the bigger catalogues flood the mail box, it can only mean one thing in racing
world – the annual yearling sales circuit is nearly upon us!.
No doubt there will be plenty of new investors coming on the scene in the
coming months, not just for yearlings but for the many weanling and broodmare
sales also in this period, and often serious money will be spent in pursuit of
their breeding and/or racing passion.
There will be no shortage of catalogue research and horse inspecting in this
period, as there should be, but what will also dawn upon many new players is the
obvious question: where do I stand with income tax and GST now that the serious
investment has started?
The starting point to answer this subjective question is whether the activity
is a 'business' or 'hobby'. If it is a 'business', income is assessable and
outgoings deductible. GST registration is also allowed if the ATO considers you
are running a 'business'.
Accordingly, I'm going to start the 2017 calendar year with an article focusing
on FAQ relating to this crucial 'business' or 'hobby' topic, which hopefully
clarifies this question for many of you.
Business or Hobby – FAQ
Q1. How much do I have to spend to be a horse business?
It's not just about the amount spent (the ATO does not set a minimum
monetary investment), it depends on several other factors, such as:
What type and number of horses have been bought (e.g. yearlings, mares,
Selling mentality of buyer; and
Is there a prospect of profit?
Buying into a few random yearlings with a spend of over $100,000, for instance,
does not automatically mean you're a business.
Q2. I'm going to buy my horses in the
company/trust/partnership that runs my other businesses, does that make the
horses a business too?
No, a thousand times, no!
The horse activity will be assessed by the ATO in its own merits. Thus, GST
cannot be claimed on horse related costs just because you can do so for
outgoings for your other businesses in your business entity.
Q3. I've heard that all I need is to
have sales/turnover in my business of at least $20,000 to be classified as a
horse business. Is that right?
Confusion reigns between the interaction of the 'Non-Commercial Loss" (NCL)
rules and the 'business' or 'hobby' criteria.
Under the NCL rules, an individual (alone or in partnership), who earns less
than $250,000 of 'adjusted taxable income', cannot generally claim a loss immediately
unless one of four criteria
are met, one such criteria is that the activity must generate at least $20,000
of 'assessable income'. But…you cannot even assess your loss under these rules
unless you have a business first.
Accordingly, whether you have $20,000 of sales from your horse activity is
academic unless you can first demonstrate that it is a business taking all the
criteria into account.
Q4. I have some lovely broodmares that
cost tens of thousands of dollars, want to send them to commercial stallions, but
I just want to race the stock. Does this make my activities a business?
Sure, in relative terms, it is easier to demonstrate a breeding business with
the ATO than a 'stand-alone' horse racing activity.
But a breeding business does not exist unless you have a primary selling
purpose – breeding to race may as well be called a 'stand-alone' horse racing
activity. Instead of going to a yearling sale to buy the racing stock, the
person is just playing the 'long game' and breeding their own racing stock.
Q5. I only own four quality mares in my commercial breeding business, but I
guess I can't claim it to be a business unless I have the magic number of 'six'
The 'six mares rule' as a breeding business criteria had its origins from the
ATO in the mid 1980's and was also enshrined in its 1993 horse industry tax
ruling. Under that ruling it quoted that "…As
a broad guideline, it is expected that the breeder would have at least six quality or commercial brood mares .
This rule was merely an ATO opinion and held little weight in the courts as
many players could prove a breeding business without the required six mares.
Thankfully the updated 2008 ATO ruling on this topic no longer contains the
'six mares rule'. I was on the ATO consultative panel that assisted with this
ruling, and I'm proud to say that I argued strongly for the death of the six
In summary, you can have less than six mares and be considered an ATO business,
but it's not just about scale, but how you go about your business, e.g. are you
selling stock, are mares mated commercially and regularly etc.
Q6. Why is a Business Plan so important in demonstrating a horse business
with the ATO?
These criteria were inserted into a 1997 ruling by the ATO, the ruling titled "Am I carrying on a business of primary
Subsequent to this, the courts are now relentlessly referring to these
criteria in adjudicating whether a person is conducting a 'business or hobby'.
Too many taxpayers have failed to demonstrate a 'business' without a plan in
the past few years (e.g. Devi's
Anyone starting a horse business is risking a fight with the ATO unless they
have a proper business plan with projections demonstrating long-term
profitability. It is a strong indicator of profit intention, a crucial ATO
Q7. How should I keep my horse records
if I want to demonstrate a business with the ATO?
This business factor is given major weighting with the ATO.
They should be kept in a form that makes the determination of a profit or loss
easily attainable to the business person. This would typically include:
A dedicated horse bank account that is regularly reconciled;
The recording of income and expenses on the likes of MYOB, Reckon, Xero
accounting software etc. As a minimum, Excel software can be used for this
Keeping stock records that are regularly updated; and
If you have computer cashbook software, 'job-costing' each horse gives the
activity a more professional look and is a more effective management tool for
the business operator, i.e. he or she knows what each horse is costing the
business at a point in time.
Please, please..don't keep records in a 'shoebox' or fall behind in your BAS
and income tax lodgements – this gives the activity a distinct 'hobby' look
with the ATO.
Q8. Can I start the horse activity in a
small way and gradually build up?
Yes, starting in small way can still be considered a business, if long term
profitability and profit intention is demonstrated. In this regard, existence
of a Business Plan is crucial (refer Q6 above).
The courts have held that 'regularity and repetition' in the activity together
with consistent growth and organisation of your activities in a 'business-like'
manner is crucial if you want to demonstrate a business in the earlier years
where stock numbers have not reached optimum levels.
Q9. Can I introduce stock into the
business that was acquired before its official start date?
Yes, but the appropriate stock must be transferred to the business in
accordance with ATO laws re the disposal of capital ('hobby') assets from 'hobby to business' or where the hobby asset
is transferred to an entirely new horse business entity set-up (e.g. a trust or
If a horse is transferred from a being 'hobby' asset to an item of trading
stock in the new business, the owner can elect to do so at either market value
or cost – whatever value is elected will largely depend on tax circumstances at
the time. If the 'hobby' horse is transferred to a new business entity, the
Capital Gains Tax (CGT) rules must be kept in mind as a capital gain can often
Note - in most circumstances, the official start date of the activity is the
date the ABN is registered.
Q10. What are the most underestimated
ATO business factors for someone wanting to demonstrate a horse business?
Per our extensive experience in dealing with the ATO and being mindful of case
law in this area, I would list these as:
The existence of a Business Plan (refer Q6 above)
If breeding stock is raced (which is allowed if it is not overdone and there is
a commercial reason for doing so), ensuring that the horse is registered in the
name of the business entity (e.g. a company) and not, say, a whole lot of
individuals related to the breeder (e.g. wife, children, parents etc.). Put
bluntly, this is an amateurish look with the ATO, especially if an 'integrated'
breeding and racing business is being argued to the ATO;
The use of experts and consultants to assist in buying bloodstock and breeding
Lack of control of your stock, i.e. having too many horses (breeding or racing)
where you only have a minority interest. Unless you have an appropriate
'shareholders' agreement as to dispute resolution or the general decision
making process, this can indicate that you are only a passive player in the
activity, which lacks business integrity.
Please contact me if you wish for me to
clarify or expand on any of the matters raised in this article.