Leading the Revolution: Can Tax Reform Assist the Australian Arts Sector?

Abstract

History has shown that tax can play a pivotal role in society. For example tax features prominently with the Rosetta Stone, the American revolution and the Eureka stockade. Indeed, at the 2020 Summit, the arts sector considered that Australia’s tax system has an important role to play in assisting the arts. This sentiment is reflected in foreign jurisdictions implementing a range of tax strategies to assist the arts, such as exempt income, transfers of art in lieu of payment and deferred gifts. Some of these strategies are canvassed below with consideration of their potential application in Australia.

In the American state of Rhode Island, artists can be exempted from state tax on income from the sale of their work. Also, to encourage the creation of cultural hubs, the American state of Maryland provides developers property tax exemptions for the renovation or construction of space for artists.

Alternatively to support cultural innovators, the Canadian province of Quebec provides that copyright income for certain artists (writers, artists, filmmakers, musicians and performers) is tax exempt up to a cap. Similarly, Ireland for the last 40 years has provided tax-exempt status to Irish resident self-employed ‘creative artists’ deriving income from the sale or copyright fee for books and writing, plays, musical compositions, paintings or sculptures.

While the exemption of artists’ income may be appealing it needs to be acknowledged that such a system would increase complexity and create inequities amongst taxpayers. It should be recalled that Australia allows artists to average their income in order to ‘smooth’ it out, which can be subject to great variations from year to year. Also the income tax free threshold and low income offset can decrease a taxpayer’s tax liability. Given data about the level of income earned by artists – this may mean that there is relatively little or no tax being paid by Australian artists any way.

Another mechanism used overseas is to allow taxpayers to transfer property, including works of art, in lieu of payment of tax. In the United Kingdom taxpayers are able to transfer works of art and other heritage objects into public ownership in full or part payment of inheritance tax. Ireland has a broader system that allows for the payment of a number of taxes (such as income tax, corporate tax, capital gains tax, capital acquisition tax) through the donation of heritage items to certain approved bodies. In Mexico, artists can pay their annual tax obligations with their own art work provided it meets a quality test determined by a panel of experts.

There is some appeal in the transfer of art in lieu of payment of tax, although if made via the Australian Tax Office this could increase the administrative and compliance cost burden. An alternative is that artists could donate their work directly to a gallery and then for those artists to claim the market value of the donated piece as a tax deduction. Currently in Australia there is little incentive for artists or art dealers to donate art, as their deductions are limited to the cost of the piece rather than its market value.

Another way the tax system can indirectly assist the arts is to allow taxpayers to make fractional or deferred gifts to charities. These mechanisms can be advantageous for both donor and recipient, in terms of certainty and timing of deductions.

A ‘fractional gift’ describes when the taxpayer retains some right or interest in the property donated. For example, a taxpayer may initially donate one-quarter of a piece of art to a gallery, meaning the piece of art is displayed for three months a year at the gallery and for the remaining nine months is part of the taxpayer’s private collection at home. In the United States, with such a fractional gift the donor can claim a fractional tax deduction in the initial year, provided the art work is fully transferred on the earlier of ten years or the donor’s death. Further tax deductions for the donor follow each subsequent fractional gift.

Alternatively, a deferred gift can occur through a ‘retained life estate’, where the donor transfers property to a charity on the proviso that the donor (or other named beneficiary) should remain in the residence for life. In the United States, if the donor can claim the property as a personal residence, then the donor is allowed to claim an immediate tax deduction to the value of the charitable remainder interest. Also, the donor’s potential estate tax is reduced. Similarly, a ‘charitable remainder trust’ can be established by transferring assets to a trust, with the donor (or other beneficiary) receiving income from the trust for life or up to 20 years. At the death of the donor or last income beneficiary, the assets of the trust are distributed to a charity. In the United States, on the establishment of such a charitable remainder trust, the donor receives a charitable income tax deduction equal to the net present value of the remainder interest to the charity.

Accordingly, given international comparisons there are a number of potential tax reforms that could be implemented in Australia to assist the art sector. However, in ‘leading the revolution’ for reform it is important to take into account characteristics unique to a jurisdiction as these may influence the effectiveness of any reform. It is these unique characteristics that the author is currently considering in formulating tax policy recommendations to the Federal Treasurer and the Minister for the Arts.

Keywords: Arts, Tax, Reform, International, film, tax concessions

JEL Classification: K34