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TAX TIPS FROM INDUSTRY PROFESSIONALS
ATO RULES A BUSINESS FOR BREEDERS Whether a horse activity is a ‘business or hobby’ for income tax purposes has long been a subjective and difficult dilemma for tax advisers. Obviously, our office has had extensive experience in this area, but this is not the case for the overwhelming majority of tax advisers. If, per the ATO ‘self-assessment’ guidelines, advisers are uncertain in making a call on this issue, they can seek a definitive opinion from the ATO via the “Private Ruling” system. The ATO publishes these decisions on its web site and is not bound by an edited private ruling version published in the ATO rulings Register in relation to any taxpayer. An edited version is not intended to provide taxpayers with advice or guidance, or a publication approved in writing by the Commissioner. However, a tax case has established that private rulings were “useful” in illustrating the way in which the ATO has applied the relevant legislation and authoritative case law. Though these rulings are specific to a taxpayer’s situation, they are indeed “useful” in gauging the ATO’s current opinion on this ‘business or hobby’ issue. I regularly trawl the ATO rulings register to see if a racing related ‘business or hobby’ ruling has been recently issued; especially if the applicant is successful! In this article I share details, and my comments, relating to the best and most recent private ruling I have come across on this topic (ATO Ruling Authorisation Number: 1051382550813), to do with a husband and wife partnership who were successful in demonstrating that their horse breeding activity was an income tax ‘business’. Pay special attention to the facts and arguments raised if you are uncertain as to your particular status! This case is especially interesting as the taxpayer was also hoping to have their associated “racing” activities approved as a ‘business’. THE RELEVANT RULING QUESTIONS 1. Do the horse breeding activities conducted by Mr AX and Mrs BX (“the Taxpayers”), constitute the carrying on of a business? 2. If the horse breeding activities constitute the carrying on of a business, will the horse racing activities constitute part of the horse breeding business?
1. RELEVANT FACTS AND CIRCUMSTANCES BACKGROUND Mr AX and Mrs BX (“the Taxpayers”) are husband and wife. The Taxpayers have an interest in a horse called Horse A. After its racing career was over, Horse A became a stallion. The Taxpayers and the other part owners of Horse A entered into a standing agreement with a Stud Farm Z which manages the day-to-day breeding activities of the horse. Although most of the decisions in respect of the breeding activities of Horse A are made by Stud Farm Z, the Taxpayers still have active involvement as they need to be consulted on major decisions and have a right to clarify any financial issues. The Taxpayers each applied for an Australian Business Number (“ABN”) as they were operating an enterprise of horse breeding due to the receipt of income from Horse A’s service activities. Each of the Taxpayers returned their share of income so generated from their respective shares of Horse A. The Taxpayers took the view that for the initial income year they were not carrying on the ‘business’ of horse breeding. To protect the future income generation of Horse A as a stallion for the horse breeding activities, the Taxpayers retain a Mortality Insurance Policy for their share in Horse A – a strong indicator of profit intention. For the next tax year, the taxpayers reassessed their activities as to whether they were in fact carrying on the business of horse breeding and came to an affirmative conclusion based on the scale and regularity of conduct of the horse breeding activities at that time. Significantly, the taxpayers have a Business Plan (a strong ATO business indicator) which outlines strategies for making the horse breeding activities profitable into the future and contains the following elements: a) A description of the horse breeding activities is given in that it consists of income generated from stallion fees through the ownership interest in Horse A. It also outlines how the horse breeding activities will diversify its income stream by selling progeny from its band of high-quality broodmares that have been recently acquired.
ATO Rules a Business for Breeders
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