Issue
Will a taxpayer's business activity be classified as a 'professional arts business' for the purposes of subsection 35-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997) if art created or performed by the taxpayer is used incidentally in the conduct of the taxpayer's business activity?
Decision
No. A taxpayer's business activity will not be classified as a 'professional arts business' for the purposes of subsection 35-10(5) of the ITAA 1997 if art created or performed by the taxpayer is used incidentally in the conduct of the taxpayer's business activity.
Facts
An individual taxpayer conducted a driving instruction business activity during the income year ending 30 June 2002. The taxpayer derived all business income by providing driving courses to students for a fee.
The expenses incurred that were attributable to that business activity exceeded the assessable income derived in that year.
As part of the operation of the business activity the taxpayer used artistic works authored by them as an aid in the courses offered to students.
No income was directly derived by the sale or performance of the artistic work.
Reasons for Decision
Division 35 of the ITAA 1997 applies to losses from certain business activities for the income year ended 30 June 2001 and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: • The 'Exception' in subsection 35-10(4) of the ITAA 1997 applies; or • One of the four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met; or • If one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997
In subsection 35-10(4) of the ITAA 1997 it is outlined that the rule in subsection 35-10(2) of the ITAA 1997 does not apply to a business activity for an income year if: (a) the activity is a primary production business, or a professional arts business; and (b) your assessable income for that year (except any net capital gain) from other sources that do not relate to that activity is less than $40,000.
Subsection 35-10(5) of the ITAA 1997 specifies that a professional arts business is a business that you carry on as: (a) the author of a literary, dramatic, musical or artistic work; or (b) a performing artist; or (c) a production associate
A note to paragraph 35-10(5)(a) of the ITAA 1997 states:
The expression 'author' is a technical term from copyright law. In general, the 'author' of a musical work is its composer and the author of an artistic work is the artist, sculptor or photographer who created it.
The terms 'performing artist' and 'production associate' are defined in section 405-25 of the ITAA 1997.
Whether a business activity qualifies as a 'professional arts business' is a mixed question of law and fact, just as was held to be the position with whether the taxpayer's 'principal business consists of the lending of money', considered in Federal Commissioner of Taxation v. Bivona Pty Ltd (1990) 21 FCR 562; 90 ATC 4168; (1990) 21 ATR 151.
In order for a business activity to fall within the meaning of 'professional arts business' in subsection 35-10(5) of the ITAA 1997, the operations of that activity must be such that it can be said that the 'substantial purpose' of it is to carry out any of the three alternative categories of activities, specified in either paragraphs 35-10(5)(a), 35-10(5)(b) or 35-10(5)(c) of the subsection: see for example, Dixon J in Commercial Banking Co of Sydney Ltd v Federal Commissioner of Taxation (1950) 81 CLR 263; (1950) 9 ATD 112; (1950) 4 AITR 406, also concerning whether a taxpayer's principal business consists of the lending of money.
For a taxpayer to be carrying on a professional arts business it need not be their only business or their principal business. However, if the activities said to amount to a professional arts business are merely ancillary or incidental to a primary business, which does not fall within subsection 35-10(5) of the ITAA 1997, then no professional arts business will be considered to be carried on.
An example of the above proposition can be found in Federal Commissioner of Taxation v. Marshall and Brougham Pty Ltd (1987) 17 FCR 541; 87 ATC 4522; (1987) 18 ATR 859. In this case Bowen CJ (Jenkinson J agreeing), found that the taxpayer's money lending operations were not sufficient to constitute an entirely new business of lending money, but were simply part of some other business, of 'construction management'.
The substantial purpose of the taxpayer's business in this case is one of providing driving instruction. As a matter of overall impression, the creation of the literary or artistic works in question is not sufficient to constitute any entirely new professional arts business, but merely incidental or ancillary to the driving instruction business.