Art and Tax benefits

The tax rules under the Australian Cultural Gifts Program seem straightforward - see recent article.

Giving art to a gallery or other public institution has become an increasingly common activity as the number of wealthy Australians with significant art collections has increased in recent decades. Being a benefactor has a high feel-good rating and there is also a handy tax deduction available under the Australian Government’s Cultural Gifts Program. Using the provisions of the Cultural Gifts Program is one of two ways to get a tax break on an art collection (second is to use a Self-managed Superannuation fund).

The work has to be valued by valuers registered with the program. An average is taken of the valuations and that amount is deductible. This can be used to offset taxable income over five years. Gifts of property made under the program are exempt from capital gains tax. If you sell a painting you pay commission to the dealer or the auction house and you pay capital gains tax. You can end up with about 60 cents in the dollar, depending on your level of income. If you give the work away, you can offset the value of the work against taxable income.


The following is the extract from the Australian Master Tax Guide on Art Gifts

Under the Cultural Gifts Program (formerly the Taxation Incentives for the Arts Scheme), certain gifts of works of art and comparable property qualify for deduction on a more liberal basis than other gifts (s 30-15, items 4 and 5). Such gifts are also exempt from CGT (s 118-60(2)). The program applies to gifts of property with a value of $2 or more for inclusion in the collections maintained by the Australiana Fund, a public art gallery, public library or public museum. Gifts by will are excluded, but may qualify under the companion deduction for cultural bequests (15-575). Gifts of money are excluded. Companies, as well as individuals, are entitled to a deduction under the program (Taxation Determination TD 93/28), although the making of a gift does not create or increase a carry-forward loss (16-880) (Taxation Determination TD 92/195).


Within certain limits, the program allows a deduction for a qualifying gift to be based on the GST inclusive market value of the gift rather than its cost. It also dispenses with the requirement for other gifts (15-510) that the gifted property must have been purchased by the taxpayer within 12 months of the gift being made or be valued by the Commissioner at more than $5,000. A taxpayer must, of course, own the gifted property to claim a deduction (eg Case Y22 91 ATC 257, where a deduction for the value of donated excess film footage in which the taxpayer did not own the copyright was denied). A proportionate deduction is allowed where property is owned and gifted by two or more persons (s 30-225). The deduction for qualifying gifts is generally based on the GST inclusive market value of the gift at the time it was made, determined by reference to the average of two or more valuations obtained from approved valuers. Valuations must be in writing and must state the estimated GST inclusive market value of the property at the time the gift was made or, provided the valuation is made within 90 days before or after the time the gift is made, the GST inclusive value of the property at the time of valuation (s 30-200). The general rule is that the average of the GST inclusive market values specified in the valuations will be treated as the value of the property. However, in some cases an adjustment may be necessary for any input tax credit entitlement (s 30-15(3); 30-215(4)). The ATO feels that the valuation method should determine what price a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree on for the transfer of the property (Taxation Ruling TR 96/1). The ATO does not accept the decision in Case X12 90 ATC 162, that the value of opals donated to a museum was the average of two retail valuations supplied by the taxpayer's valuers, as authority for a contrary view. The cost of such valuations is deductible as a tax-related expense (Taxation Determination TD 93/92).


A person making a gift should send the written valuations to the recipient institution which should then forward them, together with any further documentation required, to the Committee on Cultural Gifts Program. If the Committee accepts that the values and other aspects of the gift conform with the relevant requirements, it will endorse the valuations and return them to the taxpayer. The taxpayer need only produce the valuation documents to the ATO when requested to do so (Taxation Ruling TR 96/1). There are important exceptions to the rule that the deduction for eligible art gifts is based on market value.

These exceptions are as follows:

• Recent or prearranged acquisitions. The deduction is calculated as the lesser of the GST inclusive market value (reduced by any input tax credit entitlement) and the amount paid for the item by the taxpayer where: (a) the property is donated within 12 months of its acquisition (otherwise than by inheritance) by the taxpayer; or (b) the property was acquired by the taxpayer for the purpose of donation or was acquired subject to an agreement or understanding that the property would be donated (s 30-215(3), (4)).

• Artists, art dealers, etc. In certain circumstances, the deduction will be based on the cost of acquiring or creating the property and not on the GST inclusive market value. This will be so in a case where, had the property been sold by the taxpayer rather than gifted, any profits or proceeds arising from the sale would have been assessable to the taxpayer and where the value of that property is not so assessable to the taxpayer as a consequence of the gift being made (s 30-205; 30-215(3)). The ``cost'' method will therefore apply where an artist or art dealer donates cultural property (other than property from the dealer's own private collection), which is created in the ordinary course of business, such as a work of art created originally for sale but subsequently donated. Under the “cost” method, the value of the gift is the amount paid for the property by the taxpayer, reduced by any input tax credit entitlement. Where the property is created or produced, the value is so much of the cost of creating or producing the property as would have been allowed as a deduction to the taxpayer if the property had been sold by the taxpayer, reduced by any input tax credit entitlement. In any other case, if the average of the valuations does not fairly represent market value, the deductible amount is the market value of the property on the day the gift was made.


Deduction may be reduced
The deduction may be reduced by a “reasonable” amount where the recipient does not obtain the right to immediate custody and control of the property or full legal and equitable title to the property (s 30-220). This is also the case where the custody, control or use of the property by the recipient is affected by any agreement entered into in connection with the gift. For example, assume that a gift worth $10,000 is made on condition that the taxpayer retains full rights of possession and enjoyment for the next 10 years. The appropriate discounting factor could be 10%. Using this factor, the present value of the $10,000 gift would be $3,885 and that would be the amount of the reduced deduction allowable (Taxation Ruling IT 295).


Deduction may be spread over five years
Deductions for gifts made under the Cultural Gifts Program may be spread over a period of up to five income years at the election of the taxpayer. The election must be in writing and be made before the taxpayer lodges an income tax return for the income year in which the gift is made. The election must specify the percentage, if any, to be deducted in each income year. A copy of the election must be given to the Secretary of the Department administering the National Gallery Act 1975 before lodging an income tax return for the year in which the gift is made. The election may be varied at any time, although the variation will only apply to the percentage of the original deduction that is to be claimed in income years for which an income tax return has not yet been lodged (Sub division 30-DB: s 30-246 to 30-248).

As this seems to be quite a complex area of taxation I would highly recommend that taxation advice be sought.

Download the Australian Cultural Gifts Program guide on tax incentives

More information on the Australian Cultural Gifts Program
More information on the Australian Cultural Gifts Program approved valuers
More information on the Australian Cultural Gifts Program participating Institutions

More information on forms and certificates