The changing palette of art for investment’s sake

Following on from the 2001 Report of the Contemporary Visual Arts and Craft Inquiry (the Myer Report), the then Federal Opposition and now Labor Government expressed enthusiasm for a scheme that would tax people selling art, for example through an art dealer or auction house, with the funds raised being passed on to the artists whose work was sold.

The Government is now working on implementing the scheme in 2009, with its principal aims stated as:

> to insert an equitable mechanism into the situation where there is a glaring disparity between the first sale price of a work of art and subsequent sales;

> to assist visual artists who, in contrast to writers and composers, generally only receive one payment at the time of the first sale of their work, whereas a resale royalty arrangement would create a system of returns when art is subsequently sold; and

> to address the low average income of artists.

Of primary concern to the Government is the plight of Indigenous artists.

Many may feel the concept of taking from the ‘rich’ owners of art and distributing to ‘poor’ artists not only has an historical precedent but also has contemporary merit.

As with most things, however, if an informed assessment is to be made, it is important to look at the detail of the proposed scheme.

The Government issued a document in April this year that set out a framework of how it saw the scheme operating.

The document indicated:

1. The scheme was to be based on the rationale of artists having the right to share in the returns of the resale of their artistic output in the same way that a composer or a writer receives a royalty when their work is performed.

However, there appears to be a fundamental difference between a piece of music being made available for public performance where the composer has not actually sold the ‘rights’ to the music and an artist who has passed over total ownership of a work of art.

Using the logic of the artist having an ongoing right to a royalty payment has been likened to an architect and builder having an ongoing right to a royalty payment whenever a house, in which they had some involvement, is sold.

2. A royalty (tax) would be payable on all resales where either the buyer, the seller or their agent is acting in the course of a business of dealing in works of art, regardless of whether the work is sold at a profit or a loss.

A case might be mounted for an artist receiving a royalty payment when they originally sold a work of art on the understanding they will retain some rights to future growth in the value of the work of art.

However, it does not appear logical to extend that to a sale where the seller is making a loss.

3. It is proposed that the royalty will be calculated on the price obtained ‘net of tax’ payable on the sale.

Unfortunately, what constitutes ‘tax’ is not clarified in the Government guidelines, so it may mean income tax, capital gains tax or goods and services tax or all three.

The rate of the royalty is mooted to be a sliding scale, starting at 4 per cent of the first $100,000 and reducing to 0.25 per cent for sale amounts in excess of $1 million.

The maximum resale tax is $25,000, which would occur for sale prices of $4 million, an amount that has not yet been realised for the public sale of any Australian work of art.

4. Duration of right of tax being payable will be consistent with the Copyright Act 1968, that is, the life of the artist plus 70 years, according to the Government guidelines.

In other words, any work of art sold where the artist is alive or has been dead for less than 70 years will potentially be liable for the resale tax payment.

If the aim of the scheme is to assist the financial position of the artist, the Government may find it difficult to justify a resale tax that will outlive the artist by around three subsequent generations.

5. The rights will be unassignable and unable to be waived.

If an artist already has a contractual arrangement, they will receive a further windfall. However, if the artist wishes to use their rights as financial collateral, they may be unable to do so.

6. The minimum resale price that will trigger the tax is suggested to be $2,000.

Therefore, if an artist’s work does not command a resale price of at least $2,000, the artist will not financially benefit under the scheme.

If an artist is able to command a price of $2,000 for their work, they would only need to produce and sell one work a week to earn a gross income of $100,000, which even net of gallery commissions would still leave them in a reasonable financial position.

The possible criticism might therefore be that those who need assistance will not receive it and those that do not need assistance, will receive it.

7. The resale tax will apply to all works of art irrespective of whether the art was purchased before or after legislation is enacted.

Therefore, if you own a work of art that you purchased some years ago, you may be charged a resale tax if you sell the work of art before the artist has been dead for 70 years.

8. What constitutes a work of art?

“Any work of graphic or plastic art such as a picture, a collage, a painting, a drawing, an engraving, a print, a lithograph, a sculpture, a tapestry, a ceramic, an item of glassware or a photograph.”

A copy of a work is not to be regarded as a work of art unless the copy is of a limited number (the maximum number is not clarified) that have been made by the artists or under the artist’s authority.

Other possible matters to consider

> How will a work of art be treated if it is part of a building, for example a sculpture or wall ceramic. When the building is sold, will the artist be eligible for some of the sale proceeds?

> in some situations the tax will effectively be doubled, for example, if you purchase a work of art from a gallery and they pass on the 4 per cent tax to you as the purchaser. When you subsequently sell the work of art you will be charged the tax again as the seller. Thus 4 per cent becomes 8 per cent.

> no account is made for the value-added parties other than the artist, for example, the promotional work of the gallery, the skill of the framer, the restorer and the researcher and so on.

> a further criticism being mounted is that the tax is levied directly against those who are supporting the artists in the first place by buying their works. This could be seen as the logic equivalent of funding paid maternity leave by directly taxing working women who have children.

The Government sought submissions in regards to the proposed legislation but these closed on May 9, 2008.

Most people would not have an objection to the financial position of artists, or anyone else for that matter, being enhanced, provided the enhancement is merit-based and is not otherwise done on a basis that is prejudicial to others.

The issue of resale royalties does not rate in comparison to many other Government issues.

However, it certainly represents another possible tax impost in much the same way as stamp duty.

As such, those who invest in art or the many people who purchase art simply for personal enjoyment rather than for its investment potential may wish to keep an eye on future developments.

Col Fullagar is the head of life risk at Challenger Financial Services. This article, however, is written in Col’s private capacity as a lover of art and does not necessarily represent the position of Challenger.