Grants, prizes, and awards play an important role in supporting and recognising the talents and accomplishments of creatives. However, knowing the tax and GST (Goods and Services Tax) implications is critical. In this blog post, we'll look at whether grants, prizes, and awards are taxable and subject to GST in the eyes of the Australian Taxation Office (ATO).
Generally, grants received by creatives may be subject to tax if they are considered assessable income. The ATO considers various factors when determining the taxability of grants, including the purpose and nature of the grant, as well as the recipient's circumstances. Some key considerations include:
Expenses incurred in relation to producing creative works or activities funded by the grants may be deductible for income tax purposes. It's important to keep appropriate records and consult with a tax professional to ensure eligibility for deductions.
So, if you have a $5,000 grant (assuming it is taxable income), and $4,500 of related deductible expenses, you report all of this, and then the end result of $500 ‘profit’ is what ends up getting taxed. While the grant is taxable, if the grant is spent on deductible expenses, then you end up only paying tax on the portion that is left.
The tax treatment of prizes and awards varies based on the nature of the award and the circumstances of the recipient. Consider the following:
In Australia, GST is a 10% broad-based tax that applies to the majority of products, services, and other commodities. Grants, prizes, and awards, on the other hand, are normally excluded from GST because they do not constitute a taxable supply. This means that if you get a grant, prize, or award, you may not be required to pay GST on the cash or declare GST on these transactions. It is crucial to remember, however, that this exemption may not apply to goods or services purchased using grant funding. If you use grant money to buy goods or services, GST may apply to those transactions.
Unearned income, also known as deferred revenue or advance payments, is the payment received from clients for goods or services that have yet to be delivered or provided. Unearned revenue can occur in the context of grants, prizes, and awards when a creative individual or organization receives a cash award or grant in advance but has not yet completed the obligations associated with it.
Assume a creative artist is awarded a grant to develop a series of artworks for an exhibition. The grant is paid to the artist in advance, but the artworks have yet to be finished and displayed. In this situation, the grant funding received by the artist may be deemed unearned revenue until the artworks were completed, expenses incurred and the grant responsibilities were met.
Businesses and individuals are obligated to account for unearned revenue in their financial statements. Unearned revenue should be reflected on the balance sheet as a liability until the corresponding products or services are supplied or performed. Once the obligations are met, the unearned revenue is recorded in the income statement as revenue. However, it's important to note that the treatment of unearned revenue may vary depending on individual circumstances, accounting methods, and applicable regulations. So, chat to your accountant!
May you be awarded and funded and granted all that you desire!