By Adam Tims, Partner, Martin O’Connor & Partners

Inside Racing – November 2006

ATO audits – what should I do?

If your horse interests are within the tax system and you haven’t received the now infamous “HORSE INDUSTRY PROJECT - Owners Enterprise Questionnaire”, then get ready to strap yourself in for the ride. This Australia –wide horse industry project has been tracking now for over 18 months and is likely to extend beyond a further 18 months. Most “cases” are triggered by a large GST or income tax refund. Usually there is a “stop” on the GST refund (or income tax refund) until the ATO is satisfied that a bona fide “business” exists. This can take many, many months.

Stage 1 – the questionnaire
The document is a series of questions designed to capture information so that the ATO can determine whether or not your horse interests are commercial or simply a hobby. For instance, do you breed, do you sell your progeny, how much time to you devote to your horse activities, etc etc. It also requests a detailed listing of your interests categorised into “racing” and “breeding”. Importantly, the ATO asks if you have a business plan. Although it is not a statutory requirement to have a business plan, the ATO believes it to be an important indicator. Incidentally the courts have often commented on the importance of a business plan when assessing business vs hobby cases. So if you receive the questionnaire you should complete it accurately and by the due date. Also, be sure to have a business plan (including financial projections) available to the ATO that demonstrates the commercial nature of your horse activities.

Stage 2 – the meeting
Whether or not you are conducting a “business” (“enterprise) for tax purposes is a matter of fact. In answering the questionnaire you may believe that there is no question that you are conducting a business. Why would you risk so much time and money? The ATO appear to be keen to meet with individuals to discuss their unique circumstances. You should accept this offer and approach this phase of the audit process in a co-operative manner. For many it could be an emotional time but at the meeting try to take the emotion out. To achieve a favourable and timely resolution of the matter you would be best placed to involve professionals that specialise in the horse industry and to ensure a co-operative approach with the ATO. At the meeting the ATO will be trying to ascertain your expertise and knowledge in the industry so give it to them.

Stage 3 – further information requirements
It may be that after the initial meeting the ATO are still not convinced that your horse activities constitute a business for tax purposes. There may be some additional information such as contracts of sale or financial records that could be relevant. If the ATO requests such information you should provide it as soon as possible. Providing complete and accurate responses to requests for information, and to be truthful and honest in your dealings with the ATO, should strengthen your situation and lead to a favourable outcome.

Stage 4 – ATO
decision In arriving at their decision, the ATO must rely on the law (legislation and court cases) and take each case on its merits. The ATO’s view on tax and the horse industry is stated in Tax Ruling 93/26, a document written over 13 years ago. Remember this is their opinion and not law. A taxpayer may challenge the ATO’s decision in accordance with the procedures laid down in the Tax Act.

I look forward to presenting the next stages to this audit process in the next edition of Inside Racing. In the meantime, take some comfort in the fact that there are a large number of horse industry participants facing this timely and costly audit process.

As always we strongly recommend that you discuss this matter with your accountant and/or tax advisor as the circumstances and end tax result may differ on a case- by –case basis. This article 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 article can be accepted.