1: Small Business Owners
The 2015 Federal Budget saw the introduction of legislation which allowed small businesses (with an annual turnover of less than $2 million) to claim an immediate tax deduction for assets purchased for less than $20,000. This concession is available until 1 July 2017, when the asset threshold will decrease to $1,000.
The 2016 Federal Budget enhanced these measures by proposing to increase the small business annual threshold to $10 million (up from $2 million), which would see a greater number of small businesses gain access to the immediate asset write-off, amongst other small business concessions. This proposal has not been enacted and with an election looming on 2 July 2016, businesses with more than $2 million of turnover may need to wait for the outcome of the election before determining whether they will be eligible in the 2017 financial year.
Currently, the immediate asset write-off will apply to the following:
new and second hand depreciating assets;
costing less than $20,000 until 30 June 2017
What does this mean for businesses purchasing artwork?
The existing and proposed changes have created an ideal environment for businesses to invest in capital assets such as paintings or other pieces of art over the next 12 months. Small businesses will be able to claim an immediate deduction for artworks, as long as it is not stock (such as art for an art gallery) that costs less than $20,000.
There is no limit to the number of immediate write-offs a business can claim. For example, a small business owner may choose to acquire 5 paintings of less than $20,000 each, resulting in a potential total tax deduction for each of the paintings.
If the artwork costs $20,000 or more, or the acquiring entity does not fall under the small business threshold, the artwork should be depreciated over its useful life. The Commissioner of Taxation states that artworks which qualify as depreciating assets have an effective life of 100 years. If the business uses the prime cost depreciating method, the decline in value would equate to 1% of the original cost per year.
If you have been thinking about purchasing a new piece of art to display in your business premises, you should consider taking advantage of these measures. If you are able to have the art acquired and displayed in your premises by 30 June, you will be entitled to the deduction in the current financial year.
The Australian Taxation Office has provided guidelines to support the proposition that artworks will qualify for the immediate asset write-off provision.
In order for the immediate asset write-off to apply, the following conditions must be met:
Artwork must be tangible in nature (i.e. paintings, sculptures, drawings, engravings and photographs) and able to be moved from one location to another;
Artwork must be purchased for the purpose of being displayed in open viewing areas such as foyers or receptions on business premises; and
The artwork needs to be installed and ready for use prior to being eligible for a deduction. It is not sufficient to simply have purchased the art, if it is not yet installed on the business premises.
In practice, these conditions mean that small businesses buying art who want to qualify for the immediate asset write-off must choose works that cost under $20,000.
By electing to claim the immediate asset write-off, the artwork will thereon be considered a depreciating business asset. Any proceeds on the sale of the art in the future will be treated as assessable income. This may see you pay tax in the future if your artwork increases in value.
2: Art Collectors / Donations of Artworks
If you own art, you may be eligible to claim a deduction through the donation of that artwork to a charitable entity or otherwise through the Cultural Gifts Program. In order to claim a deduction, you will need to ensure the entity that you are donating the artwork to is a deductible gift recipient or a special entity as named under the Cultural Gifts Program.
More often than not, you will also need to obtain a valuation of the artwork to support the deduction that you intend to claim.
There are various capital gains tax issues and conditions which may need to be considered before you can claim a deduction for the artwork. It is strongly recommended that you discuss any issues with your tax agent before considering claiming a deduction for artwork acquired or donated.