As a creative entrepreneur you’re not only in the business of ideas and solutions, you’re also in the business of running a business, and that means balancing the books. Electra Frost is an accountant who works with clients across the breadth of the creative industries. When it comes to crunching the numbers for sole traders, startups and SMEs, she’s seen it all. Here, Electra gives us the 101 on accounting for creatives, from averaging your income to claiming 100 toasters as a tax deduction.
Tell me about the creative fields your clients work in and the sorts of businesses they run.
We work with all types from the artistic and creative industries – we have many visual artist clients including digital artists; a lot of film and video producers; people in VR and gaming; and app developers. It really varies, but we understand what they do as artists and creatives and their practices are quite different to other businesses.
What are the key differences that you’re seeing with creative entrepreneurs compared to salaried professionals?
They typically have unpredictable income. It fluctuates. It can be famine or feast a lot of the time. They also receive grants, prizes, royalties and advances, or crowd-funding and other start-up streams of income. Creatives generally have higher-value deductions and losses, so we often deal with those differently to make sure they get an equitable outcome. People who are just starting out in the industry often have low incomes, so need to be shown early on how to budget and keep track of their earnings. There are lots of interesting tangents that we deal with.
Are there any golden rules when it comes to accounting for creative entrepreneurs?
Bookkeeping 101 applies to everyone: have a separate bank account. Do not mix the personal with the business. A separate account will make your bookkeeping a lot easier, and it’s a lot easier at tax time if all your business, contracting and sole-trader income is going to a separate bank account and you’re just paying for your business expenses out of that account.
Any accounting tips and tricks that creatives should know about?
Income averaging is a big one – that’s a way to spread income over five years so that in your higher income years you don’t get taxed too much. If you’re in a creative profession that may be regarded as a special professional according to Australian tax legislation, we can help you figure out if you’re eligible.
What sort of advice can you give clients at tax time?
We find that people in creative fields generally claim higher deductions and their expenses might appear controversial to the ATO. So, we help clients make sure that what they’re claiming is allowable while providing advice on deductions that they may not be aware of. Working from home is a big one; that’s becoming common to freelancers everywhere. If there’s a defined, dedicated place of business within their home, a freelancer may claim some rent or interest as a tax deduction.
Anyone earning over $75,000 needs to register for GST. But for creatives, projecting their income can be difficult to do. Any tips?
Projecting your business income is tricky if you don’t know what you’re likely to earn in future. It’s important to keep your income accounting up to date, adding each month’s total to a projected income for the next 11 months. If the 12-month total is less than $75,000, write a diary record of how [you calculated] your annual projection. It might help to cover you in future if the ATO deems should have registered for GST in the past. Use accounting software or an Excel Cashbook to keep track of income getting near the $75,000 GST threshold. It doesn’t include your wages income. It does include sales before commissions are deducted, and things like grants, prizes, advances and royalties.
A lot of your clients are Australians who are living and working overseas. Do you help them with tax returns that include their international earnings?
All the time. I hold a degree in international tax and have some familiarity with overseas systems. I can’t lodge overseas tax returns, but I understand the cross-jurisdictional issues, so we chat with their overseas accountants and try to make sure that they achieve a correct overall outcome and avoid double taxation.
Any recommendations for accounting software?
A lot of our clients use Xero and MYOB Essentials, with a preference for Xero. But we particularly like, for freelancers, an Australian product called Rounded.
What are the weirdest deductions you’ve made for people or seen clients try to claim?
We’ve had clients try to claim their body modifications. And, you know, artists and photographers, they could use anything as props and art materials; we’ve had chocolate and rosehips queried, a hundred toasters – installation artists are pretty bizarre.
Why should creatives consider using a specialist for their accounting?
You’re just going to have a much better chance of a good outcome. The costs associated with having a specialist doing your tax are typically negligible in perspective of what you can gain financially. Also, if you don’t know what you’re doing, then you’re more likely to be flagged for an ATO audit.
Interview: Claire Thompson