose of building his reputation as a graphic artist. Therefore, in my opinion, the applicant displayed a profit motive in respect of his graphic artworks from 1999.
32. It is acknowledged in Tax Ruling 2005/1 that the repetition characteristic of other businesses may not be present to the same degree in an arts business. However, it is said that, for an arts activity to be carried on as a business, the activity should be conducted on a regular basis overall. It is said that it will be repetition, not in the sense of producing identical output, but rather in the repeated application of the artist's skills to different pieces of work.
33. During the period in question, the applicant engaged in substantial activity on a regular basis to promote his graphic artwork. This was particularly evident after he had purchased a scanner and a compact disk burner. Not only that, he certainly applied himself to enhancing his skills and to utilise those skills in the forms of different applications of his works. Judging by the number of different art pieces that the applicant produced and the different applications which he sought to exploit, the repetition and regularity indicator, in my opinion, is met after 1999.
34. There was no evidence before me which would enable me to determine whether the applicant's activities during the relevant years were of the same kind and were carried on in a manner characteristic of the art industry. The applicant did keep a record of his sales and expenses incurred in the course of conducting his activities as a graphic artist.
35. The applicant utilised the services of an accountant, he registered for GST and submitted at least two business activity statements. He obtained a sales tax exemption number. He rented a gallery for a week to exhibit his works.
36. The size and scale of the activity conducted by the applicant was not large. Nevertheless, the courts have recognised that a person can be carrying on a business in a small way (Ferguson, Thomas). The courts have also recognised that most professional artists carry on their business as sole traders, as did the applicant. It is also recognised that many professional artists need to supplement their arts income with income from other sources, especially in the early stages of their careers. The courts have said that whether an arts activity is being carried on with sufficient size and scale so to constitute a business may be demonstrated by the fact that:
(a)the activity and output are beyond what is needed to meet the personal needs of the artist; and
(b)the volume of output is sufficient to enable the taxpayer to be regularly bringing their work to suitable markets.
37. There is little question that the applicant's activity and output were beyond what was needed to satisfy his personal needs, in the sense of conducting a hobby or pastime. His catalogue of artworks, which contains more than 150 collages, is evidence of that. The volume and size of the works produced by the applicant, a number of which were in evidence in the hearing room, in my opinion indicates that the applicant was able to bring his work to suitable markets, which he in fact attempted to do.
38. Given the activities that the applicant conducted in relation to his graphic artwork after 1999, it is my view that those activities went beyond a mere hobby or recreational activity. In particular, his attempts to bring his work to the market, including the hiring of space in a gallery and holding an exhibition, his work in relation to projecting his images onto T‑shirts for sale and the use of a public relations consultant to establish his image as a graphic artist, take the applicant's activities beyond that of a mere hobby.
CONCLUSION
39. In order to constitute a commercial activity, an artist must have progressed beyond a preliminary stage and be actively seeking opportunities to bring his or her artwork to suitable markets. The applicant's activities prior to the 2000 tax year, although significant in disclosing an intention to progress to commercialising his activities, are probably more accurately described as being preparatory to those activities. It was not until the 2000 tax year that the applicant's activities could be described as the carrying on of a business of a graphic artist. His portfolio of works was, by then, established and in a format which was able to be commercially exploited. Prior to that, the relatively small number of works exhibited in his home studio and the very few sales which took place, some of them obviously to friends of the applicant, are not, in my opinion, sufficient to constitute the carrying on of a commercial enterprise.
40. However, the level of activity and its commercial nature did change in the 2000 tax year. The applicant's attempts at that time to commercialise his artistic activities are, in my opinion, sufficient to satisfy the test that the applicant carried on the business of a graphic artist.
41. Accordingly, the Commissioner's decision in respect of objections lodged against the applicant's assessment for the 1998 and 1999 tax years should be affirmed. However, I am persuaded that the decision made in respect of the objection to the 2000 tax year should be set aside and that the applicant's claims for deductions be remitted to the Commissioner for an assessment of allowable deductions for that tax year.
I certify that the forty‑one [41] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr E. Fice, Member
(sgd) Catherine Thomas
Clerk
Date of Hearing: 27 January 2005
Date of Decision: 17 March 2005
Advocate for the applicant: Mr A. Abbott, chartered accountant
Counsel for the respondent: Mr C. SieversSolicitor for the respondent: Australian Taxation Office Legal Practice
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