(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 1”
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 1” 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.
“2he 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.
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.