Draft Taxation Ruling – TR 2007 / D9 Relating to the horse industry
The much anticipated ATO “draft” ruling relating to the horse industry hit the streets today. It comes off the back of their intense horse industry project that has resulted in a large number of horse industry participants facing tax audits. Overall, TR 2007/D9 clarifies the ATO view relating to the proper tax treatment of horse activities that were left somewhat ambiguous as a result of their last tax ruling for the horse industry written in 1993 (TR 93/26). Nevertheless, it should be noted that this is the opinion of the Tax Commissioner only. Taxpayers should still assess their position, in light of case law and relevant legislation, based on their own unique facts and circumstances.
Martin O’Connor & Partners initial comments on noteworthy aspects of TR 2007/D9 include;
1. The ATO position on the racing of horses is made clear – only in “rare” circumstances would this be considered a stand-alone business. In other words, unless you are breeding or training and your racing interests are inherently linked to this breeding or training, it will be exceedingly difficult to demonstrate to the ATO that your racing activities constitute a business. This ATO position regarding racehorses appears less favourable to the taxpayer than their approach in TR 93/26.
2. For breeders, the ATO position is clearer than the 1993 ruling. For instance, there are no examples specifying (6) broodmares as being an indication of a commercial operation. Also, it is specified that fractional interests in horses are allowable to form part of a breeders’ trading stock. Furthermore, it is stated that the racing of horses may be an integral part of the breeding business “to prove the quality of their breeding stock.”
3. One potential adverse outcome for breeders is the ATO’s position set out at paragraph 122; “The natural increase of the taxpayer’s livestock cannot be valued under section 70-60 because they are not acquired under a contract.” This means that the ATO believe a foal bred by a breeder should not be entitled to be written down for tax purposes. For example, a Redoute’s Choice filly with a service fee cost of $300,000 (currently) would remain in the books at that value. It should be noted that Martin O’Connor & Partners believe that this position needs to be clarified.
4. The ATO view regarding the tax treatment of horses activities that are not a business remains largely unchanged. A horse would still be viewed as a “personal use asset”. It follows that the $10,000 threshold is still relevant in determining if a gain on sale is excluded from the CGT regime. The cost base in this instance includes the purchase cost of the horse and excludes maintenance type costs incurred to date of the sale. Martin O’Connor & Partners firmly believe that this remains an unfair outcome for “hobbyists”. It is our view that appropriate Federal Government lobbying through Thoroughbred Breeders Australia (TBA) is the most appropriate avenue to rectify this anomaly;
5. TR 2007/D9 is deafening in its specific omission of certain aspects of the horse industry including;
a. Foal share arrangements,
b. Syndicate arrangements generally,
c. Trading of horses.
This draft ruling is released by the ATO for public comment with any submission by the due date of 10 October 2007. It is our view that a united submission should be lodged with the ATO that is carefully drafted and presented through Thoroughbred Breeders Australia (TBA) on behalf of all breeders. Naturally Martin O’Connor & Partners intend to be heavily involved in such a submission.
We look forward to keeping you updated as to the progress of TR 2007/D9.
PLEASE CONTACT:
Adam Tims
Phone (03) 9629 3023
Email:
Martin O’Connor
Phone (03) 9629 3023
Email:
Paul Scanlon
Phone (03) 9629 3023
Email:
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.