Mandated and proposed regulatory changes that will affect Australia’s art industry have already hurt the art market and those who invest in it.
DURING the past 12 months the Australian art sector and its investors have been galvanised by political rumblings from Canberra.
The art world was still nursing a GFC hangover last June when (then) federal arts minister Peter Garrett introduced the Resale Royalties Legislation.
The mandated scheme was established to deliver a percentage of the price tag of any on-sold artwork (over $1,000) to the original artist.
But according to those in the arts industry, all the changes have done is deliver a burdensome amount of paperwork and led to stagnation in the indigenous sales market.
Adding insult to injury in July last year, the Cooper Review into Australia’s superannuation system advised the government to ban investment by self-managed super funds in art and collectables.
Currently, art and collectables account for only 0.1 per cent, or $573 million, of the $420 billion in Australian self-managed super funds.
For the art industry, however, the self-managed super fund market is significant in size and opportunity and has provided art with investment credibility over the years.
It’s no wonder the art industry was up in arms, with many saying the recommendation instantly affected the industry with, albeit unintended, consequences.
A reshuffled Gillard government quickly rejected the recommendation and instead motioned for ‘tightened legislation’ around self-managed super investment in art and collectables.
What exactly the recommendations will entail is unclear as yet, but it seems the aim is to stop investors having any immediate benefit associated with hanging artwork, while acting as a measure to crack down on the few bad eggs taking advantage of concessional tax rates to decorate their walls.
The mooted regulations would mean any art within a fund must be stored at an art gallery or premises with no association to the fund, a move away from allowing trustees to store the art.
The idea of tightening regulations was floated in parliament last week, regulations will be drafted and up for public consultation and submissions by mid April (according to federal Treasury) and will be debated in the winter parliament sitting in May-June.
If all goes to Treasury’s plan, the new regulations will be implemented by June 30 2011.
Vague rules
The industry has already been affected, according to those closest to the gallery walls.
Just from looking at the submissions to the government in response to the draft released in February, it is clear a lot of people – retailers and art investors alike – are not happy.
“It is a real mess, an absolute mess,” said prominent Western Australian art dealer and GFL Fine Art director Ian Flanagan, adding that caution and uncertainty had been injected into an already frail market.
Uncertainty has been one of the biggest impacts felt during the past 12 months, according to Australian Commercial Gallery Association WA director and Indigenart gallery owner, Diane Mossenson.
“The uncertainty of what has happened with the discussion around super has caused a real cooling of a lot of people who may buy art in their super scheme,” Dr Mossenson said.
The flow-on effects of that have already been felt. Imagine the consequences if the government was recommended to ban self-managed super funds from investing in ASX-listed companies and then proposed tough new regulations for listed share assets instead.
Investors pulling their dollars out of the stock market would be the primary impact, just as art investors have started to shy away from acquiring art as super assets.
Mr Flanagan said sales to self-managed funds now accounted for only 10 per cent of his business, down from 25 per cent in 2004.
Before that, in 1996, self-managed super sales made up 40 per cent of his business, but that dropped when the Australian Tax Office questioned the viability of art as an investment.
Dr Mossenson said the rigmarole and cost of the new storage regulations would add further disincentive to investing in art.
She also queried why viewing a displayed artwork while waiting for its value to increase was deemed inappropriate.
“There is the thought that perhaps some people are getting secondary benefit from looking at it while it is hanging, I can understand that; but the other question you should ask is, so what?” Dr Mossenson said.
Mr Flanagan agreed.
“They just seem to have this fixation that the art shouldn’t be looked at. We would consider that to be an ancillary benefit, not in breach of the sole purpose test,” he said.
“You have got to understand that if you are looking at art as a long-term investment to provide for your retirement, those reduced tax rates are there to encourage investment of that super fund to provide for your retirement at a later date, not to decorate your walls.
“If you happen to get that ancillary benefit, then so be it.”
Save Super Art was established by nationally renowned arts advocate and accountant Tom Lowenstein and art consultant Michael Fox to lobby against the Cooper Review’s recommendations and the tightened legislation.
Mr Fox said he has already seen effects throughout the process.
“They are very successfully scaring people away from investing in art,” he said.
As part of the draft recommendations, Treasury suggested self-managed funds lease or rent artwork, in order to create an income stream for reinvestment in the fund, thereby making them a viable investment.
Mr Fox questioned the merits of this.
“Most people make money through artwork by holding them and making a capital gain, they don’t buy art so they can get a rental stream,” he said.
“It has got to be said that people in Treasury obviously don’t know the art market very well. They have tried to draft the legislation but they are not thinking about the impact on people buying artworks.”
The recommendations pose another threat to the industry – flooding.
The government suggested it will allow any fund five years, to 2016, to sell any work that doesn’t comply with its regulations – a time frame Dr Mossenson said was damaging.
“It is flooding an already depressed market with product that they are forcing people to buy. They are not forcing people to sell shares because they think they’re no good. It is all very disproportionate and hasn’t been thought through,” Dr Mossenson told WA Business News.
“In forcing sales, they are going to force a lot of work to be offloaded into the market, really at a time that is not judicious to be selling. It is a depressed market at the minute.
“How come government can tell you to sell your artwork, when it really is a value judgement as with shares. Why would you be telling people to dump your BHP shares at the bottom when the stock market crashed?”
Consultation?
The resulting effects on the industry aren't the only things that have industry insiders upset.
The lack of consultation is another contentious element, according to Mr Flanagan. "We are the people at the coal face and these guys are going to sit there in their ivory towers and just take decisions without speaking to us," he said.
With art and collectables accounting for only 0.1 per cent of self-managed super funds, Mr Flanagan questioned why such attention was being paid to collectables and why the government was trying to stop the art industry's access to those dollars.
Mr Lowenstein, executive director of the Australian Artists Association and leader of the Save Super Art campaign, has his own theory.
He thinks the combination of a growth in self-managed super funds, which now account for a third of super in Australia, plus the proposed increase from 9 to 12 per cent super contributions, have left the government running scared.
He suggested self-managed funds would reduce their diversity in order to attract workers back to the industry funds.
“The whole thing seems to be aimed, perhaps to some extent, at lessening the usage of self-managed superannuation funds. I wonder if there isn't a deeper or other agenda," Mr Lowenstein said.
According to Mr Fox, the approach the government has taken to fixing any problems in the industry isn't nuanced enough; he likened it to a situation where 'the beatings will continue until morale improves'.
Between the resale royalties and super fund adjustment, it just hadn't stopped, he said.
“There have been some abuses in the way people use self-managed funds to buy artworks. People in the industry would recognise that. The regulations are like using a sledgehammer to smash a walnut. There is a problem, but it is not such a
problem that you disadvantage everyone in order to fix it," Mr Fox said.
“At the heart of all of this, it goes to having better professional standards within the industry so that when people buy artworks through self-managed funds, they are buying them from qualified professionals telling them the truth about the value of the works.
“If they could fix that, we would be well on our way to getting a good system in place."
Mr Flanagan agreed, saying due diligence should naturally be a requirement when advising someone on their super fund's art investment.
“There were elements of it that did need fixing. There needed to be a degree of due diligence in purchasing art using those funds at a concessional tax rate. But other than that I think they should have just left it alone," he said.
“The Cooper Review really looked upon the amount of funds being used to buy artwork through self-managed funds as really quite immaterial, whereas for the arts industry, it is quite material."