How to Buy and Sell Art: Some Tax Considerations

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This is an extract from How to buy & sell art by Michael Reid, published by Allen & Unwin 2004, reprinted with the kind permission of the author and the publisher.

Buying at Charity Art Auctions

Collectors are advised to consult their accountant and investigate those provisions within Australian taxation law that may allow them the opportunity to partly offset the cost of their charitable purchases against income or profits - in effect, reducing the individual's taxable income.

Taxation determination 92/110 looks into the question of whether the cost of attending a fundraising function is tax deductible as a gift. And the answer is, not surprisingly, both 'no' and 'yes'. The cost of attending a fundraising function isn't deductible under section 78 of the Income Tax Assessment Act 1936 if a material benefit is received. An amount is only deductible if the money donated amounts to a gift. Thus, if a person attends a $100-a-plate dinner; whether or not the subscription exceeds the cost of the meal, the person has received a material benefit - a dinner - in exchange for the purchase price of the ticket. However, if the fundraising dinner ticket should clearly state, 'dinner $30, gift $70, then $70 of the $100 would be a tax deduction. And if at that charity function you throw in an additional $20 as the hat passes around, then that $20 is also tax deductible as a gift because, again, you have obtained no material benefit.

Dinners and donations are all well and truly good, but to what degree does all this affect purchasing a painting at a charity auction? The answer is, 'enormously'. There is no doubt that the acquisition of a painting through outright donation would constitute material advantage, but if a painting is acquired through donation with a gift on top, then the gift component of the transaction would be tax deductible.

This is how it works. At a charity auction, if the legitimate $100 value of a painting is either printed in the charity auction sale catalogue or announced by a qualified valuer from the rostrum prior to sale, then any amount donated as a purchase price up to the value of the $100 painting isn't tax deductible as a material advantage has been received. But any amount paid above the $100 value of the painting, and therefore in excess of the painting's stated material value, is a gift! The 'cost' of the artwork is the key, and it should be readily identifiable and clearly enunciated to those bidding. If a painted is valued at $100 and sold for $150, then the first $100 is material advantage but the other $50 is a possible tax-deductible gift.

David Evers, director, Robson Chartered Accountants of Gosford, rightly points out: "The painting must be worth owning in the first instance. And a qualified valuer, prior to the painting being offered for auction, must have printed or announced the legitimate market value of the painting.' Why, then, should a collector purchase a painting above its market value? 'In that case the collector will be comforted to know that they purchased a beautiful painting at a fair market value, while the money that was paid in excess of the painting's market value is in essence a gift to a worthy charity. The cost of this can be legitimately recouped through the tax system,' says David Evers. This is a win-win situation, although it is important to remember that, as with all tax matters, collectors should keep either a copy of the charity catalogue with printed estimates or diarise any comments made by a valuer as to the painting's worth.

Donations as a Tax Deduction

The Cultural Gifts Program is a Commonwealth government initiative designed to encourage the donation of items of significant cultural heritage from private collections to approved public art galleries, museums, libraries or the Australiana Fund. In exchange for the gift the donor receives a tax deduction equivalent to the market value of the work of art, book or item of Australiana.

Since the inception of this program in 1978, approximately $270 million worth of tax-deductible gifts have moved from private hands into public institutions. The donor's tax is minimized through a philanthropic act, the institution's collection is enhanced, the country's heritage is made more accessible to the community and the government, in forgoing tax, has been instrumental in gaining private-sector support for the arts. A win-win situation? Well, almost.

The Income Tax Assessment Act imposes certain limitations on tax deductions under the program. The commissioner of taxation has the power to vary, limit or disallow the deductible amount. This may be done if, in the commissioner's opinion, the amount claimed isn't representative of the fair market value of the gift. To avoid this snag, collectors must obtain two independent valuations from art dealers specialising in the field. Collectors are well advised to stand at arm's length to the valuation procedure. The institution receiving the gift should help to arrange, and may even pay for, the necessary market valuations.

If the donor receives any material advantage in return for the gift, the commissioner may disallow the deduction. If the valuations of the gift are not undertaken within 90 days either side of the donation, it is at the discretion of the commissioner either to accept or disallow the deduction.

The gift should be unconditional. Conditions that don't grant immediate custody or control of the property to the public institution may cause the commissioner to reduce the deductible amount according to the effect such conditions may have on the gift. The program excludes gifts made by executors of deceased estates, which is covered under the Cultural Bequests Program.

Collectors should be aware that the Cultural Gifts Program has recently undergone some significant changes. These changes are:

Aside from the impact on collectors, further specific considerations affect donations from art dealers and artists. When a dealer donates work that could be viewed as their trading stock, the deductible amount isn't, as usual, the market value of the work but what the artwork actually cost the dealer to buy, often a big difference. In order to obtain a current market valuation, art dealers are advised not to donate artworks from trading stock; instead, donate artworks from your personal collection. If an artist donates his or her own work, the deductible amount is limited to the cost of the artwork's production.

Although many donations made under this program are done so anonymously, there have been a number of high profile benefactors over the years. Beginning in 1991 with a Jacob van Ruisdael painting, A View of Castle Bentheim , the Art Gallery of New South Wales received some $30 million worth of Old Master paintings from James Fairfax. These works were installed in the newly named James Fairfax Gallery. Among Australia's leading philanthropists, around the same time James Fairfax gifted a collection of Australian paintings to the Australian National Gallery. In recent years Fairfax has gifted artworks or money to the National Gallery of Victoria, the Art Gallery of South Australia and the State Library of New South Wales, to name just a few. Fairfax donates somewhere between $2 and $5 million worth of art a year.

In 1998 John and Julie Schaeffer, then ranked among the world's top fine art collectors, proprietors of the Tempo Services and prominent collectors of pre-Raphaelite and Symbolist works, generously donated to the Art Gallery of New South Wales Sir Lawrence Alma-Tadema's important oil entitled A Juggler (1870). This work last came to the market in November 1997 at Christie's London where it sold after the auction on the low estimate for £250 000 (approximately $700 000). In exchange for the gifted painting the Schaeffers received a tax deduction for the painting's 1998 market value - a value, due to worldwide economy recovery, most possibly substantially higher than the purchase price.


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