Art dealer relief at Cullen tax proposal
Art dealers and auction houses are breathing a sigh of relief that paintings, jewellery and other collectables look set to escape any capital gains tax proposed by the 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, Mowbray Collectables director John Mowbray said.
Profits from the sale of shares, businesses, land, baches and investment properties could all be routinely subject to taxation from 2021.
That is if the Government implements the recommendations of its 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 recommending 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 collectables 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.
‘‘You would have had to go around and value everybody’s artworks on their walls.’’ Dunbar Sloane
It nevertheless recommended excluding them from tax because of the compliance costs and complexities, for example around the treatment of tax losses.
Dunbar Sloane, who is the 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’’.
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 said.
The TWG’s approach avoids a ‘‘compliance nightmare’’, he said.
‘‘You would have had to go around and value everybody’s artworks on their walls,’’ he said.
‘‘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 agreed that the TWG had taken a ‘‘sensible approach’’, and pointed to tax rorts that have cropped up in the United States where art can be subject to capital gains tax.
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 favourite university to collect a $75m tax credit that they could offset against their other tax bills, Mowbray said.
‘‘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.’’
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 said 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.’’