News & Commentary, Visual Arts Do artists deserve their own tax regime? By John Kelly | June 1, 2016 | Artist John Kelly thinks so. The Australian painter and sculptor, best known for his cow images, lives most of the time in Ireland where artists are treated separately to other taxpayers. Kelly argues that a similar scheme should apply in Australia. He says this isn’t because artists are more “special” than other taxpayers but because the work they produce — their art — returns multiple forms of taxation to the Tax Office — even long after the artist is dead. Kelly consulted with arts taxation expert Doug Bourne of Melbourne firm Bourne and Romeo who says many artists whose art might not be their primary source of income would like to generate more income from their artistic pursuits. “However if they make a loss and their other gross income from a job or whatever exceeds $40,000, they are denied the ability to offset their “artistic” loss against their other income,” says Bourne. “Contrast this with the property negative gearers who set out to deliberately make losses rather than profits and who are able to make the loss offset against other income regardless of its size,” he says. (This $40,000 threshold figure has remained unchanged for 15 years). John Kelly argues his case below in a letter to the next Arts Minister, whoever he or she might be after July 2. *** Dear Arts Minister, With the Federal election over and your feet comfortably under the Ministerial desk, it is now time to sort out the mess that is the Australian arts; how the government regards the arts and how it should support them. Whichever party you belong to, you have a chance to instigate a desperately needed fresh start for the arts. We seem to have forgotten lately that most art begins with an individual’s creativity — be they a painter, writer or musician. Yet historically, government support has been about creating more and more arts organisations. But organisations do not make art, they simply facilitate it. These expensive bureaucracies ‘assist’ the artists who are perceived by many as being incapable of looking after themselves. The government receives much more money from the sale of an artwork than the artist. This ‘middle management’ of arts organisations and even museum/commercial galleries exist on the pretext that they are “assisting” Australian artists but the evidence suggests they and the government are simply exploiting them. Has the Australian government created a form of Munchausen Syndrome by Proxy (MSbP) where the carers keep the artists financially sick in order to continue to get funding to show how supportive they are of the arts? However there is another perspective; one that factually shows artists create wealth for Australian society and the government. For example, visual artists create hundreds of millions of dollars in taxable transactions each year but the government taxes its artists creativity multiple times and in perpetuity. This leads to the bizarre circumstance where the government receives much more money from the sale of an artwork than the artist. Far-fetched? No it isn’t — and here’s how: EXAMPLE 1 An Australian visual artist creates a body of work and exhibits it in an Australian commercial gallery. He or she works a part-time job earning $37,000 a year. This uses up their $18,200 tax-free allowance and they pay tax like any other salaried employee. They are registered for GST but the income from their art varies from year to year. In this example they sell $11,000 of drawings in one year through a gallery representing their work. But $1000 is taken in GST and the remainder is split 60/40 between artist and gallery (commissions for galleries/dealers vary between 33% and 50%). So $4000 goes to the gallery, which then pays 30% company tax ($1200). The artist has spent $1000 making the work so the artist is left with $5,000 profit on which $1,600 will go on income tax (33% is the tax rate after the $37,000 threshold is reached). So in this example the artwork has created $3,850 for the Australian Tax Office (GST, company and income tax combined) compared to the artist’s take home income of $4,000. It shows that a high proportion of the art works value goes straight to the Taxman! EXAMPLE 2 An artist sells a series of paintings she or he has taken two years to complete grossing $220,000 at their dealer’s gallery. The artist is on cloud nine and buys champagne for friends and colleagues who look on with envy. But of that $220,000 there is $20,000 owed in GST, which goes straight to the ATO. The gallery takes its 40% ($80,000) and assuming it’s in profit it will pay 30% company tax to the ATO ($24,000). So the artist is left with $120,000 but has spent, say, $20,000 in materials (after reclaiming $2000 in GST as allowable tax deductions). The artist will then pay $25,000 in income tax to the ATO meaning he or she takes home $75,000 — or approximately one-third of the total sales figures for two years of work — or $37,500 a year. One should not exactly be buying the Dom Perignon. This example shows that the ATO can take up to $69,000 in tax on the sale (GST on the sale price, corporate tax from the gallery commission and income tax). Add to this the Medicare levy and the HECS debt on the artist’s tertiary education and it can be demonstrated that the Australian Government is a major beneficiary of the sale of artwork that did not exist before the artist created it. It shows that there is a very rational and urgent argument to offer visual artists a fairer exchange within the tax system, especially in the case of larger works. EXAMPLE 3 In this last example we will show how the ATO profits more than the artist from the sale or the artwork. A sculptor makes a monumental sculpture that sells for $600,000. GST sees $60,000 immediately go to the ATO while another $140,000 is spent on its construction costs (after reclaiming the $14,000 GST on the expenses). This leaves a profit of $400,000 to be split between the gallery and the artist. The gallery gets its $160,000 commissions at 40% on which it will pay $48,000 in company tax. The artist will pay $81,000 in personal income tax on his/her share. The equation on this sale is quite stark as the ATO stands to receive $189,000 in taxes while the artist is left with $159,000. It just does not seem right that the government can be in a position to earn more from an artwork than the artist, but that is how it stands in Australia. SO WHAT CAN AN ARTIST DO? Should they turn to a tax advisor to help set up a complicated tax structure/business to find ways to lower their tax? But this opens them up to more costs or might simply distract them from being an artist. After all artists do not set out with commercial goals in mind. The artist can also spread the income over several years but this relies on them having poor return years before or after their ‘successful’ year and if they have been working to support themselves this provides little or no benefit. Given the low incomes that most artists earn it can also be pointless to set up a complicated structure for inconsistent and low earnings. Or they could apply to the Australia Council or a government funded arts organisation for support! But grants are hard to get, are discriminatory and they are also taxed which seems contradictory. So what’s the solution? Like many Australians, I have multiple cultural identities. I am also an Irish artist and an English artist as well. This is due to my birth, heritage and circumstance. My good fortune in having these identities and some international success has allowed me to live in a variety of countries and it is this experience I want to bring to your Ministerial attention. My international observations suggest you could introduce an idea that is based on reasoned economic thinking and has an international track record in supporting artists directly. In fact it has been refined to the point I believe it to be world’s best practice and is especially relevant in Australia as statistics reveal that artists are amongst the lowest paid workers in Australia. The ATO earns more than the artist on the same artwork. The idea I would like you to examine is how Ireland treats its artists under its taxation system and compare that to how Australia does it. Under Irish tax law artists can avail of a 50,000-euro tax-free threshold (approximately $A78, 000) on income derived from their art (not employment — even if art related). At first glance this may seem incredibly generous and benevolent, but there are sound economics underpinning the reasoning. What do I mean to have a tax-free threshold for art? Well, it is no different to the $18,200 tax-free threshold that every Australian taxpayer has as an automatic right to. In Ireland it’s just a higher amount for artists — and for a very important reason. Unlike salaried citizens, the creativity of the artist is taxed at various points before they receive their income and then he or she contributes tax again — even long after the artist is dead. It makes the artist an incredible contributor to the tax system. In fact the ATO can earn more than the artist and on multiple occasions. Don’t believe me? Let’s look at the secondary market and a couple of artists. Sidney Nolan and Emily Kame Kngwarreye have left an irrefutable cultural legacy. But if you use the dead eyes of an economic rationalist you will find their auction sales over the past few years have now passed the 100-million-dollar mark! Imagine that, a son of a tram driver (who lived most of his life in the UK) and a desert dwelling Aboriginal who started painting in her eighties creating over a hundred million dollars worth of taxable transactions from their art. Or look at Brett Whiteley’s work which turned over $100 million. Australian artists such as Nolan, Kngwarreye, Rosalie Gascoigne, Arthur Boyd, Whiteley, etc., are creating tax from the grave for the government, through GST, and company and income taxes on these transactions. In fact, more than $100 million is transacted through the auctions houses alone each year — and tens of millions more through private galleries and dealers. It seems fair that some of the tax collected on the visual art transactions should be returned to the generation of living artists through a tax regime that acknowledges artworks contribute to the tax system at various points on their journey, whether they are paintings, etchings, sculpture, songs, music or literature. One might argue that the Irish tax-free threshold only supports artists who sell well, but this is not the case for artists who rely on grants to make their work. They would also benefit from a higher tax-free threshold given they are more likely to be working other jobs, meaning their grant will attract tax at a higher rate. As I said every Australian tax resident is now able to earn $18,200 before tax is liable, so the concept the Irish have implemented is not new. The plan simply extends this threshold on the income derived from art (and not on art related employment, e.g. teaching) in recognition that artists are contributing a fair amount of tax at various points along the path their creative work takes after it’s sold. The Australia Council should be in a position to identify the validity of such artists using peer review. It’s also incredibly democratic and open to anybody, for anybody can be an artist – so there is no discrimination! It would also address the well-documented research that shows that artists are among the lowest income earners in Australia, of which, many are indigenous Australians, yet their work is taxed far more heavily than the average citizen’s wages and the corporate entities that often pay little or no tax. Meanwhile the arts organisations will continue to knock at the your Arts Ministerial door pleading for more money to assist we artists. But could I ask that you consider the above? If you felt it helpful, l would be happy to discuss this matter with you or your office personally next time I am in Australia for I now live in Ireland, though not for tax reasons as you might suspect! Best wishes in your new job. Yours in art, John Kelly Postscript: Whilst considering the future, we also have to acknowledge there is a distinct possibility that the GST will increase (some countries are already at or over 23%). When this occurs the ATO will easily become the greatest beneficiary of an artist’s work being sold and this is simply unfair. [box]Image: John Kelly at work in Melbourne on a maquette of a sculpture in progress with Cameron McIndoe. Photo by John Doggett Williams.[/box] Facebook Twitter Pinterest LinkedIn Email About the Author: John Kelly John Kelly is a painter, sculptor and printmaker Kelly who was raised in Australia and lives in Ireland. In Australia Kelly is best known for his paintings and large sculptures of William Dobell’s cows, papier-mâché creations used during WWII in an attempt to confuse enemy aircraft as to the location of the Australian airbases. His sculptures of these cows have been exhibited on the Champs Elysées, Paris, in Les Champs de la Sculpture, 1999, Monte Carlo, in La Parade des Animaux, 2002, the MAMAC in France, The Hague, 2007, Glastonbury (2006 and 2007), Cork city 2011, and Melbourne Docklands and Sunshine (2001 to the present).