Each artwork purchased by a small business to a value of less than $20,000 may be eligible for a complete tax deduction, subject to four criteria:
- The artwork must be tangible; and
- Capable of being moved; and
- Purchased with the dominant purpose of display in a business premise; and
- Not be trading stock.
There is no bar to whether the artwork is bought as a resale or whether the parties involved in the transaction are related to each other. There is no limit to the number of artworks costing less than $20,000 that a small business may claim a tax deduction for.
The depreciation provisions in the Small Business Measures may also offer super funds a tax-effective strategy to transfer their artwork investments to their members prior to the looming compliance deadline of 30 June.
It is possible to transfer ownership of an artwork from a super fund to its members by obtaining a market valuation for that purpose. If the trustee or member is a small business, defined by the Small Business Measures as an entity with an annual turnover of less than $2 million, they will also obtain a tax deduction equal to the cost of the artwork being transferred.
Artworks are classified as investments under the SIS Act but also as depreciating assets under Division 40 of the Income Tax Assessment Act 1997. Normally artworks, particularly expensive ones, are subject to a very low rate of depreciation due to their useful life being determined as 100 years by the Australian Taxation Office.
For the super fund, the transfer will cause either a capital gain or a capital loss on the disposal of the artwork. If a capital loss is created, it is not allowable to offset this loss against capital gains created through the disposal of equities and property.
For the trustee or member, the immediate write-off of an artwork costing less than $20,000 and transferred from the super fund, will reduce its cost base to nil. As the artwork is a depreciating asset, the 50% capital gain discount for assets held for more than 12 months, will not be available. A subsequent sale of the artwork will create a taxable gain on the net proceeds and, in rare cases, will also create a liability for resale royalty to the maker of the artwork.
The ATO has released a valuation instruction form, where valuations are required for taxation purposes. It is important that any valuation prepared to transfer artworks from a super fund to its trustee or members follow the methodology set out in the instruction form.
Untitled #27 (Tax Time Again) (2016)