Report #2: An International Comparative Study of Tax Concessions for the Arts



Executive Summary

This 2nd Report is an international comparative study of the tax concessions provided to the arts in a number of selected jurisdictions. Given the prominence of its level of giving, the United States of America (United States) is one of the studied jurisdictions, as well as the United Kingdom, Canada and Ireland. Reference is also made to concessions provided for in Germany, the Netherlands, Mexico, Japan and Singapore. This is the 2nd Report commissioned by Arts Queensland and builds upon the 1st Report which outlined Australia’s current tax treatment of the arts.

To assist with this analysis, the art sector is divided into three broad categories: artists, art bodies and contributors. Rather than providing a detailed analysis of each jurisdiction’s tax system, this Report focuses on particular tax concessions that have been introduced to assist the arts. The aim is to identify models or mechanisms from these international comparisons that could be informative for Australia. It is important to appreciate that, with any international tax comparison, characteristics unique to a jurisdiction may fundamentally influence the effectiveness of a tax concession. These unique characteristics may relate to features of the tax system overall,[1] or to the jurisdiction’s taxpayers themselves.2 Where relevant this Report highlights some of these nuances.

Table 1 summarizes the tax concessions provided to the arts in the jurisdictions studied, outlining such things as deferred gifts to charities and testamentary gifts. Reference is also given to the current Australian tax treatment, as discussed in the 1st Report.

It is evident from this comparison that jurisdictions around the world implement a number of tax strategies similar to those in Australia. Indeed, a number of strategies recently introduced in Australia, such as Workplace Giving, have their origin overseas. However, there are a number of overseas strategies that are not widely utilized or present in Australia. For example, exempt income for artists, tax credits for artists to reduce tax payable, goods and services tax (GST) concessions for artists or art bodies, transfer of art in lieu of payments of tax and deferred gifts. It is these alternative mechanisms that form the initial focus of this Report as they may be more informative for any future tax reform for Australia’s arts industry.

After providing an overview of the level of giving in various jurisdictions and highlighting some unique features of the jurisdictions studied, this Report analyses the tax treatment of artists, art bodies and contributors in the selected jurisdictions. The Report will consider such tax mechanisms as exempt income for artists, tax credits, GST concessions, transfer of art in lieu, deferred gifts and other concessions. The Report then outlines some concluding observations about potential reforms that will be further developed in Report #4.

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2. Need for tax concessions

While the structure of tax systems around the world varies, it appears that the plight of artists is universal. Da Silva has pointed out the features common to many artists around the world:[4]

  • A large number of employers, sporadic employment with inevitable concomitant employment;
  • Poor and unpredictable income levels (on the basis of often irregular salaries, fees, royalties and resale rights) plus the necessity of devoting unpaid time to research and personal development;
  • Combining artistic work with another waged job, in order to survive financially;
  • An unpredictable market place and the associated risks of success and hazards linked to the effects of fashion;
  • Unavoidable mobility; and
  • Dependence on intermediaries of various kinds such as agencies, publishers, producers, gallery owners and others.

In response to this, many jurisdictions have provided mechanisms in their tax systems to try to assist artists either directly or indirectly, such as concessions to art bodies that co-ordinate or hold their work. One indirect way is through tax incentives to encourage private giving or donation (commonly referred to as ‘philanthropy’) to certain organizations, including art bodies. Indeed, such private giving is in part necessitated due to declining public resources to support such organizations.[5]

2.1 The level of giving

The level of ‘private’ charitable giving varies around the world. Table 2 illustrates the level of giving as a percentage of Gross Domestic Product (GDP) in 12 countries included in the Organization for Economic Co-operation and Development (OECD). While the United States is held up to be an exemplary nation of givers (as their charitable giving is about 1.69 per cent of GDP) it needs to be appreciated that there are characteristics of the United States that are unique. For example, a large proportion of giving in the United States goes to religion, as it is the most religious of all western nations.[6] Furthermore, this is coupled with the realization that the United States is not a welfare state, and, therefore, reliance on private donations is critical for public goods to be made available.[7] Also, taxpayers living in a welfare state may consider that it is a function of the government to support charities and the arts and not their direct responsibility.

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Table 2 illustrates that the level of giving in the United Kingdom is similar to Australia’s: 0.69 per cent of GDP.[8] However, the ‘level’ of giving in the United Kingdom is lower than that in the United States even though the ‘participation’ of giving in both countries by individuals is similar: in the United States 70 per cent of households made significant contributions,[9] whereas in the same year 66 per cent of United Kingdom households contributed.[10]

A feature that could be unique to the United States’ experience: studies have demonstrated that the bulk of the United States donations goes to organizations in which Americans have some personal involvement and which are predominately local, such as church, college or university they attended, or a hospital frequented by the family.[11 The United States ‘generosity’ has been described as follows:

US giving is heavily interlaced with self-interest, either directly through tax benefits, benefits from the supported charity, or social status; or indirectly through the achievement of social goals which one might desire, such as better child care, civil rights.[12]

In comparison, other nations such as the United Kingdom give to foundations that have broader influence rather than local, and donors are more altruistic, being characterized by selflessness.[13]

It is important to acknowledge these cultural differences, as they can influence the legal system and the effectiveness of any policy implementation. For example, until recently, Australia’s legal definition of ‘donation’ for tax purposes has been based on an ‘altruistic’ platform, in that for the taxpayer to be eligible for a donation tax deduction there must not have been any material benefit received in return. If any material benefit is received then no deduction for the donation is allowed, even if the donation exceeds the amount of the received material benefit.[14] However, in the United States it is accepted that some benefit could be received, and this just ‘reduces the amount’ of tax deduction available, rather than ‘eliminating’ it.

While ‘philanthropy’ means for the love of mankind, in the United States it appears that the tax system plays an intrinsic role in planned giving, particularly since the Tax Reform Act 1969 (US).[15] The United States’ tax system has a number of mechanisms to facilitate donations; these relate to income tax and capital gains tax (CGT), as well as having the potential to reduce the imposition of estate taxes on assets held in a deceased estate. Particularly, the presence of estate tax may encourage giving to decrease the value of a taxpayer’s estate at death. There are a number of jurisdictions, such as the United Kingdom, Ireland, the Netherlands and Japan, which impose estate taxes or inheritance taxes on inter-generational transfers of property. This liability may fall either on the estate itself or on the beneficiary who is receiving the inherited good.

In the United States, the top estate tax rate is currently in the vicinity of 48 per cent, which will decrease to 45 per cent in 2009.[16] The United Kingdom also has an inheritance tax[17] with all estates taxed at zero per cent for the first 312,00 GBP, and then at 40 per cent for the value above this.

The influence of such inheritance taxes for the donation of goods can motivate efforts to decrease this exposure.[18] For example, plans to entirely phase out the Federal estate tax in the United States are estimated to reduce charitable bequests by 22 per cent.[19] The lack of an estate tax in Canada (similar to Australia) has been identified as a potential reason why charitable giving is lower in Canada compared to jurisdictions with estate taxes.[20] However, the validity of such conclusions is questionable, given that both Canada and Australia have levels of giving similar to that of the United Kingdom, and greater than those of Ireland and the Netherlands, both of which have estate taxes: refer to Table 2.

This Report will now consider the tax concessions introduced in the studied jurisdictions for the arts.

Exempt income for artists

In most jurisdictions, if art bodies[21] qualify as non-profit or charity, then tax concessions will apply to contributions received, particularly donations, and to the level of income tax paid. For example, income earned can be exempt and donations to it may be deductible for the contributor. However, a number of jurisdictions provide that income earned by an artist[22] can be exempt from income tax or sales tax. In Australia, artists are not provided any tax exemption for income they earn in their capacity as artist.[23 ]

3.1 United States: Rhode Island, Maryland & Hawaii

A number of American states provide support to artists through the exemption of their income from state taxes. However, these exemptions apply only at the state level and do not apply to federal taxes.[24]

In the American state of Rhode Island, artists can be exempted from state tax on income from the sale of their work.[25] From 1998, there is an exemption from state sales tax, similar to GST, for artists who live in one of nine designated art districts in the state of Rhode Island. Particularly, there is an exemption from sales tax on the sale of works created within the district by artists who live and work there; and the sale of original, one-of-a-kind works of art by galleries located within the district (regardless of origin of art work).

To encourage the creation of cultural hubs in the state of Maryland, the following tax incentives are available to areas designated ‘arts and entertainment’:

State income tax subtraction for artistic work sold by qualifying residing artists; Property tax exemptions for up to ten years are provided to developers who renovate or construct space for artists and/or arts-related enterprises; and Exemption from the admissions and amusement tax.[26]

The state of Kentucky offers tax credits to individual artists willing to relocate to the town of Paducah to buy and rehabilitate historic structures for live/work spaces.

Furthermore, the state of Hawaii excludes from an individual’s taxable income royalties derived from patents, copyrights or trade secrets from ‘performing art products’.[27] However, the term ‘performing art products’ is narrowly defined and includes only audio files, video files, audio/video files, computer animation, and other entertainment products perceived by or through the operation of a computer, as well as commercial television and film products.

3.2 Canada: Quebec

Within Canada, the province of Quebec[28] provides that copyright income for certain artists (writers, artists, filmmakers, musicians and performers) is tax exempt.[29] This exemption works on a sliding scale with a cap of $60,0000 CAN.[30] The justification for this exemption is that it provides some equivalency to the tax concessions provided to ‘research and development’, and supports cultural innovators who take risks in developing new work.[31]

This exemption is available to copyright income of ‘creators’ of original literary, musical or artistic work only. Performing artists are not able to access this concession on the basis that they generally paid on performance, although this exclusion is not without criticism.[32]

3.3 Ireland

Since 196933 Ireland has provided tax-exempt status to Irish resident[34] self-employed ‘creative artists’ deriving income from the sale or copyright fee for books and writing, plays, musical compositions, paintings or other pictures, or sculptures.[35] However, to access this exemption, the work must be either creative and original,[36] or have cultural or artistic merit.[37] The Revenue Commission is empowered to make a determination whether or not this is the case.

Similar to Canada, this Irish exemption does not cover all artists, and artists excluded are actors, musical performers and dancers. Of course, if these artists actually wrote work, then their royalty income from a play or song could be exempt.

Previously there was no cap to this income tax exemption which led to concerns about the amount of tax revenue lost and whether the exemption was really helping low income artists.[38] In 2001 the following income levels of artists benefiting from the scheme were identified:

  • 50 per cent had earnings averaging 5,213 Irish pounds;
  • 48 per cent had earnings between 10,000 to 50,000 Irish pounds; and
  • 2 per cent had earnings in excess of 50,000 Irish pounds. However, this 2 per cent of artist derived 58 per cent of all the exempt income.[39]

In response to concerns, from 1 January 2007 a partial cap of 250,000 Irish pounds now applies. This means there is full exemption for artistic income up to 250,000 Irish pounds; for income in excess of this cap only 50 per cent of the excess income is exempt.

Tax credits to reduce tax payable for artists

Broadly, tax credits can be distinguished from ‘tax deductions’, as tax credits directly offset the tax payable by a taxpayer. In contrast tax deductions generally only reduce the taxpayer’s taxable income to which their applicable tax rate applies. This means that $1 offset will directly save the taxpayer $1 in tax, whereas a $1 deduction will save the taxpayer 30 cents in tax, assuming the taxpayer’s tax rate is 30 per cent. Accordingly, the value of a tax credit for a taxpayer is greater than a tax deduction, and such a tax credit system operates in Canada.

While Australia has recently introduced a tax credit system for investments into the film industry, there is no tax credit system broadly available for other artistic work.

4.1 Canada

Within Canada, the Province of Ontario provides a range of tax credits which can directly offset the Ontario taxes otherwise payable in six cultural industries, including books, music and digital media. However, these tax credits do not go to the artist directly, but instead support the art body producing their work.

For booking publishing[40] there is a refundable tax credit available for Canadian-controlled Ontario-based book publishing companies that publish works by first-time Canadian authors. Expenditures which qualify for the credit include 100 per cent of pre-press and promotion costs and 50 per cent of cost related to production, with a maximum credit of $30,000 per book.[41]

In terms of music, there is a 20 per cent refundable tax credit for certain expenditures[42] incurred by a qualifying corporation[43] in the production of ‘eligible Canadian sound recordings’ by ‘emerging Canadian artists or groups.’[44] For interactive digital media, there is a 20 per cent refundable tax credit for Ontario labour expenditures incurred to develop interactive digital media products for commercial exploitation in Ontario.[45]

Other cultural industries eligible for tax credits include film, magazine publishing, and television.

GST concessions for artists or art bodies

A number of countries provide for a concessional rate of GST (known in some overseas jurisdictions as Value Added Tax (VAT)) to apply to certain artistic endeavors. For example, in Germany instead of the normal VAT rate of 15 per cent, a reduced rate of seven per cent applies to the sales of art objects and copyright income. Australia does not provide any direct GST concessions for artists or art bodies, although fund raising events can elect to be input taxed rather than subject to GST. Also, the threshold for mandatory GST registration is greater for non-profit bodies.

In the United Kingdom the regular rate of VAT is 17.5 per cent; however, supplies of books, publications and posters have a zero VAT rate. Fundraising events can also be exempt from VAT.[46] Additionally, museums and galleries that do not charge admission fees are able to claim the VAT back on their expenses.[47]

In Ireland, artists receive a number of concessions, compared to the normal 21 per cent VAT that applies there.[48] A reduced rate of 12.5 per cent applies to sales of artistic works from a registered trader, and to admissions to artistic and cultural exhibitions. Furthermore, a zero VAT rate applies to the sales of books periodicals and exhibition publications, and to the promotion of, or admission to, live theatrical performances.[49]

It should be highlighted that an adverse consequence of allowing such concessional GST treatment is the potential increase in complexity, putting pressure on raising the overall rate of GST due to a narrower base

Transfer of art in lieu of payment of tax

A number of jurisdictions allow taxpayers to transfer property, including works of art, in lieu of payment of different taxes, such as estate tax. Such in lieu of payment systems can be beneficial to taxpayers, as they effectively act as a ‘tax credit’ system compared to a ‘tax deduction’ system, and thus are more valuable.[50] Australia does not currently provide for in lieu of payment transfers.

In the United Kingdom the acceptance in lieu system[51] enables taxpayers to transfer works of art and other heritage objects[52] into public ownership in full or part payment of inheritance tax.[53] In 2006, the United Kingdom gained art works and heritage items to the value of 25.5 million GBP under this sch Ireland has a broader system that allows for the payment of a number of taxes (such as income tax, corporate tax, capital gains tax, capital acquisition tax) through the donation of heritage items to certain approved bodies.[54] Furthermore, Ireland provides that works of art on display in public places become exempt from the inheritance and CGT after seven years.[55]

The Mexican tax system allows artists such as painters and sculptors to pay their annual tax obligations with their own art work. For an art work to be accepted in lieu of payment of tax, it must meet a quality test determined by a panel of experts. In 2003, only 128 art works were accepted under this system. If an artist’s work is rejected three times, then the artist must pay their tax in cash.[56]

Accepted works are then either displayed at the Finance Ministry’s Museum in Mexico City or at other museums in the country. A benefit of this system is that it can help museums in funding the purchase of modern art work, as it has been observed that the bequest of artworks is ‘absolutely essential to museums’ as they lack significant acquisition funds.[57]

Similarly, since 1 January 1997 Dutch inheritance tax can be paid by transferring art objects of cultural significance to the Netherlands or whose sale outside the Netherlands would mean a cultural loss to the country. For such art work transferred to the government, the reduction of inheritance tax is 120 per cent of the value of the art work.

Deferred gifts

Some overseas jurisdictions have mechanisms that allow for either deferred or fractional gifts to occur over a period. These deferred gifts can occur while taxpayers are alive or after death through their estates. The closest Australia has to a deferred gift is the Cultural Bequest Program through a will, as it requires pre-approval by the Minister for Communications and Arts.[58] Also, under the Cultural Bequest Program, a fractional gift can be made which reduces the quantum of the tax deduction.

Deferral or fractional gift mechanisms operating in the United Kingdom and the United States are outlined below.

7.1 United Kingdom

It is possible to get conditional exemption from inheritance tax and CGT in the United Kingdom, where qualifying heritage ‘pre-eminent’ assets are given public access (known as ‘in situ’). The conditions required to obtain this exemption are that:

  • the goods are preserved and kept in the United Kingdom;
  • reasonable public access to the goods is made available; and
  • the availability of such public access is publicized.

In these circumstances any tax is ‘deferred’, as opposed to totally exempted. In the circumstances that the owner sells the asset or ceases to observe the conditions, then the deferred inheritance tax become payable.[59]

This conditional exemption from inheritance tax of certain pre-eminent objects on the death of the owner has been credited for keeping many art works within the United Kingdom.[60] However, there has been criticism due to the increase of the criteria of eligible goods from ‘museum quality’ to ‘pre-eminent quality’,[61] and that objects need to be accessible to the visiting public without prior appointment

7.2 United States

The United States has a number of mechanisms that allow taxpayers to make fractional or deferred gifts to charities. These can be advantageous for both donor and recipient. In addition to the tax benefits, the deferred gifts can provide some certainty or income while the donor is still alive.[63] Furthermore, donors are able to claim tax deductions during their life, compared to if the donation was made via their estate.[64] For the receiving donee such deferred gifts can increase certainty, as many of the deferred gifts are irrevocable.[65] In comparison, if gifts are made via taxpayers’ wills, it is possible for taxpayers to alter their will prior to death.

Outlined below are the deferral mechanisms of fractional gifts, retained life estates, charitable remainder trusts, charitable lead trusts and pool income funds.

7.2.1 Fractional gifts

A fractional gift describes when the taxpayer retains some right or interest in the property donated. For example, a taxpayer may initially donate one-quarter of a piece of art to a gallery, meaning the piece of art is displayed for three months a year at the gallery and for the remaining nine months is part of the taxpayer’s private collection at home.

For such a fractional gift in the United States the donor can claim a tax deduction in the initial year, provided the art work is fully transferred on the earlier of 10 years or the donor’s death.66 From 2006, the tax deduction for the donor follows each fractional gift:

  • Initial fractional gift: percentage of fair market value of the artwork gifted.
  • Subsequent fractional gifts: percentage of the lesser of:
    • Fair market value at date of initial gift;
    • Fair market value at date of subsequent fractional gift.67

If the time limits imposed to fully gift the artwork are not met, then the value of earlier fractional interest deduction are recaptured (plus interest)

7.2.2 Retained life estate

Another mechanism to make a deferred gift is retained life estates. A retained life estate is a contract under which the donor transfers property to a charity on the proviso that the donor (or other named beneficiary) should remain in the residence for life. If the donor can claim the property as a personal residence, then the donor is allowed to claim an immediate tax deduction to the value of the charitable remainder interest. Also, as the donor’s estate has been reduced, the estate tax on death is reduced.

7.2.3 Charitable remainder trusts

Yet another deferral mechanism in the United States is a charitable remainder trust. This is established by transferring assets to a trust, with the donor (or other beneficiary) receiving income from the trust for life or up to 20 years. At the death of the donor or last income beneficiary, the corpus69 of the trust is distributed to a charity.[70]

The are two types of charitable remainder trusts, being:

Annuity: This describes an irrevocable donation of cash or securities to a trust for which the donor[71] receives, in return, income payments (monthly or quarterly) for a certain term or for life. The amount of the income is determined at time the annuity is set up,[72] and may either start straight away or be deferred.[73]

Unit trust: which provides a variable income based on a fixed percentage of at least five per cent to no more than 50 per cent of the net fair market value of the trust’s assets.

On the establishment of a charitable remainder trust, the donor receives a charitable income tax deduction equal to the net present value [74] of the remainder interest to the charity.[75] Any excess deduction can be carried forward for five years. Also there is CGT deferral on the appreciated assets contributed to the trust.

While beneficiaries’ are assessable on the distributions from the trust, the likely estate tax on the taxpayer’s death is decreased to the lower amount of assets held. However, there are concerns about abuse of this system and the complexity that it can involve.[76]

7.2.4 Charitable lead trusts

Another trust utilized in the United States to facilitate deferred gifts is known as a charitable lead trust. This type of trust arises when there is a irrevocable transfer of assets to a trust that pays income annually to a charity during the life of the trust. At the end of the trust (which is usually after ten to twenty-five years) the corpus plus retained income reverts to the donor, or the donor’s beneficiaries.[77]

The donor establishing a charitable lead trust is entitled to an charitable income tax deduction for the present value of the total income the charity will receive. The trust itself may have capital gains tax liability on any asset transferred from it.

7.2.5 Pooled income fund

Another deferral mechanism is a pooled income fund which involves various donors gifting to a fund, which then invests to the benefit of the donors. This provides to the donors the right to receive a variable income for life.[78] Each donor’s proportional share of all assets held in the fund passes to a charity when the donor dies. The donor is allowed an income tax deduction in the year of the contribution to the fund based on the present value of the expected remainder interest of the gift.[79] Income received by the donor each year is assessable. Also the transfer of assets is disregarded for CGT purposes and since the donor’s estate has deceased the likely estate tax is reduced.

Other tax concessions

There are a number of other tax concessions provided to the arts in foreign jurisdictions which are similar to those already provided for in Australia. Some of these are outlined below, and include income averaging, donations of cash, intermediary bodies, inflated prices, donation of cultural and non-cultural goods, volunteering, purchase of goods and testamentary gifts.

8.1 Income averaging

To adjust for the income fluctuations that artists can experience, a number of countries, including Germany, the Netherlands and the United Kingdom, provide income averaging to artists similar to that provided in Australia,,.

8.2 Donations of cash

A person while alive can contribute to the arts in a number of ways, including donations of cash, donations of goods or property, donations of time (volunteer) and the purchase of services or goods. The tax treatment of these contributions will depend upon certain factors, particularly if the art body is regarded as a non-profit or charity.

In terms of donations of cash to charities, the United Kingdom, the United States and Canada have mechanism worthy of consideration.

8.2.1 United Kingdom

The United Kingdom has a number of tax incentives to facilitate taxpayers to donate cash to charities such as Gift Aid, payroll giving and tax form giving.

Gift Aid is the United Kingdom’s formal donation system[80], which requires the donor to make a declaration that they wish the donation to come within the Gift Aid system. If this occurs, then Gift Aid provides tax benefits for both the donor and the receiving charity, for donations of any size:[81]

  • Donors on the highest tax rate can reduce their tax payable by the difference between the highest tax rate (40 per cent) and the basic rate (20 per cent) of the donation amount multiplied by 1.20.
  • In addition to receiving the donation, the donee charity can claim a top-up payment from the Tax Office[82] of 25[83] per cent of the donated amount.[84]

Furthermore, entrance fees charged by charities (such as admission to a gallery) can come within Gift Aid provided the fee is 10 per cent more than the normal admission fee or entitles the donor to admission over a 12 month period.[85] However, a criticism of the Gift Aid system is the administrative burden on charities, including the requirement to obtain a taxpayer declaration.[86]

Although Australia provides for a tax deduction for donations made to Deductible Gift Recipients (DGR), it does not provide for a top-up payment to match the donation. To facilitate more regular donations, the United Kingdom has enabled employees of participating employers to make regular pre-tax donations to nominated charities through their payroll systems.[87] For the donor (employee) since their wages are decreased their employer withholds less income tax, thus reducing their tax burden. Unlike donations made pursuant to Gift Aid, the receiving charity is not entitled to a ‘top-up payment’ for donations received through payroll giving, although charities have improved certainty in terms of the money they are receiving.[88]

Nevertheless, the payroll giving system has been described as failing ‘to gain traction amongst companies and employees’[89] as after ten years of operation only three per cent of employees are involved.[90] However, in the 2007 tax year the number of employers involved rose by 39 per cent which has been in part attributed to a grant scheme to small and medium employers of 500 GBP to set up a payroll giving system, as well as matching payment of 10 GBP for each employee donation for six months.[91] Australia also has introduced a similar payroll giving system, the Workplace Giving Program, which has over 200 organizations registered.

Another mechanism in the United Kingdom to facilitate donations is that from April 2004 self employed taxpayers on their tax return can elect that their tax rebates be paid to a charity of their choice, rather than be refunded back to them. [92] There is currently no similar mechanism on Australian tax returns.

In the United Kingdom, a certain percentage of money raised through lottery is allocated to a fund which is then distributed to a number of sectors. This Heritage Lottery Fund, not technically a tax concession, has been described as an important source of money for the arts sector; however this has decreased recently due to money being diverted to the United Kingdom’s preparation for the 2012 Olympic games. In Australia, the taxes raised by various state governments on gambling are in part redirected to community projects.

8.2.2 United States

In the United States cash gifts to charities are deductible, and for any gift over $75 the donor must deduct the fair market value of any tangible benefits received in exchange for the gift.[93] If the donor is prevented from claiming a full deduction,[94] then any excess deduction can be carried forward by the taxpayer up to five years to reduce future assessable income. [95] The United States also has an established payroll giving system to facilitate donations to charities.[96] In terms of cash donations, in Australia taxpayers can elect to spread their donation deductions over five years.[97]

8.2.3 Canada

In Canada, if a receiving art body qualifies as charity, then a private donor is entitled to a tax credit to a maximum of 20 per cent of taxpayer’s income during the year for any donations made.[98]

8.3 Intermediary Bodies

Another technique used in jurisdictions is to provide tax rules that allow for intermediary bodies to act as facilitators between individuals and art bodies (and other charities). Some of the intermediary bodies that operate in the United Kingdom, the United States and Ireland are outlined below.

8.3.1 United Kingdom

Intermediary mechanisms utilized in the United Kingdom include charitable accounts, private foundations and the Institute of Fundraising.

It is possible for taxpayers in the United Kingdom to set-up charitable accounts, such as the Charities Aid Fund (CAF) Charity Account. With this type of bank account, money is distributed on to nominated charities. Donations to a charitable account are deductible to the taxpayer, although there is normally an administrative fee for running the account of around 4 per cent, which reduces the amount received by the nominated charity.[99] Australia does not have a similar bank account system to facilitate donations.

Other intermediary mechanisms in the United Kingdom are private foundations and charitable trusts. In these circumstances, donations to the private foundation can be tax deductible for the donor, and the private foundation pays no tax on investment income, no corporate tax and no inheritance tax. Such a private foundation would either support other charities or provide services itself. This system is similar to Australia’s Prescribed Private Funds which was introduced from July 2001.

The Institute of Fundraising is an intermediary body operating in the United Kingdom. The Institute is the professional membership body for fundraising, and its mission is to support fundraisers through leadership, representation, standards setting and education. For example, the Institute has published a number of booklets to support small and medium charities in making better use of tax-effective giving, such as ‘Making Giving Go Further: The Definitive Guide to Tax Effective Giving’’. An institution within Australia that provides similar assistance with a focus on the arts is the Australian Business Arts Foundation (AbaF).[100]

8.3.2 United States

The intermediary mechanisms in the United States include donor advised funds, social venture partners, venture philanthropy and private foundations.

The United States’ donor advised funds are vehicles that allow for the pooling of charitable giving, with donors giving to the fund recommending who is to receive grants from the fund.[101] These donor advised funds are treated similarly to charities, in terms of donations made to them, and are not subject to excise tax on investments.[102] This facilitation of donations is one of the functions which the AbaF provides in Australia, although it is not bound by the donor’s preference to ensure that the donation is tax deductible.

Other intermediary bodies that enable pooling in the United States are social venture partners[103] which allow for the pooling of money and volunteer time. Social venture partners then decide which charities will receive the money and volunteer time. Similarly, venture philanthropy views charities and social enterprises as investments in need of capital and advice to achieve sustainable growth,[104] the overarching goal being that the advice offered by venture philanthropist should make their financing of the charity go further, and therefore have greater impact. It should be noted that ‘planned giving’ is the fastest growing type of philanthropy in the United States, representing 40 per cent of all fundraised income.[105] In the United States the majority of charitable donations are of the planned variety with 79 per cent of American households having written cheques to charitable organization.[106] In Australia the notion of venture philanthropy is in its infancy and there are no particular tax concessions to encourage it, compared to venture capital investments.

Another intermediary mechanism, similar to the United Kingdom, is that it is possible to set up private foundations or charitable trusts in the United States. In such circumstances:

  • Donations to the private foundation can be tax deductible for the donor.
  • The private foundation pays no tax on investment income, no corporate tax, no inheritance tax.[107]
  • The foundation is required to distribute five per cent of its asset annually.[108]

8.3.3 Ireland

Individuals and companies can make tax deductible gifts to the Minister of Finance for use by the Exchequer, which can in turn be used towards artistic projects. Also the Business Council for the Arts was set up in 1988 to develop and promote business sponsorship of the arts. It achieves this by providing corporate in-house training to individuals from arts organizations to assist artists and arts managers to be more business-like.

8.4 Inflated prices

Another way contributions can be made is through inflated prices being paid for goods or services from a charity. In some jurisdictions receiving back a benefit due to a contribution can deny a tax deduction totally, while some jurisdictions just reduce the quantum of the tax deduction. Only recently in Australia were the tax rules relaxed to facilitate a tax deduction for inflated prices paid at charity dinners and auctions.[109]

Gift Aid in the United Kingdom is designed to apply only to donations where no material benefit is received in return by the donor. However, to allow the receipt of some minor benefits, guidelines specify that benefits are immaterial if the amount of donation is:

  • 0 to 100GBP: Benefit immaterial if up to 25 per cent of donation.
  • 101 to 1,000GBP: Benefit immaterial if up to 25GBP.

Greater than 1,000GBP: Benefit immaterial up to the lesser of 5 per cent or 500,000 GBP.[110]

8.5 Donation of Cultural goods

The tax treatment of donations of cultural goods can provide motivation for their giving, particularly if it reduces the imposition of inheritance or estate taxes. In Australia it is possible to claim a tax deduction in restricted circumstances under the Cultural Bequest Program, as well as the transfer being disregarded for CGT purposes.

8.5.1 United Kingdom

While there is no tax deduction for gifts of art to museums in the United Kingdom,[111] this is encouraged through the douceur[112] system which exempts private sales113 of pre-eminent heritage items to listed galleries or museums from CGT and inheritance tax.[114]

Due to tax not applying to such a private sale, the seller can sell for a lower price. For example, if the seller’s sale was going to be subject to tax, then the seller would demand a higher price to enable the seller to fund the tax. For the acquiring gallery or museum, the douceur system is advantageous as they do not have to fund a higher price. Interestingly, it is the practice that this ‘tax saving’ on price is shared between the seller and buyer, with the buyer paying a slightly higher price than otherwise. Generally, the buying museum gains by paying the market price less 75 per cent seller’s tax saving. Sellers gain as the amount they receive is not liable to tax, which means they are ahead, compared to selling at market and having to pay tax.[115]

A similar douceur system does not apply in Australia; however, it is possible, if the art work was donated rather than sold, that a tax deduction will be available, although with a deemed capital gain.

8.5.2 United States

In the United States, if there is an outright gift of art work to a charity then it is possible for the donor to claim a deduction. To determine the amount of the deduction it is necessary to consider whether the art work is held on revenue or capital account by the donor:[116]

Revenue account:[117] The tax deduction is the lesser of cost basis or fair market value.[118] Capital account and satisfies ‘related use’ of the recipient charity:119 The tax deduction is fair market value.[120]

Capital account and does not satisfies ‘related use’ of the recipient charity: The tax deduction is the cost basis.[121]

If the total deduction is not claimable in the contribution year, any excess deduction can be carried forward for five years. In response to concerns that the appraisals of market value have been inflated, integrity measures have been introduced.[122]

8.5.3 Canada

Taxpayers can claim a credit for donating property that is of ‘outstanding significance and national importance’ to Canadian institutions and public authorities approved by the Minister of Canadian Heritage.[123]

8.5.4 Japan

In Japan an individual or corporation that transfers land designated as an important cultural property together with its building(s) or land designated as historical site or place of scenic beauty to the national or local government or specified museums, then taxpayer is entitled to a special deduction up to 20 million or loss of $20 million for corporations.

Also inheritance tax is not imposed on donations of inherited properties or the like to corporations that mainly aim to disseminate the arts or to protection cultural properties.[124]

8.6 Donations of non-cultural goods

Similar to the Australian situation, there are some tax concessions for the donation of non-cultural goods, including shares in listed corporations and land, in a number of jurisdictions. However, in the Australian circumstance while a deduction for the donation may be available there can still be a resulting capital gain that reduces the effectiveness of the deduction. In comparison, other jurisdictions allow the tax deduction and disregard the capital gain.

In the United Kingdom, when shares in a public corporation, land or buildings are donated to a charity, then the donor receives two concessions:

The capital gain on the transfer is disregarded;[125] and

A tax deduction for the market value of shares plus cost of transfer less any consideration given by the charity for the transfer.

Similarly, in the United States deductions are available for the transfer of listed shares[126] and land[127] to a charity:[128] Also, in the United States, it is possible for individuals to claim the fair market value of gifts of clothes and household goods as a tax deduction.

In Canada, rather than a tax deduction, only 37.5 per cent of the gain for charitable gifts of publicly traded shares is included in a taxpayer’s assessable rather than 75 per cent.

8.7 Donations of time (volunteering)

As in Australia, the ability for volunteers to claim tax deductions for volunteer work for a charity is restricted. While the actual time spent by a volunteer in the United States cannot be claimed as a tax deduction, some of the out-of-pocket expenses incurred during the course of charitable volunteering such as petrol costs or overnight accommodation can be claimed.[129] While people in the United Kingdom cannot claim their time volunteering as a tax deduction, if they do it as an employee, then their employer will be able to claim the wages paid as a business expense.[130]

8.8 Purchasing services or goods

Another way that people can support the arts is through the purchase of goods and services. In Australia, the purchase of art work is likely to be classified as a collectible CGT asset and thereby subject to special rules that quarantine losses and exclude certain non-capital cost from being added to the cost base.

While not strictly a tax concession, the government in the Netherlands provides for interest free loans for the purchase of modern[131] Dutch works of art from selected art galleries.[132] The art work must cost between 1,000 NLG and 15,000 NLG. This scheme has been praised for assisting artists’ economic situation and being cost-effective for the government to administer. However, it has been criticized on equitable grounds as generally it is high income taxpayers who utilized the scheme.[133]

In Singapore the Public Art Tax Incentive Scheme encourages more private organizations and individuals to participate in the areas of donating, commissioning, displaying and maintaining public art. Under this scheme a double tax deduction is available for the donation of public art or commissions to an approved recipient on the appraised value of the artwork. Alternatively, existing public art belonging to the state can be adopted by individuals or corporations. The adopters have to pay for the maintenance of the art work but can claim a double tax deduction for this expenditure. Also a double tax deduction is available for the installation and maintenance costs for the display of owned artwork.

8.9 Individuals (dead) – testamentary donations

In Australia, gifts made via a deceased’s estate normally are not tax deductible unless they are part of a cultural bequest.[134] A number of other jurisdictions do allow deductions, as well as such donation reducing the imposition of inheritance taxes.

For example, in the United Kingdom gifts to charities made via a will are exempt from inheritance tax. In the United States a charitable bequest[135] to a charity via a deceased’s will, means that the deceased estates is entitled to tax deduction for estate tax purposes. Also, in the United States a taxpayer can designate that a charity is the owner and beneficiary of the taxpayer’s life insurance. Therefore, on the death of the taxpayer, the charity receives a payment under the life insurance policy, and allows the deceased’s estate to claim a tax deduction.[136] Furthermore, it is possible for a taxpayer to name a charity as a beneficiary of a remainder interest in their superannuation savings.[137] This enables an income tax deduction, and a reduction of the estate subject to estate duties.

Film tax concessions

Similar to Australia, a number of jurisdictions have provided extensive tax relief for film investments. For example, in Ireland deductions can be made for businesses donating funds to qualifying Irish companies producing eligible or approved films. The maximum amount is 80 per cent of the actual investment made cap to 31, 750 Euro.[138]

Recently, in the United Kingdom (commencing 30 September 2007), new film tax concessions were introduced. These provide that:

  • Qualifying films (with production budgets up to GBP 20 million) a guaranteed minimum benefit worth 20 per cent of qualifying production costs where they spend 80 per cent or more of their budget in the United Kingdom
  • Qualifying firms (with production budgets of GBP 20 million or more): a benefit typically worth 16 per cent of qualifying production cost where they spend 80 per cent or more of their budget in the United Kingdom.[139]

10 Concluding observations

Given the international comparisons between Australia and the studied jurisdictions made in this 2nd Report, some initial observations can be made.

While the exempting of artists’ income has been implemented in a number of jurisdictions, particularly Ireland, such a system would increase complexity and create inequities amongst taxpayers. It should be recalled that Australia allows artists to average their income to ‘smooth’ out their income, which can be subject to great variations from year to year.

The availability of tax credits can be more valuable compared to deductions. A way that this could be introduced in Australia is be expanding the film production offset to other artistic endeavors, such as the Canadian system. While this would apply to art bodies producing such work, artists should benefit through greater production of their work.

Australia currently enjoys a low rate of GST compared to other countries, and the deeming of artistic supplies as GST Free would narrow the tax base and put pressure to raise the overall GST rate. Furthermore, artists and art bodies would still be required to be GST registered to be able to claim back the GST input tax credits in their expenses.

There is some appeal in the transfer of art in lieu of payment of tax, although if made via the Tax Office this could increase the administrative and compliance cost burden. An alternative is that artists could donate their work directly to a gallery and then for those artists to claim the market value of the donated piece as a tax offset (or a tax deduction). This system would have less administrative burden, galleries could choose whether to accept a piece or not. The biggest problem would be ascertaining the valuation of the work. Currently in Australia there is little incentive for artists or art dealers to donate their work, as their denotation deduction is limited to the cost of the piece rather than the market value of the piece.

The implementation of a deferral and/or fractional gifts could be a viable reform, as this allows taxpayers to implement a gift during their life time while still enjoying part of the gifted asset. This can provide some certainty to the taxpayer, such as receiving income while alive and some acknowledgement of the gift. Particularly, fractional gifts and charitable remainder trusts deserve greater scrutiny.

The operation of estate taxes and death duty can be pivotal in some overseas jurisdictions to act as catalyst for gifting to reduce the exposure to such taxes – although this is not certain. All Australian states abolished estate taxes in the in the 1970s and 1980s. The closest Australia now has to an estate tax is CGT which commenced in 1985.[140] However, for assets transferred via a taxpayer’s will to beneficiaries any potential exposure to CGT is deferred.[141] It is not until the beneficiary disposes of the inherited asset (which could be a number of years) that a CGT obligation will arise. Therefore, unlike some of the foreign jurisdictions studied with estate taxes, the tax triggering point does not arise at death. Rather than an estate tax being introduced in Australia,[142] the way CGT applies to inherited assets could be altered so that CGT liability could arise when assets are transferred to a beneficiary. The bringing forward of this taxing liability may then trigger charitable donations to reduce the beneficiary’s tax exposure.[143] Of course this would be a politically sensitive reform.

Other mechanisms in foreign jurisdictions that are worthy of further consideration include:

  • Introduction of a douceur system specifying that private sales (as opposed to donations) to certain museums or galleries (such as DGRs) are exempt from CGT.
  • As outlined in Report #1, disregarding the CGT on donated non-cultural goods in addition to their tax deductibility.
  • As outlined in Report #1, allow volunteers to claim associated expenses in undertaking volunteer work as a tax deduction.
  • Allowing taxpayers on their tax returns to indicate that any tax refund could be donated to a specified charity. This donation could then be claimed as a tax deduction by the taxpayer in the following tax year.
  • Consideration of the idea that gifts in Australia that result in the donor receiving some material benefit in return should still be deductible – although reduced by the benefit received. Rather than the current treatment of the entire gift being non-deductible (unless it is a charity dinner or charity auction).
  • Allow interest on loans to purchase art work and other non-capital cost of ownership to be added to the cost base of the collectible CGT asset.

[1] For example the presence of estate or inheritance tax, or tax imposed at both the State and Federal level.

[2] For example cultural differences may be instrumental as to whether taxpayers donate.

[3] Part of this data is compiled from McAndrew, C. (2002). Artists, taxes and benefits an international review, at p 10 -11.

[4] Da Silva, H. (1999). Report on the Situation and Role of Artists in the European Union. Brussels: European Commission.

[5] AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 4. For example recently France, Spain, Belgium and Germany have induced legislation to stimulate private philanthropy.

[6] Giving USA Foundation. (2004). Giving USA 2004. The Trust for Philanthropy of the American Association of Fundraising Counsel / The Center on Philanthropy at Indianan University: 36 per cent goes to religion,16.5 per cent to health and human services, 13.1 per cent to education and 5.4 per cent to the arts. In comparison, in the United Kingdom only about 16 per cent of donations go to religion.

[7] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 9.

[8] CAF. (2006). International Comparison of Charitable Giving.

[9] Saxon-Harrold, S. (1999) Giving and Volunteering in the United States. Independent Sector, Washington DC.

[10] National Council of Voluntary Organisations. (1999). Charitable giving: stability or stagnation? Research Quarterly 6 (July).

[11] Wright, K. (2002). Generosity versus altruism: Philanthropy and charity in the US and UK. In Civil Society Working Paper. London: Centre for Civil Society, at p 11.

[12 Wright, K. (2002). Generosity versus altruism: Philanthropy and charity in the US and UK. In Civil Society Working Paper. London: Centre for Civil Society, at p 23.

[13] Wright, K. (2002). Generosity versus altruism: Philanthropy and charity in the US and UK. In Civil Society Working Paper. London: Centre for Civil Society, at p 12.

14 Note this has recently been changed in terms of charity dinners and charity auctions.

[15] AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 11.

[16] For 2004, the unified credit is $555,880 toward an applicable lifetime exclusion of $1,500,000.

[17] This replaces the previous estate tax and capital transfer tax.

[18] This motivation is likely to increase in the future as the coming transfer to wealth between generations from the post-War generation is expected to be the largest in history. This impeding transfer may encourage donors to seek even more to reduce the potential inheritance tax burden on their heirs. AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 6.

[19] The Performing Artists Alliance. (2005). Tax Incentives for Nonprofit Charitable Giving 2005 [cited 29 August 2008]. Available from http://theperformingartsalliance.org/performingarts/tax_issue_center.html. Supporting the estate tax is the United States’ ‘gift tax’, which applies to gifts made during a person’s lifetime, but this does not apply to gifts to charities. A gift is when an individual gives property (including money) or the use of income from property, without expecting to receive something of at least equal value in return. Gift tax applies to annual gifts of greater than $11,000, and count against the lifetime gift exemption limit of $1 million for Federal estate taxes.

[20] AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 14.

[21] The term ‘art bodies’ describes organizations that act as collectors of artistic work (such as museums, libraries and galleries), and/or that facilitate and organize artistic endeavors (such as dance or theatre companies). These Art Bodies may be companies, associations, trusts or quasi-government bodies.

[22] The term ‘Artist’ is used to describe individuals who are creating art, whether the artists are authors of literary, dramatic, musical or artistic works; inventors; performing artists; or production associations. Artists may either trade in their own names (sole trader or independent contractor) or use a business form (such as company, discretionary trust or general partnership). Alternatively, artists can undertake their artistic endeavors as employees.

[23] Of course, if an artist is regarded as only carrying on a ‘hobby’, compared to a business, then any receipts derived will not be assessable income.

[24] Department of Finance. (2006). Budget 2006: Review of Tax Schemes: Volume III: Internal Review of Certain Tax Schemes, at p E30.

[25] The exempt applies to income received from the sale of work created by artists who live and work within the district.

[26] Payne, A. (2003). Role of Government Panel: The Cultural Industry. Ontario: Department of Economics, McMaster University, at p 10.

[27] Act 221. See Payne, A. (2003). Role of Government Panel: The Cultural Industry. Ontario: Department of Economics, McMaster University, at p 6.

[28] Also, the province of Nova Scotia has an exemption from tax rates for artists: Department of Finance. (2006). Budget 2006: Review of Tax Schemes: Volume III: Internal Review of Certain Tax Schemes, at p E30.

[29] Known as the Quebec Bill 108, amending the Income Tax Act 1995.

[30] 2001 figure.

[31] Standing Committee on Canadian Heritage. (1999). A Sense of Place, A Sense of Being. Canada: Government of Canada. McAndrew, C. (2002). Artists, taxes and benefits an international review, at p 23: ‘creators take the most risks as they carry out research and development for which there is no payment in time, and no assurance that there will be any remuneration upon completion.

[32] McAndrew, C. (2002). Artists, taxes and benefits an international review, at p 23.

[33] Pursuant to the Finance Act 1994.

[34] Residency status as defined by the Finance Act 1994, which includes a number of test such as ‘ordinary resident’ and ‘183 days’.

[35] Under section 195 of the Taxes Consolidation Act 1997 this income tax exempt also includes Arts Council Bursaries, Cnuas payments [This is annuities paid to artists.] and payment from sales outside Ireland. While income tax exempt they will still be subject to Pay-Related Social Insurance (known as ‘PRSI’) of five per cent.

[36] ‘Original and creative’ encompasses any unique work that is brought into existence for the first time as an independent entity by the use of the creator’s imagination. This can exclude non-fiction work unless certain further requirements are met. Also excluded would be books to be used by students in a course of study, advertising (written/musical). See: Citizens Information Board. (2008). Exemption from income tax for artists. Public Service Information 2008 [cited 10 October 2008]. Available from http://www.citizensinformation.ie/categories/money-and-tax/tax/income-tax/exemption_from_income_tax_for_artists.

[37] A work has cultural merit if its contemplation enhances the quality of individual or social life as a result of its intellectual, spiritual or aesthetic form and content. A work has ‘artistic merit’ when its combined form and content enhances or intensifies the aesthetic apprehension of those who experience or contemplate it.

[38] McAndrew, C. (2002). Artists, taxes and benefits an international review, at p 44: “The incentive also offers most to artist who are already commercially successful, as they sell more works and earn more copyright income, when these are arguable the artists who need it the least. It also means that those possibly most able to pay for public welfare through taxation avoid doing so, leaving the rest of the economy (locally and regionally) to the pay the difference.”

[39] The Arts Council. (2005). Artists’ Exemption Scheme: Budget 2006: The Arts Council, at p 1.

[40] Payne, A. (2003). Role of Government Panel: The Cultural Industry. Ontario: Department of Economics, McMaster University, at p 17.

[41] Ontario Media Development Corporation. (2006). Ontario Sound Recording Tax Credit (OSRTC): Information/Application Package. Ontario, at p 33. The maximum credit was previously $10,000 prior to 2000.

[42] Lloyd, T. (2005). A Guide to Giving, edited by Philanthropy UK. London, at p 2: “Qualifying expenditures include recording production costs, such as artists’ royalties, musicians’ session fees, graphics, digital scanning, programming and testing, production costs for music video.”

[43] Lloyd, T. (2005). A Guide to Giving, edited by Philanthropy UK. London, at p 2: “An eligible sound recording company is a Canadian-controlled corporation having carried on a sound recording business in Ontario for at least 12 months as a corporation or, prior to incorporation, as a sole proprietorship or partnership if the corporation’s taxation year ends after 11 May 2005…must earn more than 50% of its taxable income in Ontario for the preceding taxation year and more than 50% of the company’s business must be related to sound recoding activities.”

[44] Ontario Media Development Corporation. (2006). Ontario Sound Recording Tax Credit (OSRTC): Information/Application Package. Ontario, at p 33. Lloyd, T. (2005). A Guide to Giving, edited by Philanthropy UK. London, at p 3: “An individual is an emerging Canadian artist if, at the time they signed the recording contract, they are a Canadian citizen or permanent resident ordinarily resident in Canada and if they have not had a gold recording as an individual or as part of a group in the USA and either Canada, UK, France, Germany, Asia or Latin America. A group is an emerging Canadian group if at least 75 per cent of its members are emerging Canadian artists.”

[45] Ontario Media Development Corporation. (2006). Ontario Sound Recording Tax Credit (OSRTC): Information/Application Package. Ontario, at p 35.

[46] Hoefler, C. (1998). Higher Taxes Threaten Viability of Big Concerts. Music Business International.

[47] VAT Act 1994 (UK), section 33A.

[48] Even if an artist’s income is income tax exempt, this does not mean such income will not be subject to VAT.

[49] Exhibition publications have to be less than 8 pages in length.

[50] Refer to the prior explanation of the difference between a tax deduction and tax credit.

[51] Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich. Recommendations 26 and 27: that the system be extend to offset all forms of tax liability and not just tax liability on deceased estates, and owners of objects, during their lifetimes, be able to arrange offers in lieu of tax liabilities following their deaths.

[52] The scheme covers land, objects which are individually pre-eminent or form part of pre-eminent collections, and objects which are or have been kept in certain buildings.

[53] Inheritance Tax Act 1984 (UK), sections 230 and 231. Previously known as capital transfer tax or estate duty.

[54] However, there are caps that apply, as the market value from a single donor must be at least 75, 248 Irish pounds but not greater than 3 million Irish pounds.

[55] Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich, at p 58.

[56] Lyons, J. (2004). Sculpture or Tax Loophole? Mexico Demands More of Artists in ‘Pay in Kind’ Program. Wall Street Journal, 6 April, 14.

[57] Lyon, J, and M Cullina. (2007). Reflections on Deductibility of Items of Tangible Personal Property to Museums. Connecticut.

[58] Income Tax Assessment Act 1997 (Cth), section 30-230(5).

[59] Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich, at p 73.

[60] Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich, at p 26. The notice period of the intention to sell has been recommended to be increased to three months: Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich Recommendation 24.

[61] Finance Act 1998 (UK). The criteria for pre-eminence are (a) that the object has an especially close association with the United Kingdom’s history and national life; (b) that it is of especial artistic or art-historical interest, (c) that it is of especial importance for the study of some particular branch of art, learning or history, (d) that it has an especially close association with a particular historic setting.

[62] Previously, the access was interpreted as 100 days a year.

[63] The ability to generate some income back to the donor can be particularly beneficial for taxpayers who are asset rich but income poor.

[64] Another benefit is that the donor sees the benefit of the gift while alive: John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 55.

[65] So, once the donation is made, the donor cannot change his/her mind.

[66] If the donor does not meet the timeframe then the prior deduction for the fractional donations are recaptured plus interest plus 10 per cent tax: Pension Protection Act 2006 (US). Also the donor must own 100 per cent of the art work initially.

[67] This means that if there is an increase in market value of the art since the initial fractional gift the donor will not be able to claim an ‘extra’ deduction to recognise the increase in value.

[68] IRC 1986 (US), section 170(O)(3)(A).

[69] Corpus describes the capital property (assets) of the trust, compared to the ‘income’ in which may be generated by this capital property. At least ten per cent of the fair market value of each contribution of property of the trust must be set aside as the remainder interest in such property held by the trust at the date of contribution: IRC 1986 (US), section 664.

[70] Note the donor can reserve the right to terminate a beneficiary’s interest prior to the term stated in the trust. AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 20.

[71] Or nominated beneficiaries.

[72] This is determined on the basis of payout rates with reference to charitable gift annuity rates, taking into account mortality, a residuum of at least 50 per cent of initial gift, interest, expenses and other beneficiaries.

[73] AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, Part 2, at p 17.

[74] This ‘net present value’ will equal net fair market value of property transferred less present value of the annuity.

[75] In the year of transfer of assets to the trust, the donor is able to claim a charitable income tax deduction of between 30 and 70 per cent, depending upon an actuarial calculation based on the donor’s age and payout rate. This can be a complex calculation as it involves discounting the net fair market value of the assets transferred by the present value of the income that will be distributed to the beneficiaries of the term of the trust. There are unisex Treasury tables that assist in this discount calculation. Also a probability test applies to prevent tax deductions in the circumstances that the trust’s assets will be exhausted before the remainder interest is transferred to the charity. The deduction is allowed, up to 50 per cent of donor’s AGI if cash or 50 per cent if appreciated property.

[76] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 56.

[77] AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 21.

[78] The level of income depends upon the market performance of the fund and the administrating expenses.

[79] In the year of transfer of assets to the trust, the donor is able to claim a charitable income tax deduction between 30 and 70 per cent, depending upon an actuarial calculation based on the donor’s age and payout rate. This can be a complex calculation as it involves discounting the net fair market value of the assets transferred by the present value of the income that will be distributed to the beneficiaries of the term of the trust. There are unisex Treasury tables that assist in this discount calculation. Also a probability test applies to prevent tax deductions in the circumstances that the trust’s assets will be exhausted before the remainder interest is transferred to the charity.

[80] Introduced in 1990.

[81] Previously the donation had to be worth at lease GBP 250.

[82] The United Kingdom’s Tax Office is known as Her Majesty’s Revenue and Customs

[83] Prior to 6 April 2008 this was 22 per cent. Also from 6 April 2008 to 5 April 2011 there is a transitional 3p for every pound.

[84] This percentage is based on the basic individual tax rate. This is provided the donor has paid sufficient tax to cover the amount reclaimed.

[85] Campbell, B. (2008). Making Giving Go Further: The Definitive Guide to Tax-Effective Giving. Edited by Institute of Fundraising. 5th ed. United Kingdom: Institute of Fundraising, at p 16.

[86] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 47.

[87] Introduced in 1987.

[88] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 50.

[89] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 50.

[90] Institute of Fundraising. (2007). Institute of Fundraising launches payroll giving review: Press Release 13 June.

[91] This was a temporary inducement ending in 2007.

[92] Known as Self Assessment Form.

[93] Gifts over $250 require a written receipt from the charity.

[94] Up to 50 percent of the donor’s Adjusted Gross Income (‘AGI’). AGI is essentially the taxpayer’s gross income less deductions above ‘the line’: IRC 1986 (US), section 62. Deductions that occur ‘below the line’ are known as itemized deductions.

[95] Also, recently extended the tax deductibility for charitable gifts for taxpayers who do not itemise their returns. AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting at p 4.

[96] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 122.

[97] Income Tax Assessment Act 1997 (Cth), section 30-247.

[98] Performing arts companies, public galleries and museums.

[99] See: www.cfaonline.org

[100] The AbaF is a Commonwealth-owned corporation whose mission is to increase the private sector support for the arts, through sponsorship and business-arts partnerships.

[101] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 69.

[102] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 69.

[103] Originating in Washington in around 1997.

[104] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 81.

[105] Sargeant, A, S Lee, and E Jay. (2002). Major Gift Philanthropy – Individual Giving to the Arts. Oxfordshire: Centre for Voluntary Sector Management, at p 27.

[106] Saxon-Harrold, S. (1999) Giving and Volunteering in the United States. Independent Sector, Washington DC. In comparison, in the United Kingdom, planned giving accounts for just 20 per cent of donations: National Council of Voluntary Organisations. (1999). Charitable giving: stability or stagnation? Research Quarterly 6 (July)

[107] The foundation is subject to Federal excise tax on investment income (generally 2 per cent). [108] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 124. A private foundation may be regarded as a Private Operating Foundation, which describes foundations that use the bulk of their resources to provide charitable service of their own. In these circumstances, at least 85 per cent of the Foundation’s adjusted net income must be used for the active conduct of its exempt activity.

[109] Income Tax Assessment Act 1997 (Cth), Division 30.

[110] Campbell, B. (2008). Making Giving Go Further: The Definitive Guide to Tax-Effective Giving. Edited by Institute of Fundraising. 5th ed. United Kingdom: Institute of Fundraising, at p 18.

[111] John, R, R Davies, and L Mitchell. (2007). Give and let give: Building a culture of philanthropy in the financial services industry. London: Policy Exchange, at p 98.

[112] The term ‘douceur’ refers to the tax saving benefit shared between the buyer and seller.

[113] It must be a private treaty sale, in that the owner agrees to sell to one buyer compared to putting the item up for auction.

[114] Referred to as Schedule 3 Bodies, such as National Galleries.

[115] Goodison, N. (2004). Goodison Review: Securing the Best for our Museums: Private Giving and Government Support. Norwich, at p 76.

[116] The burden of substantiating non-cash gifts is on the donor. Most gifts (and all donated art) appraised at $5,000 or more require a signature from a qualified appraiser.

[117] This would include when the donor created it (ie artists own work) or trading stock of the donor. IRC 1986 (US), section 1221(d), 170(e)(1)(A).

[118] Deduction capped to 50 per cent of donor’s AGI.

[119] For example, will the charity use the gifted property in a way related to its mission or objectives (such as a gift of a painting to an art museum that will be exhibited as part of the museum’s exhibit).

[120] IRC 1986 (US), section 170(b)(1)(C). Deduction capped to 30 per cent of donor’s AGI.

[121] IRC 1986 (US), section 170(e) (1)(B)(i). For example a donation of a painting to the Red Cross would not satisfy the ‘related use’ test: Zale, L, and P Temple. (2008). Expert Advice on the Donations of Art to Charitable Organizations. Gift Planner’s Digest. Deduction capped up to 30 per cent of donor’s AGI. [122] Lyon, J, and M Cullina. (2007). Reflections on Deductibility of Items of Tangible Personal Property to Museums. Connecticut. If the donated goods are disposed of by the charity within three years of donation, then: (a) If within 12 months: donor may only deduct cost basis; (b) If within 3 years: the donor must include in their ordinary income (plus interest) an amount equal to the excess of: (i)The amount of the deduction previously claimed by the donor; or (ii) The donor’s cost basis in the property at time of donation. There is no adjustment if the museum makes a qualifying certification to the IRS.

[123] Cultural Property Export and Import Act (Can).

[124] Approval of the Minister of Education, Culture, Sports, Science and Technology required

[131] The work of art must have been produced after 1945.

[132] The gallery must have acquired the Dutch work of art directly from the Dutch artist. Galleries must have been in existence for at least three years, be open daily, achieve minimum sales of 75,000 NLG per annum and holds exhibits at least six times a year.

[133] McAndrew, C. (2002). Artists, taxes and benefits an international review, at p 56.

[134] A person through their will may direct that certain contributions known as ‘testamentary donations’ be made to artists or art bodies.

[135] Either the transfer of money or property.

[136] The amount of the donor’s charitable tax deduction depends upon to what extent the policy is paid –up: (a) If fully paid-up: Amount is the lesser of (i) donor’s cost basis of the policy, or (ii) how much it would cost to purchase an identical policy (this is known as the ‘replacement value’).(up to 50 per cent of donor’s AGI and any excess can be carried forward for five years); (b) If party paid-up: Amount is the lesser of (i) donor’s cost basis of the policy, or (ii) interpolated terminal reserve of the policy. (up to 30 per cent of donor’s AGI and any excess can be carried forward for five years) AEA Consulting. (2004). The Maecenas Initiative: A Review of Charitable Giving Vehicles and Their Use in the U.S. and Canada. New York: AEA Consulting, at p 26: “The interpolated terminal reserve equals an amount slightly larger than the cash surrender value of the policy plus a portion of the last premium paid before the gift is made.”

[137] In the United States this is known as ‘retirement plans’ and include employee benefit plans, individual retirement accounts, corporate saving plans, pension and profit sharing plans and annuities.

[138] Within the United States, 27 states have passed legislation creating tax incentives for film and related industries. Payne, A. (2003). Role of Government Panel: The Cultural Industry. Ontario: Department of Economics, McMaster University, at p15.

[139] Canada has a number of tax credits able for film, such as: Ontario Film and Television Tax Credit, which covers labour expenditures and production costs of film and television production activity conducted in Ontario. The Ontario Computer Animation and Special effects Tax Credit: which covers computer and special effects activities used in film and television production. And the Ontario Production Services Tax Credit which covers labor expenditures for film and television activities conducted in Ontario. Ontario Media Development Corporation. (2006). Ontario Sound Recording Tax Credit (OSRTC): Information/Application Package. Ontario, at p 35.

[140] Note that the state taxes of land tax and stamp duty could also be considered, in part, as an estate type tax.

[141] Income Tax Assessment Act1997 (Cth), sections 128-10 and 128-15.

[142] Which has been advocated by others on the presumption that donations to the arts would reduce the estate tax: Recommendation 8.27 of Australia 2020 Conference: Towards a creative Australia

[143] Note all assets transferred to a beneficiary will necessary expose the beneficiary to CGT. For example, if the beneficiary inherits the deceased’s main residence then this retains it exempt status for up to two years from date of death: Income Tax Assessment Act1997 (Cth), section 118-195. If the deceased’s asset was acquired prior to 20 September 1985, then the beneficiary cost base is the market value at date of death: Income Tax Assessment Act1997 (Cth), sections 128-15. If the asset was acquired by the decease on or after 20 September 1985, then the beneficiary inherits the deceased’s cost base of the CGT asset at date of death: sections 128-15.

Brett Freudenberg

Griffith Business School

Griffith University

Queensland, Australia

14 November 2008

Disclaimer:

The information and opinions in this Report were prepared for general information only, and do not constitute advice or the promotion of any particular course of action or strategy. The Report is based on the Australian income tax law as at the date of this Report. Given the general nature of this Report, it is important that people seek their own independent taxation advice, specific to their own circumstances.

Table of Contents

1 Executive Summary

2 Need for tax concessions

2.1 The level of giving

3 Exempt income for artists

3.1 United States: Rhode Island, Maryland & Hawaii

3.2 Canada: Quebec

3.3 Ireland

4 Tax credits to reduce tax payable for artists

4.1 Canada

5 GST concessions for artists or art bodies

6 Transfer of art in lieu of payment of tax

7 Deferred gifts

7.1 United Kingdom

7.2 United States

7.2.1 Fractional gifts

7.2.2 Retained life estate

7.2.3 Charitable remainder trusts

7.2.4 Charitable lead trusts

7.2.5 Pooled income fund

8 Other tax concessions

8.1 Income averaging

8.2 Donations of cash

8.2.1 United Kingdom

8.2.2 United States

8.2.3 Canada

8.3 Intermediary Bodies

8.3.1 United Kingdom

8.3.2 United States

8.3.3 Ireland

8.4 Inflated prices

8.5 Donation of Cultural goods

8.5.1 United Kingdom

8.5.2 United States

8.5.3 Canada

8.5.4 Japan

8.6 Donations of non-cultural goods

8.7 Donations of time (volunteering)

8.8 Purchasing services or goods

8.9 Individuals (dead) – testamentary donations

9 Film tax concessions

10 Concluding observations

 

Senior Lecturer - Taxation,Griffith University - Griffith Business School, Brisbane, Queensland, Australia