‘With friends like this’: Labor policies and the commercial, independent visual arts sector

Australian Aboriginal Art is much sought after internationally, but Australians overall and Aborigines themselves benefit little from it (and even less since Labor's Resale Royalty Scheme which is the subject of this article)

(This article is by Anne Sanders and John Walker, but published under my name pending their response to a confirmation email making them official Troppo authors)

Also see ‘With friends like this’… part II.

In June and July of 2010 the Labor government launched two policies directed at the commercial visual arts sector. These policies are hurtful, contradictory, confused and confusing. While it is almost impossible to get unanimity on anything from the independent, commercial sector, the government has surely achieved a first. When the question is asked “why is the government doing this?” the unanimous answer is “they must really hate us”. Let‘s start with the Australian Resale Royalty Scheme which started life on June 9 2010. Passage of the act was uncontroversial and there was a bi-partisan hope that the scheme would somehow deal with the problem of remote indigenous artists selling their art, in ignorance of its real current market value, to unscrupulous carpetbaggers. On the whole, both the Act and its technical implementation has been done as well as it could be.

Sadly there is a paradox at the heart of this scheme.

For what seemed on the surface a generous intention to improve the lot of indigenous artists has actually had the unintended consequence of complicating the first sale of their works; in some cases actually reducing the prices at which their works are sold and, worst of all, reducing demand for their works. Certain figures tell a story. The scheme so far has delivered $600,000 to artists (60% of which went to indigenous artists), yet in the same period the government has had to commit a total of $2.25 million to run the scheme. If inefficiency was the worst outcome of the scheme that would be a poor result, however the consequences go well beyond the cost / benefit equation. The scheme is distorting the art market itself and this result is reducing the amount of money that artists can earn from the sale of their work. It has created market distortions that are bad news for most working Australian artists.

Access Economics warned that the claim of net benefit to artists was: “based upon extremely unrealistic assumptions, in particular the assumption that seller and buyer behavior would be completely unaffected by the introduction of RRR [ARR]”

I will detail the way in which this has been achieved later in this piece but I want to point out that this unintended harm should not be news as it was anticipated by a respected Canberra-based economic consultancy. In 2004, Access Economics was commissioned to model the likely impact of an Artist Resale Royalty. In their report, Access Economics warned that the claim of net benefit to artists was: “based upon extremely unrealistic assumptions, in particular the assumption that seller and buyer behavior would be completely unaffected by the introduction of RRR [ARR]” and that, “Access Economics considers that the results of this analysis are both unhelpful and potentially misleading”.

Access Economics has been proved correct.

Following are the five main reasons why the resale royalty scheme has been counter- productive, particularly towards the very indigenous artists it was supposed to assist.

1. Buyers face a clear choice between investing in art that is affected, or art that is not affected. A percentage of buyers are choosing to not buy at all, switch to unaffected types of collectables such as ming porcelain or they are adjusting their offering price on first sale down to reflect the royalty to be paid on resale. The scheme is a hobbling of the competitiveness of artists affected by the royalty , particularly so in the case of indigenous artists.

The following figures are revealing. Resales of indigenous art at auction are in marked decline: last year’s auction sales totaled only $8 million (the lowest this century!), less than 10% of the total art resale auction market. Yet 60% of the value of resale royalties collected was paid to indigenous artists. The answer to this paradox is that many of the resale royalty payments that indigenous artists are receiving are in reality delayed payments for first sales, less costs. Uniquely, the indigenous market is an area where artworks are regularly bought from artists on a paid-in-full, up-front basis and then onsold. Because many indigenous artists sell their work on this wholesale-retail model, these artists have simply seen a reduction in their wholesale (the first sale) prices that matches or exceeds the royalties they eventually receive on the subsequent retail sale.

2. There are aspects of the scheme that are especially problematic for indigenous artists. The Royalty makes no allowance for costs.  The costs of bringing art from the remote communities to market are higher than those for much of the rest of the Australian art market. The lack of allowance for marketing costs is a particular disincentive to investment in the marketing of indigenous art.

3. Reducing the resale market affects the primary market.  A healthy art resale market is good news for artists’ first sales. If one of my paintings was to resell for much more than it was first sold, it is great news for me: it is a great sales pitch for more first sales and it raises the value of my back catalogue.

The effects of this anxiety have been particularly marked in indigenous art: drops of more than 50% in prices for some blue chip indigenous artists have occurred since the royalty’s introduction.

4. The biggest single negative of the Royalty scheme is the effect it has had on buyer confidence and buyer numbers. The hit to the market’s confidence derives mostly from the fact that: (a) it had little broad community support or need; (b) it was done without proper consultation; it took most in the sector by almost complete surprise; (c) the scheme was imposed by law hence, the scheme looks like government anti-market interference simply for the sake of it. Therefore, the scheme in itself has created an anxiety that the government has something in principle against buying and selling art. A percentage of buyers have simply decided that it is “all too hard” and have left the field altogether. The effects of this anxiety have been particularly marked in indigenous art: drops of more than 50% in prices for some blue chip indigenous artists have occurred since the royalty’s introduction. These drops in price greatly exceed the effects of the GFC on the non-indigenous art sector prices.

5. The scheme is an exemplar of the adage that special cases make bad law. Its effects are widespread, yet the problems it sought to address are isolated.

The perverse effect of the resale royalty on confidence and demand were set to be made far worse by the next Government policy announcement on July 10th 2010.

The resale royalty scheme now entered into a particularly bad marriage with the government’s changes to the rules which govern the purchase, storage and sale of art to Self Managed Super Funds (SMSF). The result is that the anxiety caused by the impact of the resale royalty has connected with a bigger and mounting anxiety about the effects of the government’s new restrictions on SMSF art collections, particularly as it applies to pre-existing collections.

“[T]he panel did not take the art sector’s concerns into consideration because its task was to review the superannuation industry and not all the industries around it”.

The genesis of the changes to art investment rules by SMSFs date from June 2010 when the Government released the Report of the Cooper Inquiry into Superannuation. It contained a bombshell, recommending that art be wiped entirely from all SMSFs. When asked why the enquiry had not consulted with the art sector, Cooper Review panelist Meg Heffron was reported as saying that, “the panel did not take the art sector’s concerns into consideration because its task was to review the superannuation industry and not all the industries around it”. Many were shocked by the fact that the then Arts Minister Peter Garrett knew nothing about the impact of the Cooper recommendation on art.

Labor was soon confronted with angry demonstrations by leading artists in a seat that was vulnerable to the Greens (previously safe Labor heartland occupied by outgoing Lindsay Tanner) According to a number of commentators including Marcus Westbury writing in The Age, Labor was faced with a real possibility of losing the seat of Melbourne because of anger over the damage that the Cooper recommendations would do. The Greens quickly condemned the Cooper recommendations and further condemnation ranged across the whole political spectrum from Katrina Strickland in the AFR and Michaela Boland in The Australian.  About three weeks before the election date, Labor announced that it would reconsider the recommendations. Marcus Westbury in The Age, 22 September 2010 wrote: “Until defused in the last few weeks, the role of art under the Cooper superannuation review threatened to boil over into a full-blown election revolt.”

After the election, the results of the government’s ‘defusing ‘ of the Cooper recommendations were released. It turned out to be spin. Instead of the open ban on art in SMSFs, the government opted for: you can keep art in your SMSF as long as it costs you significant annual fees and you must not look at it; you must not derive pleasure from your SMSF art investment. More importantly, these new rules apply to pre-existing collections. Pre-existing collections  have only 4 years to be either sold or moved to off-site, fully and separately insured, climate-controlled storage. This is a costly, onerous requirement. Art accountant Michael Fox estimates the annual storage costs to be between 2 to 5 per cent of the value of a collection. After 10 years this would add up to between 20% and 50% of the value of the collection. Most collections will be sold: for many there is no real choice.

The negatives, contradictions and harm of the two policies are multiplying in unpredictable ways.

1. Capital losses from the sales of artworks cannot be offset against capital gains from the disposal of other asset classes like shares and real estate. This contradicts the ARR scheme that provides a definition of artwork as a category of investment capable of being levied. However, the super art laws do not use the ARR definition of artwork and instead use the Income Tax Assessment Act definition with the effect of denying the capital loss relief on the sale of collections. Talk about having your cake and eating it too! This contradictory treatment of capital loss relief is central to understanding how the cross-purposes of the RR and super art laws have created a real feeling that the commercial art sector has been targeted for political reasons.

The resale royalty scheme is a levy on the value of the resale market. Obviously, the long-term viability of any resale scheme is predicated on a healthy resale market and yet the new SMSF policy is significantly reducing the net value of the indigenous resale market in a long-term way. In the words of Damian Hackett of auction house Deutscher and Hackett:  “in the past, I’d estimate that invoices made to Super Funds could reach 10 – 15% of auction sales, with many more bidders registered under SMSFs. We now have zero.  This is especially relevant to Aboriginal art.”

As is evident from these figures the super fund investment in art was, in reality, relatively small beer, harmed no one and gave support to indigenous culture. Again, this government policy on art and super looks political in motive rather than economically rational.

2 The rationale behind restricting the acquisition of artworks for SMSFs was that there was excessive growth in holdings of artworks. This was based upon risible estimates by the ATO. Incredibly, the estimates show total holdings of artworks and collectables increasing from $554 million in March 2010 to $678 million in March 2012.  This is a more that 20% increase at exactly the period when purchasing art for SMSFs effectively ceased. As is evident from these figures the super fund investment in art was, in reality, relatively small beer, harmed no one and gave support to indigenous culture. Again, this government policy on art and super looks political in motive rather than economically rational.

3 The new SMSF policy has started to create an indigestible glut of indigenous art for resale. The recent 28 May auction of Aboriginal Art from the Superannuation fund of William Nuttall & Annette Reeves only grossed $350,000, well below the estimate range of between $470,000 – $690,000. Mr Nuttall sold his super fund collection because the new rules are “ too onerous and expensive“.  This high quality collection was built up over decades by a respected, very knowledgable long-term dealer (Niagara Galleries, Melbourne) and is just the tip of the iceberg. The total value of indigenous art resales at auction in 2011 was only $8 million (the lowest this century). Obviously the total value of indigenous art that the government’s super rules will force onto the market is much more than the art market can cope with. The government is engineering a collapse in indigenous art.

4 Damage to the commercial gallery sector in which artists sell their works is mounting. The West Australian 31 May 2012, reports that three of Perth and Fremantle’s leading representative galleries will be closing and a fourth will cease trading for one year, leaving about 120, one quarter of WA’s high end exhibiting artists, without gallery representation. The effects of the super art ruling is a significant factor in these closures.

5 Minister for Superannuation, Bill Shorten, agreed to an amendment, proposed by the Greens in the Senate, that the new laws would not be enacted if they created a disincentive for super funds to acquire art. For a year now, the government has continued to blather that they are satisfied with the current situation and in that time, the damage continues to mount.

It is not surprising that most in the commercial art sector now firmly believe that this government is hostile and malicious in intention; further, that it is willfully destructive. The super fund tax concessions effectively acted as a support to indigenous art. This tax effective support did create the usual problem of oversupply leading to problems that needed correcting. However, the government removed this support overnight without any provision for a structural adjustment; a thoughtlessly cruel move. The combination of favorable investment status and the special nature of indigenous culture led many investors to assume that support for indigenous art was a safe, conservative investment akin to investing in a government cultural bond. The sudden requirement to either sell (with incurred costs of about 20%) or to store it at cumulative 10 years’ costs of between 20-50% of the value of a collection, without any provision for compensation or allowance for offsetting losses, is unjust. And, one month after introducing the resale royalty scheme, the government acted to greatly reduce the value of the resale market; a myopic move.

In February 2011, Minister Shorten agreed to a Greens amendment that called on the government to: “ensure that any conditions do not act as a disincentive for DIY superannuation funds to invest in Australian art. (General Business notice of motion no.167)”. The evidence that government policies are causing serious harm to the commercial art sector is irrefutable, yet the government does nothing about its promise. It is little wonder that most people in the commercial visual arts sector view this government’s refusal to act on a promise made at election and a promise made to parliament as intentional.

The government’s twinned policies have damaged confidence, reduced tax collections, reduced incomes, made the long-term viability of the government’s own resale royalty scheme more implausible and these policies are threatening to impose a damaging oversupply on the art market. They are costing artists, investors and the government alike. With friends like this, who needs enemies.

Post Scriptum

I have no professional or private involvement in the resale of art. Sales to SMSFs were not a significant source of income for me.

If anything Access Economics underestimated the intrinsic net negative effects on working artists of any resale royalties. The harm caused by such schemes takes the form of what doesn’t happen, and therefore the harm done is often not seen. When an artist, like me, sells a work for $10,000, I pay $4,000 to the costs of sales and marketing (through my representative agent) and retain $6,000 as income. In the case of a $10,000 resale, I would receive $500 (minus costs). If buyer nervousness about the resale royalty was to cause me to lose just one $10,000 first sale buyer, I would need the royalty payable on a total of $120,000 of future resales, just to recoup the lost income of that one primary market buyer.

An insightful paper, ‘Joining the Dots: the sustainability of the Aboriginal art market’, which addresses some of the deeper structural problems of the indigenous art sector, provides good background reading for those interested.

This entry was posted in Art and Architecture, Uncategorized by Ken Parish. Bookmark the permalink.

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.

25 thoughts on “‘With friends like this’: Labor policies and the commercial, independent visual arts sector

  1. I’ve got lots of sympathy with your first complaint – it seems to me that the problems were entirely predictable and indeed entirely predicted. Arts-types (which includes the arts bureaucrats responsible for this policy) often give we boring Gradgrindian economists a lot of stick, but they really should have listened here.

    I’m afraid I’ve got less sympathy with the latter complaint. So you’re saying the prices for paintings (not, BTW, just indigenous ones) were maintained by a tax lurk for those collectors wealthy enough to hide it in their SMSF, and are complaining that the lurk has now been closed. I think taxpayers should subsidise the arts (man cannot live by bread alone and all that) but let’s make the subsidy transparent, equitable and efficient rather than hidden away in tax evasion. And when we close a tax loophole we don’t normally give “structural adjustment” to the people dependent on that loophole.

  2. “The biggest single negative of the Royalty scheme is the effect it has had on buyer confidence and buyer numbers.”

    Ahh the zombie confidence fairy again, won’t that chick every stay down?

  3. The link for the Access Economics paper
    http://www.arts.gov.au/sites/default/files/pdfs/Viscopy_Access_Economics.pdf

    Derider
    I am with Ken Henry all special tax treatments are sus.
    That said why is it that SMSF investment in shares gets special treatment but investment in Rover Thomas does not?
    The people who have been most hit are indiginous.

    The super system did create problems for indigenous art , ending it is not a bad move. As for adjustment the people most hit are the Indigenous Art Centers .

    It is the large scale ,forced, expensive, fire sale of artworks bought perfectly legally years ago , that is wrong and bad.

  4. The term “art market” has always seemed to me a strange one.

    No transparency, full of middle men (middle persons?) , shonky dealings, gullible buyers, tax dodges, hype and schemes. Always complex schemes.

  5. fxh

    That is an man bites dog version of the reality . Nobody reports all the normal intelligent, passionate, hard working and honest stuff. In fact bad performers get cut very quickly in our part of world – if you really want to be bad there is a lot more money to be ripped in corporate and public life.

  6. Derrida
    This is off topic
    You have touched upon a related forty year old government created problem :
    transparent and equitable and efficient subsidy of individual projects is not possible . What it creates is Government appointed academies (arts councils) not a good result.

  7. John,

    Thanks for a great post. My sympathies are those of DD.

    The royalty tax scheme sounds like a debacle. The rule on SMSFs seems largely consistent with the ‘sole purpose’ test which is that SMSF investments should be for the sole purpose of investing for retirement. Saying you can’t look at the painting on your wall sounds particularly stupid, but so does saying that people can’t put their holiday houses into SMSFs. But both rules make sense both for standard anti-tax avoidance reasons and also because if permitted they’d lead all sorts of mugs to try to have their cake and eat it too with holiday homes and art that were bad investments.

  8. Ta
    Obviously its the retrospective aspect of the Super rules that has got everybody very worried … what justification???

  9. fxh
    That is an man bites dog version of the reality . Nobody reports all the normal intelligent, passionate, hard working and honest stuff. In fact bad performers get cut very quickly in our part of world – if you really want to be bad there is a lot more money to be ripped in corporate and public life.

    John – I don’t think so – Just look at the current case being played out here in Vic.
    Art “expert” employed full time by state gallery, allegedly uses “expertise” to enrich partner/sugar daddy in private gallery. They allegedly amass a fortune of around $50m just from trading in artworks. Yes $50M. If its even half true it points to a whole system of rorts and market distortion not just a “few bad apples”

    “IT MAKES me shudder to contemplate that they might have been able to generate $56 million out of the art market,” a seasoned Melbourne art dealer said this week of the recent Smith v Gould court case that has transfixed the visual arts industry.

    Geoffrey Smith, a former curator of Australian art at the National Gallery of Victoria and now executive chairman of Sotheby’s Australia, has sued his former partner, Robert Gould, owner of Gould Galleries in South Yarra, for up to half of the more than $50 million in real estate, art, cash and cars he claims the couple amassed during their 14-year domestic relationship that ended in 2004.
    http://www.theage.com.au/victoria/art-of-doing-business-20120608-201f6.html

  10. Fxh, I do not understand why some otherwise rational people become moralistic about art. I don’t wish to comment on a current court case, however if you really wanted to do big fraud in that period you went into leveraged buyouts, CDO sub-primes and brokerage fees for investments in Queensland holiday resorts; or you fiddled with the penny-dreadful share market, or laundered money at Randwick. A lot of questionable antics went on during the ‘bubble’. This article is about a resale royalty that seriously affects the competitiveness of artists that are afflicted by it and the forced sale of collections that were legally built up within SMSFs over many years by owners, the majority of whom would not otherwise sell them until they were heading for permanent care. What is the relevance of a domestic dispute involving mutual allegations of misbehaviour over assets got to do with the government’s policies on resale royalty and pre-existing SMSF collections?

  11. ??
    Calm down.

    I’m no more moralistic about art than I am about any market distortion. Thats all I was pointing out – there is a myriad of market distortion through Gov and ATO polices and little of it benefits artists.

    I’m not suggesting that the art world is any less moral than financial planners, real estate agents, union officials and academics. Or any more moral.

    Most of the “reforms” I see only add more opportunities for lurks, perks and rorts.

    The “domestic dispute” you refer to only seems possible in a crazily distorted market with sanctioned opportunities for arbitrage and boosterism by lack of transparency and the art market system where everyone makes money except the artists.

    • fxh – “where everyone makes money except the artists” – all of the professional artists that I know are well paid for their labour. Your quote sounds like the hyperbolic fantasy about exploited artists that underpins the rationale for a compulsory resale royalty. Making and selling artist is a costly and time-consuming activity. People who do not get paid give up. Van Gogh is a rare example of a really important artist who didn’t sell in his own short lifetime. There have always been artists like Rembrandt who found themselves old and out of fashion, but Rembrandt would not have been broke if he hadn’t lost vast amounts in speculative trading on spice ships and paying off an unmarried mother. If you do not get paid, you do have the time or the money to do the work.
      The people who buy my work are my fans. I love ‘em.

  12. John – I’m a bit like DD.
    I’m happy to see art, of all kinds, film, street, music, etc, get a bit of taxpayer support. How much and how and when is the harder question.

    Doing it through Super fund concessions or tax loopholes for the wealthy isn’t a good way as the benefit to artists is mostly just a theoretical trickle down effect. And it leads to all sorts of crazy distortions downline and upline.

    There is also the problem with taxpayer support of how do you separate the “worthwhile” artists from those who just want to be payed to undertake their hobby.

    FYI – I occasionally support a whole family of artists, musicians, filmmakers and their creative friends from time to time – I get no tax lurks. And none of them has ever had a grant or taxpayer support.

  13. fxh – no one is arguing about the merits of whether the Super concessions should continue or not. It is simply about the effective requirement to sell an awful lot of a long-hold, conservative type of investment into a depressed market in a very short period of time (now 4 years and dropping). Personally speaking, like Gustave Courbet, I believe that the one and only thing that a government can do for an individual artist is leave them alone. I support public funding of infrastructre such as exhibition venues etc but I firmly believe that it should be left to audiences to determine what is supported. Anything else always ends in academies. I have not applied for a government grant in more than 25 years. Regarding tax concessions, the government recently commissioned Harold Mitchell to report on ways of increasing tax deductible support to art (ie. philanthropy). Whether encouraging a view of art as a loss making charitable activity is a good policy for sustainability, is an interesting question. As always, Labor seems more interested in redistributing the cake than making cake.

  14. I’m with John W. If artists want academies they should bloody well fund them through sausage sizzles in front of Bunnings like everybody else.

  15. Pingback: Artist resale royalties : a strange loop | Club Troppo

  16. The Govt distorting a market? Maybe the art prices were distorted by SMSFs. This might be simply a market correction. That aside I think that the Govt shouldn’t interfere with the market especially with complex regulation. If SMSFs want to invest in art, rare coins, widgets or holiday houses, let them! The idea if for these funds to grow to provide for money in retirement. And the capital requirement of a SMSF needs to be 15-20 times the desired income. The few people that abuse the system and over-speculate will probably die penniless regardless. The alternative is that they invest in stocks, bonds and shares. Hey, now there’s a safe place to put your money!

    • 40 cent in the dollar deductions do remote careless buying of just about anything. Timbecorp alone cost investors 240 million , thats about twice the total size of the art resale market.

      The specific problem is that the new storage rules apply to all collections acquired prior to june 2010 and in the current market, the resulting forced sale of these collections by 2015 must end in lose/lose for all, so why do it?

  17. Debacle from the start.
    CAL the Copyright Agency Limited won the rights by tender to manage the resale royalty collection system, I know as I tried and tried to get a meeting with them several times after they were awarded the contract. I had part developed a globalartregister.com system to manage tracking of artwork sales so could save on development costs but for reasons unknown they wouldn’t even communicate.

    It was all very strange at the time of launch as I went to the so called public launch events (2 in Sydney) were they were asking for feedback but it was a sham, they would not return calls or enter into any correspondence, even not knowing myself or what I was about. Also NAVA (National Association of Visual Artists) calmed up, after several attempts i eventually forced a meeting with, but they wanted to discuss with CAL and then clamped up.

    What is it about this secret society when it comes to being awarded government funds.

    • Geoff
      on your site you state that the ARR is : “unable to be waived.”.
      This is not quite correct , Clauses 22 and 23 of the ARR act allow artists a case by case right to refuse consent to collection.

      This is because of the first sentence of clause 55 of our constitution.

      • Hi John,
        Yes you are quite correct, as you point out and as we were led to understand it, each artwork is a case by case to be waved from ARR collection and they could not opt out all together with one request. It may have been changed but I thought we covered that in…
        How to manage your royalty receipts and payments.
        Artist Step by Step.
        d. Alert that Royalty is NOT to be collected by CAL.
        I will change to make a little clearer anyway, thanks.

        • The ARR needs to be changed into a individual opt-in for individual artists choice, just like real copyright. In Copyrights both actual usage and collective management are purely matters for individual right holder choice.
          Restrictions of the exclusive rights of copyright such as mandated collective management, are permitted in community benefit situations -for example education libraries- if these restrictions can pass “the 3 step test” of the Berne convention. Essentially the test is: very clear community need and benefit , lack of workable alternatives and minimal side effects on right holders economic rights out side that special need situation.

          ARR is not copyright . However it is obvious that a scheme that benefits a handful of mostly dead and well of people, at some cost to the living, would not pass the 3 step test.

          In the UK ARR is part of Copyright law . However in a marvelous piece of double speak the the UK Government has stated that art is not a “reproduction” and therefore the UKs ARR does not need to pass the 3 step test over restrictions of exclusive rights in the case of the UK ARR

          Nice.

  18. CAL is a professionally run copyright organization I would expect that at the time they were running flat out trying to workout how to deal with something that is not copyright. Without CAL , labor would have had a total debacle by now.
    The “secret society” that you refer to is still getting about 700 thousand a year in funding.

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