South African tax implications of paintings

Some people buy paintings for their aesthetic appeal, while others buy paintings for capital appreciation and trading purposes.

South African collectors of paintings who acquire paintings with a view to holding paintings for the long term must account for tax in South Africa as follows:

·        They do not pay income tax when they sell the paintings in future because they are not trading in the paintings.

·        They do not pay capital gains tax (CGT) when they sell the paintings as the paintings are so-called “personal use assets” which are exempt from CGT.

·        They do not need to charge value-added tax (VAT) when they sell the paintings. However, they will also not be able to claim VAT that they may have paid on the purchase of the paintings.

·        The paintings will fall into their estates for purposes of estate duty when they pass away. So, the value of the paintings may be subject to estate duty at the rate of 20% or 25% of the value of the painting, depending on the gross value of their estate.

·        If they donate a painting during their lifetimes, they may be liable for donations tax at the rate of 20% or 25% of the value of the painting.

A person who buys and sells paintings on a regular basis will be seen as a trader for income tax purposes, and would need to pay income tax on any profit realised on the sale of paintings. If that person’s turnover from the sale or paintings exceeds R1 million during any 12-month period, that person would need to charge VAT when they sell the paintings. However, the person will be able to claim VAT that they have paid on the purchase of the paintings.

The same would apply to an artist who makes and sells paintings for a living.

If a person during his or her lifetime donates, or upon his or her death bequeaths, a painting to a tax-exempt non-profit organisation in his or her will, the person may get an income tax or estate duty deduction.

An art dealer who buys paintings from the artist, and then on-sells the paintings must charge VAT on the sale of the paintings of the dealer’s turnover exceeds R1 million during any 12-month period. However, the dealer will be able to claim the VAT paid to the artist.

However, an art dealer who deals with paintings on consignment, that is, a dealer who sells the painting as the artist’s agent and not for his or her own accounts, only needs to charge VAT on the commission the dealer charges.

Unfortunately, owning and selling paintings is not a simple affair from a tax perspective. Art collectors and dealers should ideally obtain professional tax advice.

-          Ben Strauss | www.solarislaw.co.za