Taxing Prize Money

Last Friday it was announced that Mitch Cairns won the 2017 Archibald Prize with his portrait of partner and fellow artist, Agatha Gothe-Snape. Media headlines throughout the weekend boasted that the young 30-something painter will take home a huge $100,000 in prize money. No one mentions that he could pay up to $25,000 in tax on this rare, probably once in a life-time win, nor that $25,000 is more than what he has, up till now, made annually as a full-time professional artist – the average income from arts related work is $15,300 annually [1]. Another fact that is not mentioned is that he has actually spent a lot more than $100,000 in paint materials, studio space, and other overheads throughout the last 10 years plus developing his practice to get to this point.

Although declaring the win as income in his next tax return is the last thing on his mind right now, I did manage to catch Mitch over the weekend for a chat about the tax implications of this win. He raised a good point: “if you place a bet on who will win the Archibald, you don’t have to declare those winnings in your next tax return.” Currently in Australia, the only way you can legally dodge tax is either through a gambling win; an amateur sporting race or game show; or if you’re lucky enough to benefit from a number of government schemes targeted at the top 20-30% of income earners in the country.

Previous Archibald recipient, Ben Quilty, who won with his portrait of Margaret Olley in 2011 says “it’s completely insane inequality.” Ben has spoken out about this issue in the past, noting that the Stawell Gift, Australia’s oldest and richest short distance running race of 120 metres is awarded each year with complete tax exemption due to its target contestants of young ‘amateur’ sportspeople.

Multi-award winning artist and former athlete, Sophie Cape says, “sport and art, though polar opposites, are both vital for the character and identity of a country and should be equally supported. The majority of both artists and athletes are struggling to make ends meet. Prize money should not be taxed.”

Wendy Sharpe, who won the Archibald Prize in 1996 says, “it is unfair and irrational that artists have to pay tax on prizes. How can this be justified?"

Five time Archibald finalist and winner of the 2015 Wynne Prize and Portia Geach Memorial Award, Natasha Bieniek, agrees; “it's completely unjust that prize money from a sports bet or lotto win is not considered taxable but a monetary prize awarded to an artist is. Where's the logic?”

The logic, if you can call it that, is in the concept that prizes are considered ‘ordinary’ income avenues for artists, even though most artists will never win a large monetary prize, some might win one or two prizes during their careers, others may receive several prizes, but it is relatively rare.

Recent recipient of the inaugural $100,000 Ramsay Art Prize, Sarah Contos says, “winning prizes in art happens perhaps once, maybe twice in an artists' career, yet every single day they are constantly working, whether at the studio or not. Art isn't a nine-to-five job, it’s 24/7. Time, energy and sacrifice makes an artist do what they do and to be recognised in their field with a financial reward should really be seen as extraordinary income. A recompense to the years of hard work that the artist has put into not only their practice but in creating culture and community.”

Megan Seres, winner of last year’s Doug Moran National Portrait Prize, the richest portraiture prize in the world, agrees that “prize money is awarded to an artist for their excellence and their contribution to the arts and society, it should not be seen as a business transaction.”

Heath Franco, winner of the 2015 NSW Visual Arts Fellowship (Emerging) adds “prizes for artists are not reliable sources of income. Winning a prize depends on so many factors outside of the artist's control and should be seen as a windfall gain. All practicing artists are paying regular income tax either through sales of their work or other jobs they must maintain to provide a liveable income. Monetary prizes are exceptional circumstances where exceptional rules should be applied.”

The government sees gambling winnings as a fortunate windfall, and allows players to keep the entirety of their winnings. Generally a prize is regarded as a personal windfall gain and not as ordinary income, unless you receive the prize because of, in respect of, or in relation to any income-producing activity [2] – such as carrying on business as a professional artist. Gambling, however, is not considered a profession by the ATO. It is worth noting that gamblers whose winnings would be most likely to have been based on skill – such as the case with a professional poker player for example, are not asked by government to pay taxes on their winnings [3].

In 2005 the Australian Tax Office (ATO) issued the Public Taxation Ruling: carrying on business as a professional artist (TR 2005/1). This ruling recognises that arts businesses typically have different characteristics to other businesses. For income tax purposes, artists who can demonstrate that they are 'in business' as a professional rather than a hobbyist, are able to claim their art practice expenses against all forms of income. This also means that artists are required to declare all sources of income, including grants, awards and prizes. For artists and their tax accountants it is important to understand the conditions contained in this Ruling in order to be able to act appropriately.

Arts Accountant Michael Fox explains that there are two tax issues artists face when they receive large amounts of prize money: “Firstly, income tax will be payable on the prize as it is considered ordinary assessable income. Secondly, GST may also be payable on the prize and may then force the artist to register for GST. In the Australian tax system, income averaging may mediate the first tax issue, but the imposition of GST on the prize may operate to have a greater impact and one that may catch artists unaware.”

Brian Tucker, Arts Accountant, explains the special professional income averaging (a concessional tax treatment) further, “the application of averaging would mean that if one-quarter of the prize would not push the artist up into the next threshold, then none of the prize would be assessed at the higher rate.” This is determined by other sources of income the artist has across that five-year period.

Multi-award winning artist, Tony Albert, raises another issue found with acquisitive art prizes. “After the gallery or representative takes their commission, which is up to 50%, income tax can take up to 50% of the balance (pending tax bracket), so the artist ends up with only a quarter of the original prize money.”

As part of measures to ensure a conducive environment for the visual arts in Australia, NAVA has made a number of recommendations to be considered for address in national government arts policies. Recommendation 5 (a) proposes that any government grants, fellowships, scholarships, awards and prizes to artists be tax exempt. NAVA will continue to push for the adoption of this recommendation as part of our Fair Pay for Artists campaign.

[1] Throsby D and Zednick A, 2010, Do You Really Expect to Get Paid? An Economic Study of Professional Artists in Australia, The Australia Council for the Arts. Pg 46 (plus CPI).

[2] ATO ID 2002/644 Income Tax: Assessability of Prize

[3] Australian Taxes, Gambling and You, australiangambling.com.au

Image: Mitch Cairns and Agatha Gothe-Snape with the Archibald winning portrait. Photo Sebastian Goldspink.