14th May 2011
ATO Focus on Revenue Losses
By Paul Carazzo
What is a horse business for ATO purposes?
It goes without saying that my office has seen many instances over the years where SMEs have had their business status questioned by the ATO and their tax losses put at risk. I don’t expect this ATO project to be any different and I’m sure many breeders and owners will come under scrutiny, thus it’s crucial that your tax losses are reviewed for eligibility before the ATO darkens your doorstep…
In summary, the primary business factors the ATO wants demonstrated for a horse breeding business and/or racing business to be accepted are listed below and are sourced from guidelines within the ATO tax rulings TR 2008/2 and TR 97/11 and related case law in this area:
- whether the activity has a significant commercial purpose or character;
- whether the taxpayer has more than just an intention to engage in business;
- whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
- whether there is repetition and regularity of the activity;
- if racing, are they “integrated” with the breeding activities?;
- whether the activity is of the same kind and carried on in a businesslike manner such that it is directed at making a profit;
- the size, scale and permanency of the activity;
- existence of a breeding property;
- if the activity started with limited numbers, is their consistent growth in the scale of the activities (e.g. increase in mare numbers and/or foals);
- whether the activity is better described as a hobby, a form of recreation or a sporting activity;
- prior horse industry experience;
- the keeping of proper records;
- the existence of a business plan evidencing viability (see comments below);
- time expended on the activity;
- are mares being regularly serviced;
- progeny must be sold on a commercial basis;
- stallions used for breeding need to have market appeal (commerciality);
- are progeny being regularly sold in order to generate a profit;
- are stallion rights (if applicable) being utilised;
- registration of a business name;
- establishing a separate bank account;
- the regular use of experts and consultants; and
- does the taxpayer exercise “control” of his/her stock?
N.B. The taxpayer need not demonstrate all of these factors, however the existence of a business is enhanced by the activity demonstrating as many of these factors as possible. Whether an activity is a taxation “business” will always be decided as a question of fact.
You are welcome to contact the writer if you wish to clarify or expand upon any of the matters raised in this release.
Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information’s applicability to their particular circumstances with an accountant specialising in this area.
Paul Carrazzo CPA
Carrazzo Consulting CPAs
22 Blackwood St, North Melbourne VIC 3051