Why pay capital gains tax on the sale of art?

Minister for the Arts Mitch Fifield said in a recent interview that ‘part of the role of the arts is to push boundaries’.

The Federal Government could help artists push those boundaries by being pro-active about the taxation of art and by considering reforms to assist the livelihood of artists.

Arts tax policy has lacked clarity and purpose since the GFC. Initially the Federal Government applied harsh laws to prevent SMSFs from acquiring artworks. The super art laws have continued to have a detrimental effect on the art market, particularly the Aboriginal art market. Then, mistakenly, tax concessions were introduced for small businesses to buy art as part of the 2015 Small Business Measures. Finally, these concessions were made available to more businesses for one year only when the government redefined what a ‘small business’ is.

A good starting point to reform arts tax policy would be to revisit the 2010 Henry Report findings into the capital gains tax treatment of art. It was found that only 0.07% of the national CGT tax take came from art sales. The Henry Report recommended that, if CGT on art was worth the administrative bother, it should only apply to artworks sold for $10,000 or more.

For consistency of policy – looking at income tax law and superannuation legislation together and not as separate systems – it could be argued that art bought privately not be subject to CGT at all.

A useful way of considering how to tax art is to analyse the reasons why people buy art in the first place, and then to consider the concessions that apply in each instance.

There are 3 main reasons that art is bought or acquired:
1. Private reasons, including inheritance;
2. Business and work-related reasons; and
3. Investment.

People buying art privately are not seeking tax concessions at acquisition, but they may receive benefits at a future time if they are able to donate their collections through the Cultural Gifts Program. Currently, art bought privately for $500 or more and disposed of at a profit will be subject to CGT. The rules surrounding these measures are complex. For example, capital losses on the sale of art cannot be used to reduce the capital profits on the sale of property. Many SMSFs that were forced to liquidate their art holdings did so at a loss, which ultimately will not have any tax benefit at all in the future.

Art may be bought for business or for work-related reasons, and concessions claimed for depreciation. When art is bought this way, the CGT concession that reduces the taxable profit by 50% for assets held for a year or more, no longer applies. This would seem to counteract the Small Business Measures concession where tax deductions of 100% on the purchase of art costing less than $20,000 are allowed.

Finally, art may be bought for investment. Currently, if a SMSF buys artwork, it must satisfy the related party, insurance and storage requirements. It will not be allowed to display its artwork investments in the residence of a member nor the boardroom of its trustee company. The additional costs of complying with the super art laws have been calculated as adding 2% to 5% to the capital costs of purchasing art. They effectively operate in the same way that ‘sin taxes’ discourage people from smoking, drinking and gambling!

In this century, in contract to the period when the original laws regarding super were legislated, investment outcomes are not only measured in financial terms. Ethical investment is becoming a norm, illustrated by the recent decision of American firm BlackRock to demand that the companies it invests in need to do more than make profits. ‘Society is demanding that companies…serve a social purpose’, its chairman said. In a similar way, SMSFs investing in art support the ability of artists to earn a livelihood.

A consistent and purposeful arts tax policy that sought to incentivize artists who ‘use their talents to create something from nothing’, to quote Minister Fifield, would eliminate capital gains tax on privately acquired art and reform the super art laws.

Please feel free to contact me about this article to continue the conversation – or you could send this post to your local Federal member of parliament.

Featured Artwork:
Bec Juniper
A Day Early Colourfield (2016)
See more at Fox Galleries