Supporting Australian art – proposals to reform the taxation of artworks

The super art laws are consistent with the original intent of the CGT rules in deterring speculation in art – but the impact on the livelihood of artists from these changes warrants reform to the taxation of artwork.

Proposals to provide taxation incentives for artists should be made where it is also beneficial for the integrity and efficiency of the Australian taxation system.

The Federal Government should legislate these proposals:

  • The sale of artworks bought privately to be exempt from capital gains tax (CGT); and
  • For artists to be able to sell their work to self-managed super funds (SMSFs) without the trustees of SMSFs being mandated to store all of their art investments, where appropriate.

​In relation to the first proposed measure:

  • The Henry Review considered scrapping CGT on all artworks and recommended a higher tax threshold than is currently legislated;
  • CGT on artworks would be retained for superannuation funds and other investment trading entities as an integrity measure that recognises art as a valid investment class for trustees and directors to consider in their investment strategy;
  • Revenue collected from CGT on artwork is administratively complex and immaterial to total government receipts; and
    Removing the tax on all non-art investment transactions would not only stimulate the art market but it would improve the efficiency of the Australian taxation system.

In relation to the second proposed measure:

  • It should apply only to artworks sold to SMSFs by artists or art market professionals that belong to professional bodies;
  • Trustees of SMSFs should be able to hold 5% of their fund’s net assets in artworks at their private residence, which was the position of the SIS Act prior to 1 July 2011; and
  • This is an integrity measure that would enable SMSFs to diversify their investment portfolios from cash (low interest rates), shares (volatile since the GFC) and direct property (historically high values).

In 1986 the McLeay Report examined ‘the impact of the present level and allocation of expenditure and of other means of support such as taxation incentives.’ It found that:

‘There is ample evidence that important components of the arts …. cannot survive anywhere in the world without some form of public subsidy.’

An important outcome of the McLeay Report was the introduction of an income averaging scheme 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. ​

Thirty years later a review was conducted 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. It was estimated that about $700 million of the total funds under SMSF management were invested in artworks and collectables.

The rules governing the types of investments allowable for SMSFs are contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act). Section 52 provides a number of covenants that trustees must comply with in order to receive concessional tax treatment. 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 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.’ 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.’ As a result, the Cooper Report urged the Government to prohibit SMSFs from acquiring artworks.

The proposition that SMSF artwork investment contravenes the sole purpose test is not supported by case law. Regardless, in 2011 the Government amended the SIS Act by legislating new regulations concerning artworks and collectables. A ban on SMSF artwork investment did not occur but the new conditions for insurance, storage and related-party transactions effectively constituted a levy on new purchases. 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 or other investment entities. Studies in Australia and overseas have concluded that artworks bought on the secondary market and held for long periods could make positive returns. The decision in Swansea Services also affirms that a private investor in the art market can be considered to be operating a business making taxable supplies of artworks.

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

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.’

In relation to the first of these reasons, the Henry Review recommended increasing the threshold, 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).’

In relation to the second of these reasons, the intent was 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. 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.

Absent from the two official reasons given above were concerns over self-managed superannuation funds (SMSFs) investing in the art market.

With so much money at stake in the superannuation system, it is not surprising the Cooper Report focused on the sustainability of the superannuation system and recommended better protection for members through prudential regulation of investments.

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 other words, the externality – lack of regulation in the market – should be fixed. Instead, the super art laws apply strong disincentives to invest in art and tax income and wealth.

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%.

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.’
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.
Statistics show the average price of artworks traded on the Australian art market have decreased since 2010. Production of artwork from the Aboriginal sector of the market has also declined in this period.

The Henry Review noted that ‘all taxes ultimately bear on or benefit people, not businesses or other entities.’ Artists have borne the brunt of the super art laws.

At the same time these new measures were introduced in 2011, a carve-out was made for the real estate industry to sell direct property to SMSFs.

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.

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.

The peak professional membership association for the visual arts, the National Association for the Visual Arts (NAVA), implements all of the above procedures for artists.

However, there are no minimum education standards for art market professionals in the Australian art market. 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.

Supporting Australian art
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.’
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).’

Cultural 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.

Throsby and Zednick observed an increase in artist income (from 1986 to 2009) 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.’ 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.

To achieve equitable treatment between various investment options and to foster the production of contemporary Australian art, changes need to be made to CGT and the regulations governing the acquisition of art by SMSFs.
This would achieve greater diversity in investment portfolio holdings and contribute to the viability and sustainability of Australian artists’ careers. Ultimately the whole community would gain cultural benefit.

To summarise, it is proposed that:

  • 5% of the net asset value of a SMSF should be allowed to 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 who belong to a professional body; and
  • Capital gains tax on all artwork sales other than those made by superannuation funds and other investment trading entities cease.

Featured Artwork:
Michael Nelson Tjakamarra
Five Stories (1984)