ALP’s history of market-based arts policy
When it has been in government, the Australian Labor Party (ALP) has a proud history of providing support to the arts, both in the form of direct grants and taxation incentives.

In 1986 it initiated an enquiry that produced the McLeay Report.[1] One of the terms of reference for this enquiry was ‘the impact of the present level and allocation of expenditure and of other means of support such as taxation incentives.’

In relation to market issues, the McLeay Report found that:
‘There is ample evidence that important components of the arts …. cannot survive anywhere in the world without some form of public subsidy.’[2]

An important outcome of the McLeay Report was the introduction of an income averaging scheme[3] for artists, similar to the scheme that had historically applied to primary producers, writers and inventors. Today, the artist averaging scheme is a cornerstone of Australia’s market-based arts policy and enjoys bipartisan support.

The Cooper Report recommendation to ban SMSF artwork investments
In May 2009, a review was made into Australia’s superannuation system. By that stage, funds being managed by the SMSF sector had increased to almost $500 billion. The terms of reference of the review was to examine ‘the governance, efficiency, structure and operation’ of the superannuation system.[4] It was estimated that about $700 million of the total funds under SMSF management were invested in artworks and collectables.[5]

The rules governing the types of investments allowable for SMSFs are contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act). Section 52[6] provides a number of covenants that trustees must comply with in order to receive concessional tax treatment.[7] One of these covenants is a requirement for the trustees to formulate an investment strategy. Once an investment strategy is in place, section 62 requires that SMSFs must be maintained for the sole purpose of providing retirement benefits to its members. This has become known as the ‘sole purpose test’.

In 2010, the Super System Review (the Cooper Report) made a finding that ‘investments in collectables and personal use assets pose issues in relation to the application of the sole purpose test.’
[8] In particular, ‘these investments lend themselves to personal enjoyment and therefore can involve current day benefits being derived by those using or accessing the assets.’[9] Recommendation 8.14 of the Cooper Report urged the Government to prohibit SMSFs (although not APRA-regulated funds[10]) from acquiring artworks.

The proposition that SMSF artwork investment contravenes the sole purpose test is not supported by case law.[11] Regardless, in 2011 the Government amended the SIS Act by legislating new regulations[12] concerning artworks and collectables. A ban on SMSF artwork investment did not occur[13] but the new conditions for insurance, storage and related-party transactions effectively constituted a levy on new purchases.[14] Artworks owned by SMSFs on or before 30 June 2011 could continue to rely on the former regulations, but only until 30 June 2016.

The market failure the Cooper Review sought to address was not the issue of whether artworks could be bought as investments by SMSFs. Studies in Australia and overseas had concluded that artworks bought on the secondary market and held for long periods could make positive returns.[15] The decision in Swansea Services[16] also affirms that a private investor in the art market can be considered to be operating a business making taxable supplies of artworks.

CGT and art
Artworks have been subject to capital gains tax since the introduction of the CGT regime by the Hawke government 30 years ago, indicating a historical recognition that artworks may be bought as investments. At the same time, the rules provide for complex limits and exemptions.[17]

Officially there are two reasons given for the special CGT treatment of artworks –
1.    ‘to avoid the difficulties that would be involved for taxpayers and the Australian Taxation Office in recording and assessing a multitude of small value transactions’; and
2.    ‘to restrict the availability of the deduction for losses of listed personal-use assets.’[18]

In relation to the first of these reasons, the Henry Review recommended increasing the threshold[19], on the basis that it would reduce compliance costs ‘without establishing a tax bias to invest in high-value collectables (such as works of art).’[20]

In relation to the second of these reasons, the intent is to create a disincentive on the trading of artworks to deter speculative investment. The revenue raised from levying CGT on collectables equals only 0.07% of the total CGT take
[21]. This raises the question as to whether the tax is necessary at all for the inconvenience it causes taxpayers. Quarantined capital losses on the sale of artworks may also represent a saving of government revenue[22] that increase the deadweight loss of this measure.

Absent from the two official reasons given above were concerns over self-managed superannuation funds (SMSFs) investing in the art market. This is not surprising as SMSFs were not liable for tax on capital gains until 1 June 1988. At that stage, total funds held in superannuation throughout Australia was little more than $40 billion.  However, the introduction of the superannuation guarantee scheme in 1993 led to a rapid increase in the funds held by SMSFs. Today aggregate funds held by Australian superannuation funds exceed $2 trillion.[23]

Art market issues
With so much money at stake, it is not surprising that the Cooper Review focused on the sustainability of the superannuation system and recommended better protection for members through prudential regulation of the investments that could be made by funds. In relation to artwork investments, the market failure observed by panel members was more the unregulated nature of the market than whether SMSFs could invest in artworks.

Chairman Jeremy Cooper said ‘I look at the art market and it has a long way to go before being legitimate.’ In effect, the art market was caught up in the need for better financial advice requirements for professionals selling investment products to the SMSF market.  In making its recommendation to ban all SMSF artwork investment, the Cooper Report chose negative taxation on artist over positive taxation on artwork vendors.

According to Stern, taxation concerned with distribution and market failures should, where possible, go to the root of the problem. [24] In other words, the externality – lack of regulation in the market – should be taxed. Instead, the super art laws tax income and wealth.

Impact of the super art laws
Since the new regulations were enacted in 2011, there has been a continual sell-down of the ‘super art’ stockpile, which has placed great pressure on the market for Australian artworks. Statistics from the Australian Taxation Office reveal that in the first year of the super art laws, the value of collectables held by SMSFs decreased from $700 million to $500 million, a fall of 26%.[25] The impact has been most severe on the market for Aboriginal artworks, with a recent study concluding that: ‘Changes to Self-Managed Super Funds was perceived to have had a significant and detrimental impact on collectable art.’[26]

It is inevitable that, to avoid the new regulations, SMSFs will sell their artwork investments and create non-concessional capital losses that will never be able to be offset against other capital gains of their funds. Taken together, the compliance costs of the new super art laws combined with non-concessional capital losses represent a deadweight loss to the art

This deadweight loss increases consumer surplus to the detriment of producer surplus. That is, consumers have benefited from the super art laws and artists have been disadvantaged. This is borne out by statistics that show the average price of artworks traded on the Australian art market have decreased since 2010, the number of artworks being offered for sale have increased and the proportion of unsold works has also increased. Production of artwork from the Aboriginal sector of the market has rapidly declined in this period.[27]

It would appear the new super art laws are consistent with the original intent of the CGT rules in relation to artworks, being to deter speculation; however, the impact on the livelihood of artists from these changes warrants consideration for a package of taxes.[28]

Proposed super art reforms
The Henry Review noted that ‘all taxes ultimately bear on or benefit people, not businesses or other entities.’[29]  It considered selective taxes as ‘highly effective in increasing the price of activities that generate negative externalities that affect society as a whole.’[30]

When the super art laws were introduced in 2011, a carve-out was made for the real estate industry to sell direct property to SMSFs through LRBA instruments.[31] As neither art or direct property investments are prudentially regulated, the only plausible explanation for the preferential treatment of the real estate industry over the commercial art industry is that its members are subject to both government and voluntary regulation and supervision.

The Inspector-General of Taxation states that professional associations generally implement the following procedures:
·         membership entry requirements;
·         continuing occupational education;
·         codes of ethics and practice;
·         complaints and discipline of association members;
·         standards for Professional Indemnity Insurance for all its members; and
·         risk management which track the above and any claims against members.[32]

There are no minimum education standards for art market professionals in the Australian art market – but this is not to say art market professionals do not practice any of the above
procedures in their practices. It is just a fact that the market is unregulated and its members comply to an industry standard of excellence that is normative and relies on their individual reputation and experience.

Reforming the super art laws presents an opportunity to start regulating the Australian art market. This is not an exclusive prudential requirement for SMSFs, but a wider consumer protection issue in Australia.

It is proposed that:
·         5% of the net asset value of a SMSF may be held in the form of artworks and stored at the private residence of members of that SMSF, but only in the event that the artworks have been bought from art market professionals with current professional indemnity insurance of at least $1 million; and
·         Capital gains tax on all artwork sales other than those made by superannuation funds be abolished.
In 2015, the Strategic Direction Statement of the Department of the Arts contained the following goal: ‘support participation in, and access to, the arts and encourage greater private sector support for the arts.’[33]

During the Save Super Art campaign, former Axa Asia-Pacific chief executive officer, Andrew Penn, observed that:
‘We need to ensure that we continue to support our development culturally as well as economically. Australia has a talented but fragile visual arts sectors and the benefits of protecting this far outweigh the rationale for this specific proposal (to ban SMSF investment in artworks).’[34]

Economists Throsby and Zednik found the ‘breadth and depth of the output of Australia’s professional artists is enormous’; however, they also found lack of income was preventing artists from spending more of their time on creative work.[35] Between 1986 and 2009, Throsby and Zednick observed an increase in income sufficient to keep pace with inflation, but not with the ‘rising trend in real (inflation-adjusted) incomes that have been experienced across the workforce at large.’[36] It is worth noting that the starting point of this survey is the introduction of the artist averaging scheme that was the result of the McLeay Report.

[1] Patronage, Power and the Muse. Inquiry into Commonwealth Assistance to the Arts, Report from the House of Representatives Standing Committee on Expenditure, September 1986
[2] Patronage, Power and the Muse. Inquiry into Commonwealth Assistance to the Arts, Report from the House of Representatives Standing Committee on Expenditure, September 1986, p. 36
[3] Division 405, Income Tax Assessment Act 1997
[4] Tax Law Amendment (2011 Measures No. 2) Bill 2011 Explanatory Memorandum, paragraph 1.7
[5] ATO statistics
[6] s.52, Superannuation Industry (Supervision) Act (1993) was amended in September 2012 and ss.52A, 52B and 52C added in order to separate the covenant regulations concerning APRA-regulated super funds and SMSFs
[7] For example, complying superannuation funds pay 15% tax on their earnings in their accumulation phase and no tax in their benefit stage.
[8] Tax Law Amendment (2011 Measures No. 2) Bill 2011 Explanatory Memorandum, paragraph 1.9
[9] Ibid.
[10] Super System Review: Final Report – Part One: Overview and Recommendations, Recommendation 8.14(c),
[11] FCT v Swansea Services Ltd [2009] FCA 402
[12] Regulation 13.18AA, SIS Regulations
[13] In response to an art industry campaign against the Cooper Report called Save Super Art, the Government promised not to implement the Cooper Report recommendation during the 2010 Federal Election
[14] The cost of insurance and storage of artworks has been estimated at between 2% to 5%.
[16] FCT v Swansea Services Ltd [2009], FCA 402
[17] Division 108, Income Tax Assessment Act 1997
[18] CCH Australian Federal Tax Reporter Commentary (ITAA 1936) Archive, [78-723] Personal-use assets
[19] Henry Tax Review, Recommendation 17
[20] Henry Tax Review, p.82
[21] According to the 2009 Australian Taxation Office statistics, CGT collections on collectables raised $67 million from a total CGT revenue of $46 billion
[22] ATO statistics are not publicly available
[24] Peter Abelson, Public Economics – Principles and Practice, p.430
[25] ATO stats
[26] Woodhead, A and Acker, T. 2014. The Art Economies Value Chain reports: Synthesis. CRC-REP Research Report CR004. Ninti One Limited, Alice Springs, Summary of findings p.x
[27] Woodhead, A and Acker, T. 2014. The Art Economies Value Chain reports: Synthesis. CRC-REP Research Report CR004. Ninti One Limited, Alice Springs, Summary of findings p.x
[28] Abelson, Peter:  Public Economics – Principles and Practice, p.430 noted that – ‘In a second-best environment, a strict-target instrument may be inefficient. The optimal policy may involve a package of taxes.’
[29] Henry Review
[30] The Tax and Transfer Policy Institute, A Stocktake of the Tax System and Directions for Reform: five years after the Henry Review, February 2015, p.80 at 7.1
[31] Limited recourse borrowing arrangement
[32] Inspector-General of Taxation, Review into the Australian Taxation Office’s administration of valuation matters, a report to the Assistant Treasurer, September 2014, p.6 at 2.22
[33] Portfolio Budget Statement 2015-16, Attorney-General’s Department, page 15
[34] Teckchandani, Vishal: Axa chief calls for balanced regulation, Investor Daily, 29 July 2010
[35] Throsby, David and Anita Zednik (2010), Do You Really Expect to Get Paid ? An Economic Study of Professional Artists in Australia. Sydney, Executive Summary, p.8
[36] Ibid, p.12

Featured Image: Richard Dunlop, Large Blue Vase of Tulips, 2017. Oil on Belgian linen, 170 cm by 170 cm.

Richard Dunlop ‘100% Botanical’ 2 June – 28 June 2022.