Wednesday 15 May 2008

ATO CONCEDES GROUND – FINALISATION OF TAX RULING (TR 2008/2) FOR THE HORSE INDUSTRY

Summary
It is a relief that the horse industry now has a final public tax ruling (TR 2008/2), the last such ruling came some 15 years ago. The horse industry was on the canvas in round #1, during the initial tax audits of the horse industry some three years ago. TR 2008/2 is probably not a knockout blow, however the taxpayer is in a much stronger position.

Essentially, the ruling conveys the current view of the ATO regarding how the horse industry fits with taxation law. Overrall we believe TR 2008/2 is reasonably fair, however, a disappointing aspect is the specific omission of some critical issues facing the horse industry involving foal share arrangements and leasing and syndicate arrangements generally. That will be round #12.

A timely win
The draft ruling (TR 2007/D9) was released on 22 August 2007 for industry comment. They say timing is everything, for the horse industry we should be grateful for the favourable decision handed down in MR & SL Block v Federal Commissioner of Taxation (2007) “Block” . The decision in Block in Western Australia on 26 October 2007 has firmly placed the ATO on the ropes. The main difference between the draft and final ruling has been various specific references to Block. In particular, there were concerns that the language used in the draft was too strongly against racing as a business. Thankfully, statements such as “it would be a rare case indeed” and “anti-business” have been replaced with “it is possible for the racing of horses to be a standalone business” (Para 75).

Racing is important
Common sense appears to have prevailed. The ATO, on the back of Block, added paragraphs 29 and 30 to the final ruling under the heading, “Can the racing of horses as a stand-alone activity constitute the carrying on of a business?” The answer is YES if;

1. there is system and organisation, rather than chance, driving the prospect of profit, which is consistent with a business; and

2. there is reasonable expectation that the activity will be commercially viable with a timeframe consistent with the industry standards.

So what are industry standards? A pleasing aspect of TR 2008/2, due primarily to the timely Block, is that industry standards should take into account the effect of unexpected events such as injury, death or floods. In other words, it is acknowledged that where horse businesses incur significant losses, especially in the start up phase, it is important to consider why that had been the case.

In a nutshell
There isn’t a prescribed checklist as to what constitutes a horse business and every case still needs to be decided on its own particular facts. Nevertheless, with TR 2008/2 and Block, we have some current guidance that finally acknowledges that the horse industry is not simply a pleasure dome. Genuine horse businesses exist in many varieties albeit that many can take some time to be profitable.

- Ends

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Adam Tims
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This media release is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific professional advice. No responsibility for loss occasioned to any person acting on or refraining from action as a result of this media release can be accepted.