Dana is a full-time student is studying music at the Sydney Conservatorium of Music. She is a percussionist. She will finish her three year degree at the end of 2014.
For many years Dana and her two friends have played in a band called Gilligan’s Island (GI). They practice together at Dana’s parents’ house at least once a week and play on the weekends at friends’ parties and family functions wherever possible. Sometimes they get paid a small amount e.g. $150 for the three of them, other times they are given food and drink, and they just do it for the fun and experience. During the year ended 30 June 2013 they performed at five 21st birthday parties, three 50th birthday parties and two weddings. The only time they received payment was for the weddings. For each of the weddings the band was paid $150.
GI continues to play at various parties for family and friends and in January 2014 they made their own CD of their own original and some ‘cover’ songs. They had 300 copies of the CD made. The cost was $3,000. This included the hire of the studio and the cost of the CDs and some art work and printing of the CD cover. They have been selling the CDs to friends and acquaintances for $15 a CD. So far (until 30 June 2014) they have sold 50 CDs. They have also given away about 20 copies. During the 2 months leading up to Christmas 2014 they hired a stand at a local market and sold the CDs there. They were at the market every Saturday for 8 weeks and sold an average of 20 CDs each Saturday. The hire of the market stall cost them $45 per week.
Dana’s parents and neighbours are complaining about the noise in the garage and they have decided that they need to practice somewhere else. Dana rents a studio/garage in North Sydney for $100 a week starting on 1 July 2014. GI practice there several times a week and store their instruments there. The lease is in Dana’s name and she pays all the invoices as she is the only one with a part-time job. The others reimburse her when they have some cash. Dana has started giving music lessons and is teaching part-time at a local high school one day a week. She is paid $160 a week for her band lessons.
Dana and the other members of GI decide that they need to improve their image if they want to make it as musicians. Dana goes out and spends $3,000 on new clothes at Alphaville Boutique so that she looks really cool. She only intends to wear these clothes when she is performing. She buys these clothes on 20 November 2014.
On 20 December 2014 GI was hired to play at a Hotel in Newtown. This is a big break for them as this Hotel is very popular with audiences of their type of music. GI are paid $800 for this.
In early February 2015 Dana is approached by Big Label Company, an independent music label. The company representative, Chris James, arranges to meet with the band. Dana acts as their representative, as the others agree that she is the one with the business sense. They have a series of meetings with Mr James and finally sign a contract with Big Label Company. The contract states that GI will make three CDs with Big Label Company over the next two years and that Big Label Company will bear all the costs of producing the CDs. In return, Big Label Company will also market the CDs and will be entitled to 45% of the profits on the sale of all CDs before any payment to GI. The contract also states that GI will not receive any share of profits until all copies of the first CD are sold. The contract also states that GI will share their portion of the profits three equal ways. Another clause in the contract states that GI is not to do any live performances without the prior written approval of Big Label Company. The contract is signed on 1 April 2015.
GI start working on new songs and by 30 May 2015 they have enough original songs and covers that they think are suitable for their first CD. The CD is recorded and Big Label Company starts to market it on 1 July 2015. Sales are fairly slow and GI are disappointed with the poor marketing undertaken by Big Label Company. They talk to Mr James several times, but he just makes excuses and states that this often happens in the music business.
Dana and the other band members are given the opportunity to perform as the opening act for the internationally acclaimed Mumford and Sons, who are to perform at the Opera House on 30 November 2015. In accordance with the contract they ask Big Label Company. Big Label Company agrees but states that GI will have to pay the company a $3,000 fee. Reluctantly, they agree to this as they feel it is such a great opportunity for the band. They are paid $1,500 for their appearance with Mumford and Sons.
Advise Dana and GI of the taxation implications of all of the above transactions. Make sure that you discuss whether or not any of the amounts are ordinary income and/or deductible. Do not discuss capital gains tax or the goods and services tax. In your answer make sure that you discuss relevant legislation, case law and Australian Tax Office rulings.