Am I in the business of Horse Racing or Breeding

admin · #1 (**permalink**) 1st March 2010, 06:51 PM

Are you carrying on a Horse Racing or Breeding Business?
This specific issue has been dealt with comprehensively by Taxation Ruling TR 2008/2 “Does racing, training and breeding activities (carried out as stand-alone activities or in combination) amount to the carrying on of a business?”

In responding to this question it is important to establish whether you, as a taxpayer, are carrying on a business as this will determine the basis for claiming tax deductions in relation to the ‘horse business’. Importantly, if you are unable to establish that you are carrying on a business, you will not be entitled to claim expenses in relation to your horse activities.
Whether your activities amount to carrying on a business (or more than one business) in any particular case is a question of fact as each case turns on its own particular factual circumstances.

In coming to a conclusion as to whether a business is being carried on in a particular case, the courts have identified a number of indicators that are relevant in determining whether a taxpayer’s activities amount to the carrying on of a business. These indicators are outlined in Taxation Ruling TR 97/11: “Am I carrying on a primary production business?”, which include the following:

· whether the activity has a significant commercial purpose or character - this indicator comprises many aspects of the other indicators set out below;

· whether the taxpayer has more than just an intention to engage in business or to commence a business in the future - an intention alone without commencement of activities is insufficient;

· 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 being engaged in;

· whether the activity is of the same kind and carried out in a similar manner to that of the ordinary trade in that line of business or industry;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.
It is important to note that regard should be had to all the above indicators as no one indicator will be determinative on its own.

What are the implications if you are running a horse related business?
If your activities do amount to the carrying on of a business, the following two important consequences follow, namely:
· the gross proceeds derived from the activities will be assessable income for tax purposes; and
· the non-capital outlays and other expenses will generally be deductible against such income.

What are the implications if you are not running a horse related business?
If your activities do not amount to the carrying on of a business, the following important consequences follow, namely:
· the gross proceeds derived from the activities will not be considered to be assessable income for tax purposes;
· the non-capital outlays and other expenses will not be tax deductible;
· the horses will not be trading stock of any other business that you may be conducting; and
· the horses (or interests in them) being depreciating assets will not be subject to a deduction for decline in value (ie no deprecation will be allowable) in relation to those assets.

Can the racing of horses as a stand-alone activity constitute the carrying on of a business?
In the Tax Office's view, the racing of horses as a stand-alone activity would not amount to the carrying on of a business if either one of the following significant non-business features are present:
· a significant element of chance - meaning that whether or not a profit is made will depend very largely on considerations other than system and organisation of the taxpayer; or
· the activities are no more than the mere pursuit (albeit vigorous in many cases) of a hobby, recreational pursuit or pastime.
To overcome the non-business features described above, the Tax Office considers that a taxpayer would need to demonstrate that:
· there is system and organisation, rather than chance, driving the prospect of profit, which is consistent with a business; and
· there is a reasonable expectation that the activity will be commercially viable within a reasonable timeframe consistent with industry standards.
In assessing commercial viability, it is emphasised that the presence of a genuine intention to make a profit does not of itself necessarily establish a reasonable prospect of making one.

Horse racing activities that are carried on as an integral part of a horse training and/or horse breeding business
If a taxpayer conducts racing activities as an integral part of a horse training or breeding business, then the horse racing activities would constitute activities in the carrying on of that business.
To be considered an integral part of the other business, the racing activities must be inherently connected with it and be consistent with the furtherance of that business activity.
Again, it will be a question of fact whether there is a business in the first place, and whether the horse racing activities are an integral part of it (as opposed to a separate activity).

Breeding of horses
The income tax consequences of the breeding of horses depend on whether or not the activity amounts to the carrying on of a business. As mentioned above, this will be a question of fact and special attention needs to be paid to the indicators discussed in Taxation Ruling TR 97/11.
From a practical perspective, specific industry factors that one should consider may include the following:
· the quality and number of horses;
· whether the taxpayer is selling stock, for example at yearling sales, to generate a cash flow;
· whether the mares are being serviced;
· whether the taxpayer is using their stallion rights; and
· whether the taxpayer maintains geldings, barren female horses or other horses which are inappropriate for breeding - excluding horses that are being raced.

Summary:
Whether your involvement in the horse industry can amount to the carrying on of a business is a question of fact that has to be determined based on factors discussed above. In determining whether (in your situation) you are carrying on a business, you are strongly advised to seek appropriate professional advice to ensure that you are meeting your tax obligations and that you are not missing out on any legitimate tax concessions.

Please note the information contained on this website is general in nature and should not be relied upon as tax advice. If you have a question please contact Sean Urquhart on 02 8264 0755.

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