LAWRENCE SMITH/Stuff
Jacinda Ardern on talks on whether a capital gains tax will be introduced.
Art dealers and auction houses are breathing a sigh of relief that paintings, jewellery and other collectibles look set to escape any capital gains tax proposed by the Government's Tax Working Group.
However, the exemption may do little to scotch the popular belief that the very wealthy will find legal ways of avoiding tax, whatever changes are made to the tax system.
About $75 million of fine art, stamps and coins are bought from galleries and auction houses each year, according to Mowbray Collectables director John Mowbray.
Profits from the sale of shares, businesses, land, baches, and investment properties could all be routinely subject to tax from 2021.
That is if the Government implements the recommendations of the Tax Working Group (TWG), which expects to hand its final report to ministers at the end of next week.
But the working group, chaired by Sir Michael Cullen, is recommended that profits from the sale of personal property including boats, cars, art and jewellery should not be taxed.
In the vast majority of cases, the value of such personal property goes down over time – rather than up – making taxation pointless, Cullen has pointed out.
The common exceptions to that are expensive artworks and collectibles that people may buy either partly or entirely as an investment.
The TWG acknowledged in its interim report in September that there was a case for including such items in a capital income tax regime.
Otherwise people might invest in expensive jewellery, fine art, rare coins and vintage cars, instead of "more productive assets" simply because they weren't taxed, it admitted.
It nevertheless recommended excluding them from tax because of the compliance costs and complexities, for example around the treatment of tax losses.
Dunbar Sloane – director of the Dunbar Sloane auction house – doubts the exemption will see an investment-fuelled boom in the art market, but says "thank God they have left it alone".
John Mowbray estimates about $15m of stamps are bought by collectors each year.
While the art market might see "a little bit of a pick-up" as a result, it is now rare for Kiwis to buy art as an investment, rather than to enjoy or as a way of displaying their wealth, he says.
In the early 2000s when asset prices were high and there was a lot of "new wealth", the New Zealand art market had a boom run, but people don't really talk about "investment" now, he says.
The TWG's approach avoids a "compliance nightmare", he says.
"You would have had to go around and value everybody's artworks on their walls. That might have been a small, short-term bonus for us going around valuing everything and charging fees for that.
"But in the long term it would have been a bureaucratic nightmare."
Mowbray agrees the working group has taken a "sensible approach", pointing to tax rorts that have cropped in the United States where art can be subject to capital gains tax.
Dunbar Sloane says valuing artworks for tax purposes would have provided a short-term fillip for auction houses - but subjecting art and collectibles to a capital gains tax would be a "compliance nightmare".
"It has been proved worldwide that attempts to tax the capital gains on private assets are fraught with difficulty, are subject to manipulation and are a nightmare of compliance," he says.
"You get the extraordinary situation in the United States where to avoid capital gains tax, people donate items – for example to their favourite university – at vastly inflated values and get a lovely little tax deduction as a result of it."
A wealthy investor might for example get a collection that was really worth $50m assessed as being worth $200m by a valuer.
They could then donate it to their "alma mater" to collect a $75m tax credit that they could offset against their other tax bills, he says.
"This goes on a lot in America and that's the final result of trying to tax a capital gain on such objects – it is just too easy to manipulate the values and it's best to just stay away."
US accountancy firm Ardito, Toscano & McCollum notes on its website that in the US it can be more advantageous from a tax perspective to keep artworks out of sight in a vault.
The Tax Working Group chaired by Sir Michael Cullen has admitted there is a risk people might channel money from "productive investments" and into art to escape tax.
The absurdity arises because if the owner hangs a painting on a wall they are likely to be deemed to be getting "personal use" from it, so could not claim a deduction if it dropped in value.
Like Sloane, Mowbray doesn't believe the TWG's regime would result in a boom in art investing. But he acknowledges there will be those who may "find it nice to find they could still own something that didn't have a tax stuck on it".
The TWG's proposed regime could throw up a few anomalies.
Profits from the sale of gold bullion – or at least in shares in exchange-traded funds that mirror the gold price – would be subject to tax while actual gold modelled into fine jewellery or gold coins might not be.
Sloane says there could be grey areas. "Is Grandma's necklace looked upon as gold bullion? But I don't think they will go there – it's too difficult."
Since an art market boom petered out in 2004, most people have been buying art for personal enjoyment rather than as an investment.
The working group has noted that if people buy items with the express intention of selling them for a profit, tax could already kick in.
"Existing tax rules can tax certain gains on sale, if the assets were acquired for resale. These rules will continue to apply to such assets."
That is in theory, anyway.
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