It has been already for some time and before the articles appeared in the media in recent months about the Zurich art collector, that many private art collectors found themselves in the spotlight of the tax authorities hovering with a hawk’s eye over anything that could be subject to taxation.
Honestly! Have you ever considered whether this painting of a country landscape, which has been hanging in your study for many years, and which you originally received as a gift, makes you a potential tax evader? Maybe the value of this painting is subject to wealth tax and you should have, therefore, declared it on your tax return. How is that possible?
The cantonal tax laws stipulate that paintings and other collections as well as works of art, jewellery and ornamental objects form part of the taxable assets, while only household effects are tax-free. It is particularly important to note that not only art collections but also a single art object may have to be declared on the tax return. But where does the borderline between tax-free household effects and taxable assets run?
For a long time, the practice has been that the context in which the art object is used constitutes the deciding factor. As long as the object of art serves residential purpose or personal use and can be counted as the “usual furnishings of the home”, it is considered as a household goods. If, on the other hand, the acquisition of the art object has the character of an investment, then it constitutes a taxable asset. The conclusion of a separate insurance contract can be a strong, although not irrefutable indication in this regard. In any case, the income and wealth circumstances of the taxpayer must be taken under consideration.
In 2012, a controversy arose from a decision of the Administrative Court of the Canton of Zurich, which stipulated that regardless of their purpose, such objects should always be classified as taxable assets, as soon as their market value exceeds a certain amount. However, the level of this “certain amount” has been left open by the court. In that specific case it concerned a painting insured for CHF 150,000.
Should you have now accepted that the landscape painting is after all a part of the taxable assets, further tax issues immediately arise.
Should, for instance, your painting appreciates in value and you decide to sell it, the tax authorities will most likely want to know more about the circumstances of the sale. If you have acted “commercially” in the sense of official practice – which might be the case, for example, when selling through an auction house – the profit actually generated will be subject to both income tax and AHV contributions. In addition, a high revenue from the sale could become taxable for VAT. The Federal Supreme Court has already upheld respective assessments of the tax authorities and the Social Insurance Funds (AHV Ausgleichkassen) taking into account the approach to and the specific circumstances of the sale.
Even if this makes you shake your head and you rather opt for giving away the painting, remember that all cantons with the exception of Schwyz, Lucerne and Obwalden levy a gift tax. If the recipient is not himself exempt from paying gift tax (as is the case with spouses and descendants as well as with many museums), this donation can be an expensive affair. And please do not forget: as a general rule, the donor is jointly and severally liable with the recipient for paying the gift tax!
Our tax consultants at swisspartners have extensive experience in tax matters relating to works of art and art collections. If you have a specific question, do not hesitate to contact us.
Written by:
Beat Sonderegger
Your Wealth at a Glance.