The recent capital gains tax changes do not only affect housing and shares.
Artworks, collectables and personal use assets held by individuals, companies, partnerships and trusts (but not SMSFs) are all impacted, with previously CGT-exempt items becoming subject to taxation for the first time on 1 July 2027.
From that date, the gains on all investment classes will be taxed at a flat rate of 30%.
The government will achieve their revenue goals on the taxation of investments bought on or before 30 June 2027 through two mechanisms:
- Establishing a market value; and
- The CGT substitution rule.
Establishing a market value is where you engage a qualified valuer to prescribe the value of an asset which has a willing seller and a willing buyer. In the art and collectibles markets, market value is normally taken to mean the retail price of an object as opposed to its realisable value at auction.
The differences between the two valuation methodologies will have material consequences for how CGT will be levied under the new system.
Employing the CGT substitution rule will mean the market value established by a qualified valuer on 1 July 2027 will become the cost base of the investment being valued from that date.
Artworks, collectibles and personal use assets are exempt from CGT for two main reasons:
- They were acquired before the introduction of the legislation in 1985 or the amendment of the collectibles rules in 1995; and/or
- The amount paid for the items was less than the statutory threshold.
All investments bought before the introduction of the old CGT legislation in 1985 (or 1995) will now be subject to the new CGT legislation in 2027, unless the market value established through the substitution rule is less than the statutory threshold.
What then are the statutory thresholds?
For artworks and collectables the threshold is $500 and for personal use assets it is $10,000.
What then defines artworks, collectables and personal use assets?
Artworks are not specifically defined in the Income Tax Assessment Act 1997, except to distinguish between:
- trading stock
- art bought for business (and subject to the depreciation provisions); and
- art bought for personal use and enjoyment.
The last category is the one that captures artworks for CGT purposes.
A broader definition of art can be found by reference to copyright law, however the Resale Royalty Right for Visual Artists Act 2009 helpfully provides the following broad categories:
- paintings and pictures
- sculptures, carvings and installations
- photographs, prints and lithographs
- drawings and engravings
- tapestries, weavings and batiks
- ceramics and glasswares
- fine art jewellery
- artist books
- digital, multimedia and video artworks
Collectables, other than artworks, are taken to mean:
- jewellery
- antiques
- numismatics
- rare folios, books or manuscripts
- philately
If you make a capital loss on a collectable you can only deduct it against capital gains from collectables, not from other capital gains.
After 30 June 2027 if you dispose of collectables individually, that would usually be disposed of as a set, they are exempt only if you acquired the set for $500 or less by establishing the market value of the set on 1 July 2027.
Personal use assets, which you keep for your own enjoyment, are taken to mean:
- boats
- furniture
- household items
A capital gain on a personal use asset is subject to CGT if it cost you more than $10,000 to acquire the asset. The CGT substitution rule means that the value of such items on 1 July 2027 will become its cost.
This is particularly relevant for twentieth century design furniture and pre-owned luxury goods, with both categories regularly featuring items being sold at auction in excess of the personal use assets threshold.
Cars are not defined by the Australian Taxation Office as personal use items and are exempt from capital gains tax.
Watches can be categorised as either personal use assets or as collectables.
Capital losses on personal use assets are ignored. This means you can’t use a capital loss on a personal use asset to reduce capital gains on other assets (including other personal use assets).
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Image details:
Michael Fox (Director) alongside David Boyd’s (1924-2011) ‘Judge and Prosecutor’. Photography by Louis Trerise