Owners stand alone in tax ruling

From March 28, ample expensive horseflesh will go on sale at the Magic Millions yearlings sale on the Gold Coast. Whether prices will reach the 2007 average sale of $180,000 following a rough year for Australian horse racing remains to be seen.

The effects of equine influenza were devastating for breeding and training businesses, and even more tumultuous in terms of gambling revenue lost for the industry as a whole.

Away from the track and the breeding stables, tax accountants have been pondering another major event to affect the industry: the new horse tax ruling, the first issued in more than 14 years by the ATO.

The ruling, which was made in the midst of the Tax Office's continuing audit of the industry, deals with common horse tax issues, and mainly concerns the issue of whether ownership of racehorses should be considered a busi-ness or hobby for tax purposes.

The draft ruling TR 2007 / D9 is in essence a rewriting and update of the former TR 93 / 26.  A Tax Office spokesman says: 'We received feedback from the industry that the former ruling was perhaps too prescriptive in nature and so the draft ruling takes a more principled based, less prescriptive approach.

'Its purpose is not so much to change the existing position but to explain it in a more principled manner. This should make it easier for taxpayers to apply the principles set out in the new ruling to their individual circumstances.'

Paul Carrazzo CPA, who deals extensively with the horseracing industry says the ruling is 'a little bit disappointing, because the industry was looking for more guidance, especially in the area of 'business versus hobby'.

'If there was some progress, it was that it clarified the point that the racing of horses is considered acceptable [for tax purposes] if it is integrated with the breeding activities.'

Although this has been a long-held administrative position by the Tax Office, it's only in this ruling where the point has been made publicly.

Carrazzo believes the new ruling does not provide sufficient guidance on the tax position for stand-alone racehorse owners: those who buy, own and race horses with the view to making money from the activity.

'That's the major failing of the ruling, it doesn't clarify when a stand-alone racing activity can be a business,' he says. 'Like the 1993 ruling, it doesn't address that issue.'

The Tax Office has stated 'the racing of horses as a stand-alone activity would rarely amount to the carrying on of a business'.

Yet Carrazzo believes the Tax Office should have provided an example of what an acceptable stand-alone activity might look like. 'I have a client that was accepted at AAT mediation level,' he says. 'So I know that if the facts are appropriate, the ATO will accept racing activities. Yet unfortunately with this ruling, they still haven't given a positive example. The ATO is still showing a lot of resistance at this level.'

Carrazzo believes more owners will challenge the Tax Office in the courts in this area of stand-alone racing activity.

'In my opinion a lot more should be accepted as a business, if you look at the strict tax principles,' he says. 'But because so many of them make losses in the early phase, the ATO tends to think that because something makes a loss it can't be a business, which is not what case law says, and all factors need to be considered.'

At the time of writing the ruling was scheduled to be finalised by late March. The Tax Office says feedback received in relation to the draft ruling are being considered, as is the recent Block v Orrs AAT hearing, where the tribunal decided in favour of the horse breeder plaintiffs, accepting that extensive capital costs and bad luck were the major reasons the partnership incurred significant losses.

For further information visit the ATO's website.

Reference: March 2008, volume 78:02, p. 13