SPRING NEWS 2007

POST EI – ADAPTING TO A DIFFERENT HORSE INDUSTRY

We take this opportunity to offer our sincere wishes to the large number of horse industry participants who have either lost jobs or businesses as a result of the unforeseen Equine Influenza (EI) outbreak. The broad reach and scale of this disaster should not be underestimated. It is likely to be felt for many years to come; but the horse industry is a robust one with many, many high spirited individuals prepared to continue to work very hard to overcome the many challenges the horse industry presents to us on a regular basis.

The goalposts have changed for the horse industry including all stakeholders. EI is another reminder of the risks associated in this challenging industry. Business confidence is normally shaped by the worldwide economy. In recent years the worldwide horse industry has been no exception with outstanding yearling sales prices being the barometer for very strong investor confidence. However, large reward is normally associated with large risk. Successful business owners would normally understand and try to mitigate against risks associated with their chosen industry.

Arguably the “risk” of an EI outbreak is akin to a natural disaster, almost beyond belief. How do you put in place measures to combat an outbreak such as EI that largely involves the non-thoroughbred population of horses? How do you plan to have your business prepared for a disaster that brings your industry to its knees? The answer is that there is nothing that individual businesses could have done to minimise the impact of such a disaster.

IBIS World Australia published an independent research report on “Horse farming in Australia” on 14 September 2006. In a section of the report titled “Industry volatility”, IBISWorld Australia stated, “Both imports and exports within this industry are volatile, depending on international demand and affected by disease outbreaks in various countries”. The frightening aspect of this statement is that the importing and exporting of horses to and from Australia is now likely to be viewed from abroad as a risky proposition. EI (particularly the Eastern Creek disaster) has effectively placed Australia in the “unsafe category” in the “global” horse industry. Overall total negative economic impact to the horse industry would be a very scary number indeed.

We believe the future success (or survival) of your business in the post EI horse industry now requires immediate action. There is a unique opportunity to be ahead of your competitors and position your business for the “new” equine industry landscape. The marketplace is going to look very, very different for the next 5 years at least and serious time needs to be invested planning and implementing strategies to adapt to a different horse industry.

Some items for consideration may include:
1. Business restructuring and/or refinance.
2. Updated breeding plan noting impact of reduced foal crop.
3. Updated business plan including cash flow projections.
4. Regular financial reporting including a thorough understanding of your fixed costs.
5. Insurance strategies.
6. Exit strategies.
7. Debt collection strategies.
8. Government assistance.
9. Workplace issues.
10. Opportunities in middle market.

Those that perhaps think outside the square and adapt to change best may eventually enjoy the economic rewards. Most importantly, be sure to surround your business with good advisors and speak to others at the coalface of industry developments.

To that end, Martin O'Connor & Partners is conducting a horse industry forum providing interested participants with an independent environment to share experiences and ideas and obtain information from relevant external sources. We look forward to assisting you get through the upcoming challenges that face us post EI. If you are interested in being part of the forum please contact Adam Tims on (03) 9629 3023.

On a positive note, EI has gone a long way to educate the uninitiated as to the vast reach and economic impact the horse industry has in Australia. That should bode well for Government concessions for the horse industry leading up to the election.



DRAFT TAXATION RULING - TR 2007/D9

Relating to the horse industry.

Extraordinary to think that a new tax ruling released on 22 August 2007 would not feature as the main topic in our Spring 2007 newsletter. Although overshadowed by the “EI” disaster, TR 2007/ D9 is an important release from the ATO as it is the first time in 14 years that they have offered us their thoughts as to how the tax system works as it relates to the horse industry.

This “draft” ATO ruling 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. The ATO have changed their view of the proper tax characterisation of racehorses that are part of the breeding activities of the taxpayer. In 1993 the ruling stated that racehorses were depreciable plant. The new draft ruling states that such horses are livestock and therefore trading stock subject to the trading stock valuation provisions. In effect, the different valuation methodologies can arrive at very different tax outcomes.

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.



NEW HOME

We are pleased to announce that effective 1 August 2007 Martin O'Connor & Partners have moved office to Level 6, 45 William Street, Melbourne. We haven’t moved far, across the road in a diagonal direction. All other contact details remain the same.

We take this opportunity to thank the SolutionsWon group who has been tremendous in making the move relatively straightforward. The internal design by Kate Butler from SolutionsWon is simply Group One. We hope that you can visit and see for yourself shortly.

NEW WEBSITE - AND A CASE OF WINE

We are happy to announce the firm’s website is in the process of an upgrade. We see websites as essentially an alternate means to update clients and associates with information that they should care about. For our website, it should be an easy way for you to access what we regard as being important in the world of accounting, tax and financial services. It should also be viewed as an independent resource point for horse industry specific information and comment. To that end, we invite you to assist us with the content of our website. What would you like to see included? The best suggestion wins a case of premium wine. Good luck!

FINANCIAL SERVICES

Income Tax Returns
As part of the service offered to clients of the firm, we are reviewing the information supplied with your tax return to identify areas where we may be able to provide some assistance. Please give consideration to our comments as I have been surprised at the lack of income protection insurance throughout our client base. I cannot emphasis enough how important it is to ensure that your income continues if you are not working. In most cases your ability to earn income is your biggest asset, it not only allows you to pay the bills, but provides you with the lifestyle you currently enjoy.

Accordingly please review the comments we have made in your tax return’s covering letter and give me a call to discuss or take up our offer of a free no obligation consultation.

Financial Markets
As you are no doubt aware there has been a lot of volatility in financial markets since our last newsletter, much of which has been caused by concerns in the sub prime market in the US. (When banks lend money to people who have no visible means of paying it back this is not surprising).

The goods news is that whilst this situation still has some way to go before it plays itself out; the markets have rebounded to around the same levels as they were before the crisis occurred. This obviously does not make such good press as the market dropping quickly and therefore doesn’t make the front page of the newspapers however the moral of the story is that the markets do go up and down and the current volatility should not be used as an excuse not to invest.

Centrelink Changes
The major strategy news since our last newsletter has been the increase in the level of allowable assets an eligible person can have and still qualify for at least a part aged pension. From 20 September, a homeowning couple can now have a whopping $825,500 of assets excluding the family home and still qualify for the aged pension. Clients who previously had been ineligible due to their level of assets may now qualify, so if you are of pension age it is time to assess you circumstances.