Media Releases

By Adam Tims, Partner, Martin O’Connor & Partners
Inside Racing – January 2008

Block and Commissioner of Taxation (2007)
AATA 1897 (26 October 2007)

Relating to the horse industry

 

HAPPY NEW YEAR! With the continuation of ATO tax audits of horse owners and breeders together with the release of TR 2007/D9 (being the new tax ruling for the horse industry, refer October 2007 Inside Racing), 2007 was a massive year for those advising the horse industry on tax matters. Just when we thought it couldn’t get any bigger, the Administrative Appeals Tribunal (“AAT”) in Perth has overturned an earlier ATO decision regarding “Income tax – GST – whether horse and sheep breeding activities were a business or a hobby or recreational pursuit”. The decision made by the AAT on 26 October 2007 is of particular interest to horse industry participants as it is a recent, favourable case for the taxpayer.

Some noteworthy aspects of Block and Commissioner of Taxation (2007) include;

1. The AAT acknowledge that a business can incur significant losses. The income tax losses in this case for the years under review are as follows;

  • 2001 $143,955;
  • 2002 $199,750;
  • 2003 $208,401;
  • 2004 $169,913.

Paragraph 85 of the AAT decision is worth noting, “It is clear that the first applicant has incurred significant losses in respect of the business because of the capital costs of setting up the business, the subsequent restructuring of the business and, as a result of a series of unforeseeable setbacks”. Further, paragraph 87 states that the couple “..conducts the business in a proper business like and commercial manner with an intention of making profits”;

2. The AAT reaffirm the view that the racing of horses, especially fillies, can represent an important aspect of one’s horse breeding business;

3. An investment in a property and suitable infrastructure for horse activities appears to be a very important indicator as to whether or not a horse business exists;

4. The maintenance of proper books and records and a business plan continue to be an important (although not mandatory) indicator as to whether or not a business exists;

5. The expertise and knowledge of the individuals involved in the business is also an important business indicator.

Restatement of important facts
Malcolm and Sally Block resided at a farm (known as Cheverell Park) at Gidgegannup approximately 45 kilometres north east of Perth. They commenced a business of breeding thoroughbred horses and Suffolk sheep for sale at a profit (operated as a partnership for tax purposes.) The property was 60 hectares at a cost of $385,000 in 1998 and included a house and specific improvements for a horse stud, including a stable block, some post and rail yards and shelters. In due course the couple upgraded the property making a number of improvements including improved water facilities, a laneway system and installation of lighting in foaling paddocks.

The couple had extensive experience in business and with horses, including undertaking of courses in horse management and are members of relevant industry associations.

The couple also maintained manual and electronic records of all matters pertaining to the horses held and bred.

Between 1 July 1996 and 30 June 2000 the couple built up their thoroughbred horse interests by;

  • Making substantial improvements to the infrastructure;
  • Paying $500 per mare in 1996/1997, for mares to be compatibly matched under the Pedigree Dynamics system;
  • Obtaining advice from bloodstock agents;
  • Adopting a programme of breeding to make the horse breeding activities profitable and commercial;
  • Purchasing and breeding quality mares, with a substantial amount of “black type” in their breeding;
  • Putting the mares into foal every other year;
  • Acquiring interests in stallions for the purpose of serving mares and
  • Utilising the commercial market for the sale of horses in the “Magic Millions”, “Yearling” and “Ready to Run” sales as well as making private sales.

During the relevant period the couple raced horses to either promote the stud and/or prove the breeding. They sold 3 colts at the spring and autumn sales for $69,000 in 1999 and 3 totalling $56,000 in 2000. During the 2001 year one horse was passed in for $39,000 and another sold for $4,900. In 2002 one horse was sold for $5,000.

As is typical with many breeding ventures the couple suffered injuries and deaths to horses totalling 8 deaths and 5 injuries during the period 1 July 2000 to 30 June 2004, having a serious effect upon the business.

Due to poor sales and a series of mishaps the couple restructured their business by investing in infrastructure, culling stock and producing, racing and breeding from young mares to replace mares that had died or aged. The AAT state that such a restructure or downsizing contributed to losses made by the business.

ATO decision
In light of the facts above, it is remarkable that the ATO let this case get as far as the AAT. We firmly believe that such a case is clearly a business.

The reasons for the ATO’s initial, unfavourable decision include some contentious views including;

1. The strategy of the couple of increasing the value of its broodmares and their progeny by successful racing depends upon chance more than a reasonable person with a serious intent to profit or gain from breeding horses would permit;

2. The couple had only two broodmares of recognized “black type” quality;

Summary
Thankfully, with the release of “draft” tax ruling TR 2007/D9 and Block’s case, it is our experience that the ATO approach to audits has become more reasonable and common sense appears to be prevailing. The outbreak of EI has also reinforced the size and significance of the horse industry that should bode well for the ATO and government’s approach to equine matters.

As always we strongly recommend that you discuss this matter with your accountant 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.