Collectibles a taxing business

In part four of his series on collectibles, Gary Kleyn examines some of the tax implications.

HOBBYISTS and serious collectible investors beware. When it comes to tax planning issues it makes no difference what your motives for holding collectibles are.

Regardless of whether you are dealing in collectibles for plea-sure or as a nest egg as part of your self-funded superannuation fund, the item will face the same capital gains rules when sold, according to Barrington Partners partner Roger Sullivan.

Mr Sullivan believes many people would not be aware of their responsibility to keep a proper record of assets bought and sold for personal use or as a collectible. Furthermore, he believes it is something the tax office tends not to worry about and would normally only pick up on if it was concerned with other aspects of an individual’s tax return.

“However, if someone is a serious collector then that does expose them to all the record keeping requirements,” Mr Sullivan said. “You need to keep a record of everything you buy. Most wouldn’t be aware that if they have sold things like jewellery they could be subject to capital gains tax.”

Any expenses that arise while holding the collectible, such as insurance costs, and other spending including polishing or cleaning the collectible in order to enhance or improve the item, also should be kept. This may help minimise the tax damage if a profit is made on the sale.

Mr Sullivan believes many of the professional dealers already keep good records, given the nature of collectibles and the intrinsic value often associated with the history of the item. But having these records on file also makes it easier for the ATO to back check if any income is not properly declared.

Under the law, a collectible is defined as artwork, jewellery, an antique, coin, medallion, a rare folio, manuscript or book, a postage stamp or first day cover “that is used or kept mainly for your [or your associate’s] personal use or enjoyment”.

The law also covers a debt that arises from a collectible or an option or right to acquire any collectible.

Mr Sullivan also warns that, within the capital gains code, personal use assets and collectibles are segregated from general income items.

In effect, this means that any capital gains can only be subtracted by capital losses made within the same period from the sale of personal use or collectibles.

Chapter Three of the Income Tax Assessment Act 1997 division 108 sets out the methods that should be applied to capital gains and losses.

“In working out your net capital gain or net capital loss for the income year, capital losses from collectibles can be used only to reduce capital gains from collectibles,” the act says.

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