As we enter the 2024 season of major yearling and breeding stock sales, our office again prepares for the inevitable calls from new clients with their “how do I start and structure a new horse business” questions. Getting the start-up on a solid tax foundation is crucial, yet in our troubleshooting we often see a worrying lack of thought put into this phase. Undoubtedly, advisers are most commonly tripped up by the fact that “hobby” horse stock has to become “business” stock, a step that often also involves setting up a new business structure (e.g., a company, trust or partnership). If you want to get a start-up right, it’s well worth your while to review this article as I will raise the problems and tax-traps I frequently come across. 1. IGNORING THE NON-COMMERCIAL LOSS (NCL) RULES Due to the inherent nature of breeding and racing activities and the time lag before any income is derived, tax losses are often derived in the first few years – sometimes it can take 5 years plus before a profit is derived. This reality means you ignore the NCL rules at your own peril! The NCL rules only apply to individuals, alone or in partnership. The NCL rules prevents an individual’s losses from non-commercial business activities being immediately offset against the individual’s other assessable income in the year the loss is incurred. The loss is deferred to be offset against future income from the same business activity (e.g., horse breeding), unless : the individual meets the income requirement (i.e., “adjusted taxable income” (ATI) – refer definition below) from other activities is less than $250,000 and the business activity satisfies one of the following four tests: Assessable income test - the business produces assessable income of at least $20,000 for the income year; Profits test - the business has produced a taxable income in three out of the last five income years (including the current income year); Real property test - the value of real property (i.e. land and buildings) used in the business is at least $500,000; or Other assets test - the value of certain other assets (e.g., trading stock and depreciating assets - excluding cars, motorcycles and similar vehicles) used in the business activity is at least $100,000. the individual has a business activity that is eligible for an exception; or the ATO exercises its discretion to allow the loss for the business activity for one or more income years. It is these rules that have been modified in this new PCG. For reference, Adjusted Taxable Income (ATI) noted above includes the sum of: Taxable income for that year (e.g., wages less work-related deductions); Reportable employer superannuation contributions (“RESCs”) for that year; Total net investment losses for that year; and Reportable fringe benefits for that year. 1.1. THE PROBLEM? Where a high income earning client, i.e., they have other income on or beyond $250,000 (e.g., wages), wants to run the business as an individual (alone or in partnership, they must go through the onerous, costly and time consuming task of seeking an ATO private ruling to be able to claim those losses immediately, furthermore a poor application could mean that they must defer those losses immediately. Individual high-income earners could thus be deprived of tax relief if they are caught up in the NCL rules and unable to claim their tax losses immediately. Maybe another tax structure could have been considered? 2.0 TAX IMPLICATIONS ON TRANSFER OF STOCK This problem arises where valuable stock is transferred to a new tax structure when the business commences. What is overlooked is that the stock is converting from “hobby” to “business” stock and this “hobby” stock is considered a “capital” asset under income tax rules. Capital Assets are subject to the Capital Gains Tax (CGT) provisions when they are disposed of. It is irrelevant that no money changes hands as under the CGT rules the disposal of stock to a new entity is a “deemed” disposal at market value . The only relief from these CGT provisions is if the horse is a “personal use asset” (e.g., a racehorse) and cost the taxpayer $10,000 or less (including GST). These horses are exempt from CGT upon disposal. 2.0.1. THE PROBLEM/IMPLICATIONS? The horse is subject to CGT and its market value has increased considerably since acquisition. This horse would be subject to CGT to the extent its market value exceeds its eligible cost base. To soften the tax blow, where the horse is subject to CGT on transfer, a 50% CGT discount applies if the horse is transferred at least 12 months after acquisition. 2.1. “HOBBY” TO “BUSINESS” STOCK IF NO NEW ENTITY The above discusses where the stock is considered to be part of a “business”, but the taxpayer decides to start the “business” in a different entity, e.g., from a sole trader to a trust. However, it is most common for a sole trader taxpayer to move from ‘hobby” to “business” without changing the entity. Where this occurs the income tax law relating to items “becoming trading stock for the first time” must be considered. In this case, the taxpayer is treated as having sold the item at either cost or market value (at the taxpayer's option), and as having reacquired it for the same amount. This has the effect that a deduction is allowed to the taxpayer for the cost or market value of the item at the time of the change, being a deduction for the cost of acquiring trading stock. Note – for the purposes of the “cost” option, an “in-foal” broodmare can have the cost of the service fee for the foal “in the belly” added to its cost price – our office was advised of this via an ATO private ruling we submitted. 2.1.1. THE PROBLEM/IMPLICATIONS? Where these rules are overlooked, there are two major implications: a) Stock that is subject to CGT which has increased considerably in value, need only be transferred at its “cost” value, thus triggering no tax implications when a horse tax business is set-up; and b) Stock could be transferred at market value, without triggering tax implications, if that stock is CGT exempt, i.e., it is a personal use asset acquired for $10,000 or less (refer above). 3.0 ANOTHER BUSINESS ENTITY DOES NOT HAVE “MAGIC” POWERS FOR YOUR HORSE ACTIVITIES Let me explain what I mean. I often have potential clients approach me and ask whether they can place their horse activities, say a breeding activity, into their existing business entity, say a company, on the basis that “oh..it’s ok…my company runs my other retailing business, which means that the breeding activity will also be considered by the ATO as a tax “business”. No! The ATO looks at each activity individually to ensure that each one has a tax “business” status. For example, merely placing one hobby broodmare into your existing business company does not mean that one mare is considered a “breeding business” activity. 4.0 CLAIMING PRE-GST ON STOCK ACQUIRED 4.1 Companies To get around the situation where pre-establishment GST can be “lost” on a new business start-up, the GST Act provides an exception to the general operation of the GST rules for all the pre-establishment costs of a company . Upon its creation and registration for GST, the company can claim back GST for these pre-establishment costs if the necessary requirements are met. 4.1.1 Eligible pre-establishment costs To claim GST credits for these pre-establishment costs of a company the following seven criteria must apply: the purchase must be for the purpose of bringing the company into existence or carrying on a business after it comes into existence the company must come into existence and be registered for GST no more than six months after the purchase you must become a shareholder, officer or employee of the company the company must have fully reimbursed you for the cost of the purchase the purchase must not be used to make input-taxed sales or for private purposes to avoid “double dipping” the company must not be entitled to a GST credit for the purchase, if it subsequently acquires the thing from you you must not be entitled to claim a GST credit for the purchase. The GST Act does this by treating an acquisition or importation made by a future shareholder, director/secretary or employee of the company as being an acquisition or importation of the company upon (not before) its creation. Of the seven requirements listed above, the most difficult to meet are: the “six-months” rule; and the “fully reimbursed” requirement (see below) for the shareholder, director or employee who incurred the expense. 4.1.2 What does “fully reimbursed” mean? In relation to acquisitions only, the acquisition does not qualify as a pre-establishment acquisition unless the member, officer or employee is "fully reimbursed" by the company for the consideration for the acquisition. In other words, before the relevant GST can be claimed back, the company must reimburse the individual not only for the GST-exclusive cost of the thing acquired, but also for any GST on the thing acquired. 4.1.3 What costs are eligible? The costs eligible include: set-up fees (e.g. accounting fees, company cost, business plan); business registration; plant & trading stock (e.g. broodmares, stallions, pin-hook stock, service fees); business premises; and GST on importation. Example 1 – claiming pre-GST establishment costs for a company In May 2020, Andre engages Alex & Co, accountants, to prepare a horse industry business plan for his yet to be incorporated company. Andre receives the plan in October 2020. The company is set-up in December 2020 and is registered for GST in January 2020. The company can claim back the GST referable to the services of Alex & Co. This is because Andre "made" the acquisition when the business plan was supplied, which was within 6 months of the company coming into existence and becoming GST-registered. 4.2 All other entities (e.g., sole traders, partnerships and trusts) There is a special GST adjustment rule which states that an entity may claim GST relating to opening stock on hand if it becomes registered or required to be registered for GST. Simply put, the GST Act will deem the acquisition of the stock on hand by the entity prior to its registration as a creditable acquisition and thereby allowing the entity to claim the associated GST. The special adjustment rule only applies to stock on hand. That is, any other items (including capital items) acquired by an entity will not be eligible (unlike companies, as noted above). 4.2.1 Eligibility requirements This special GST rule applies if an existing entity becomes registered or required to be registered for GST. A GST claim on opening stock will arise at the time of the entity registering or meeting the requirements to be registered if: the entity that holds stock is carrying on its enterprise; and the entity had acquired the stock solely or partly for a business/creditable purpose I reiterate that this special adjustment rule does not apply to any other items (e.g. plant and equipment) acquired by an entity prior to it becoming registered. 5.0 PAST “HOBBY” LOSSES ARE NOT DEDUCTIBLE IN A NEW BUSINESS You can only treat your horse activity as a “tax business” if it has met the ATO criteria. This article does not go into these factors, but this topic is constantly referred to in many of my other articles – see www.carrazzo.com.au . Once the business case is established and the business is “up and running”, it is only expenditure that relates to the period on or after start date that can be deductible to the business – there is no income tax law that allows the prior expenditure to be deductible. To avoid confusion, as noted above, pre-GST can be claimed in certain circumstances, depending primarily on when that GST is incurred and the type of entity that is running the new business. Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.

How wealthy would I be if I received a dollar for every query I have had on these issues! Buying a stallion (whole or in part via a syndication) or worthwhile commercial broodmare is no cheap exercise and cash-flow needs to be very solid to afford these spends when payment time comes. Enter the “cashed-up” Self-Managed Super Fund (SMSF) solution! This article will focus on some basic ground rules that need to be met to justify that these acquisitions can be “eligible investments” for your SMSF. 1. Superannuation Investments and the “Sole Purpose Test” The trustee of a regulated superannuation fund must ensure that the ''sole purpose test'' as prescribed in the Superannuation Industry Supervision Act (“SIS”) Act is satisfied at all times. The sole purpose test requires a fund to be maintained solely for one or more of the ''core purposes'', or for one or more of the core purposes and for ''ancillary purposes''. A fund which is not maintained solely for at least one of the core purposes fails the test, as does a fund which has as one of its purposes a purpose other than a core or ancillary purpose. “Core” and “Ancillary” purposes are defined as: Core purposes Retirement benefits Specified age benefits Pre-retirement death benefits Ancillary purposes Resignation/retrenchment benefits Disability benefits Post-retirement benefits Financial hardship benefits Welfare benefits Long service leave benefits Compassionate benefits The sole purpose test is a civil penalty provision, and trustees may be liable to civil and criminal proceedings if the provision is breached. 1.1 Current SIS Investment Standards Superannuation funds should ensure that they carefully evaluate their compliance with the SIS investment standards. As a general rule, a fund must: have an investment strategy; enter transactions on an arm’s length basis; not borrow unless it is a Limited Recourse Borrowing of a “single acquirable asset”; not acquire assets from members or relatives of members; not provide financial assistance to members or their relatives; and not invest in “in-house” assets above the relevant thresholds (currently 5% of the market value of fund assets). 2. Exotic investments & new tighter standards The Government announced that from 1 July 2011 new standards apply to “collectables” or “personal use assets” that are acquired by a Self-Managed Superannuation Fund (SMSF). Collectables includes items such as: Artwork; Jewellery; Antiques; coins or medallions; wine; cars; memorabilia; postage stamps or first day covers; rare folios, manuscripts or books; cars; recreational boats; memberships of sporting or social clubs, or assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for “personal use or enjoyment”. Unfortunately, the latter category generally includes racehorses in training, owned by a SMSF, given that the ATO has long classified them as “personal use assets”. A personal use asset is defined as an asset “kept mainly for the taxpayer’s personal use or enjoyment”. 2.1 What are the new standards for holding these assets? The tightened rules state that: The item must not be leased to, or part of a lease arrangement with a related party (a related party includes a member of the fund); If the item is transferred to a related party, it must be independently valued; The item must not be stored in the private residence of a related party; The item must not be used by a related party; The decision on the storage of the item must be recorded and kept for at least 10 years after the decision has been made; and The item must be insured in the fund’s name. It’s obvious from the above, that the very fact that an item such as a Racehorse in training must not be “used” or “leased” to a related party now makes them ineligible to be a SMSF asset and should be immediately removed to either a related party or outsider for an arm’s length value. Against this background, I comment below as the technical feasibility of having the stallions and mares held in a SMSF. 3. Stallion Shares To respond to these questions, background on the “sole purpose test” is required. No matter what type of investment a fund makes, whether it is an exotic investment or an investment in equities, the fund needs to carefully evaluate the investment prior to deciding to make, keep or sell the investment. Significantly, the expertise of the trustees of a fund may also have a bearing on the types of investments of the fund – if a trustee has considerable expertise in a particular area (e.g. horse breeder), it may well be that the investment portfolio of the fund will reflect that expertise. The key questions that trustees need to ask themselves when they are making investment decisions, particularly is a SMSF are: Does the investment satisfy the sole purpose test? Is the investment consistent with the investment strategy of the fund? Does the investment breach any of the SIS investment standards (see above)? When considering the appropriateness of the investment in terms of the sole purpose test, the fund needs to consider such things as: What is the expected income flow from the investment? Is there any capital appreciation likely to arise from the investment? If there is only an expected capital appreciation, does the amount of this appreciation justify the lack of income flow? Having regard to the above investment guidelines, I would consider it unlikely that a SMSF investment in a stallion share would cause it to fail the SIS “sole purpose test”, reasons where: The SMSF trustee has significant experience and expertise in the horse racing and breeding industry; An interest in a commercial stallion should be capable of generating a yearly cash-flow consistent with your fund’s investment strategy. Their expected yearly nomination fees should be able to generate a significant return on the funds invested; Unlike many public companies, a shareholder “overs” dividend can be reasonably expected on a year to year basis; You can secure the SMSF’s interest in the asset via insurance; Stallion Shares commonly generate capital appreciation. Even in years where dividends are low or non-existent, the amount of capital appreciation could easily justify the lack of income; and Most fund investment strategy’s require liquidity from its assets – stallion shares have a fertile secondary market and many avenues exist to enable a relatively quick disposal, e.g. bloodstock agents, auction, industry advertising etc. Service right – cannot be used by a related party Read this section below carefully, the use of a stallion right by your commercial breeding entity is not as straightforward as you might think! From 1 July 2000 “in-house assets” may not amount to more than five percent of the total market value of a fund’s assets. Under the SISA rules, the definition of an “in-house asset” includes: “an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party” A “lease arrangement” is defined in the SISA rules, being: “any agreement, arrangement or understanding in the nature of a lease (other than a lease) between the trustee of a SMSF and another person, under which the right to use, or control the use of, property owned by the fund”. In effect, this closes off the right for a related party (i.e. your breeding entity) to use a stallion right where the horse market value is greater than 5% of the total market value of the fund’s assets. Where this is the case, a related party, such as a breeding business in a related entity, could not use the service right, even where you pay the required “arm’s length” market value fee to the super fund. Where 5% test is met Where, however, the stallion value is less than 5% of the total market value of the fund’s assets, to secure the “arm’s length” nature of this investment, the related party must pay the fund a commercial fee where you use the service right for your own breeding activities. The “arm’s length rule” rule also applies to external parties that pay the SMSF to use the right. If the fund were of a complying nature, the fee would generate 15% tax within the fund (unless the fund is in pension phase where NIL tax applies).  Investment strategy Finally, any investment that your fund undertakes must be consistent with its investment strategy. For example, asset allocation percentages should be in line with the investment strategy currently formulated. If a stallion share is contemplated, I suggest that you adjust these percentages accordingly – fund trustees are encouraged to review investment strategies on a regular basis as and when needed. 4. Broodmares In my professional opinion, it could be reasonably argued that a broodmare can be held in a SMSF where she avoids the “personal use asset”/“collectable” designation outlined in the above stricter investment standards. This typically will be achieved where: The mare acquired is commercial, reflected primarily in original purchase price; The mare is used for commercial breeding purposes and all foals are ultimately sold on arm’s length basis. The primary purpose to sell foals is crucial; The mare and her foals are appropriately insured; The numbers acquired are not to the extent and scale of an income tax “business” (preferably two or less held for this purpose at any one time); It is not held as trading stock within the SMSF accounts; She is included in the investment strategy; and The SMSF trustee has capability and experience in the breeding industry. 5. Private Ruling for definitive ATO opinion If you or YOUR client base need a definitive ATO opinion on this issue, I would suggest you seek a private ruling prior to commencement of the activity. A private ruling is an expression of the Commissioner’s opinion of the way in which a relevant provision applies, or would apply, to an entity in relation to a specified scheme. Private rulings are usually made on application by an entity, the entity’s agent or legal personal representative. The ATO should issue the private ruling within 60 days. Where this does not happen, the applicant may request the Commissioner to issue the private ruling. If a further 30 days passes, the applicant has objection rights. Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.

Since April 2022 I have been constantly updating the industry on the status of Godolphin’s land tax exemption dispute with Revenue NSW. A Darley loss on assessment, a win at the NSW Supreme Court, a loss at the Court of Appeal – a drama that we hope would end with victory at the highest court in the land, the High Court. It was never a fait accompli that Darley would ever get their day in the High Court, special leave had to be applied for. Under this process the parties apply to have their cases heard by the court. During this process the court decides whether or not the appeal a party is attempting to raise merits the attention of the High Court. In great news, on 16 October the High Court announced it will hear an appeal on land tax exemption for rural land in NSW used for a business that combined the breeding and racing of thoroughbred horses. The taxpayer in Chief Commissioner of State Revenue (NSW) v Godolphin Australia Pty Ltd secured special leave to appeal to the High Court against the decision of the NSW Court of Appeal denying the exemption. The Court of Appeal had held that the land was not entitled to the exemption for land used for primary production within the Land Tax Management Act 1956 (NSW). That section exempted primary production land from land tax if the dominant use of the land was for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce. At the latest court hearing, the Court of Appeal had held that rural land used for a business that combined the breeding and racing of thoroughbred horses was not entitled to the exemption for land used for primary production. In other words, they successfully argued that the dominant use of the land was not for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce. The appeal court argued that the text and structure of the exemption rules as a whole, and the relevant authorities, indicated that the concepts of “use” and “purpose” are connected and should not be considered separately. In their words “use of land cannot be mixed into a conglomerate “animal maintenance” to which a purpose of sale then adheres.” My sources advise the High Court appeal will be held around April 2024. Fingers crossed my next update has a final chapter that brings a victory to Darley, a victory that will have widespread and positive implications to many similar operations in the breeding and racing industry. Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article. End of release.

Fringe Benefits Tax (FBT) is a confusing concept for many of my racing industry clients (and many Accountants too!). Not only do clients consider it an unfair and “silent” tax, but the frustration mainly revolves around as to when it applies. This article is going to explore the most common of all FBT liabilities – the providing of cars to employees. It will surprise few that car benefits are a major factor in the racing and breeding industry, given that valued senior employees (e.g., farm managers) are often incentivized to join a rural based employer through the provision of an appropriate work vehicle. Based on my experience with business clients and the ATO, below I will discuss the key issues surrounding the providing of car fringe benefits. 1. WHAT IS A CAR BENEFIT? Where an employer, associate of an employer or third party under an arrangement with the employer provides a motor vehicle to an employee, a car benefit may arise. Where a car benefit does arise, the employer will be liable to fringe benefits tax on the taxable value of that benefit unless an exemption applies. A car benefit arises where the following requirements are satisfied: the motor vehicle is a “car” (refer below) the car is provided to the employee or an associate (e.g., partner or child) of an employee the car must be “held” by the provider the car must be either: applied to a private use, or made available for private use. Refer below for my commentary on these above requirements. 2. WHAT IS A “CAR” FOR FBT PURPOSES? Not all of your business vehicles are subject to FBT, especially common farm vehicles. For FBT to apply, the employee or an associate of an employee must be provided with an eligible “car”. A “car” is defined the Tax Act. That is, any motor-powered road vehicle (including a four-wheel drive but excluding a motor cycle or similar vehicle) being: a station wagon, panel van, utility truck or similar vehicle designed to carry a load of less than one tonne, or any other road vehicle designed to carry a load of less than one tonne and fewer than nine passengers. Where a motor vehicle is not a car, then the provision of the motor vehicle will not be a car fringe benefit. Panel vans The inclusion in the definition of “cars” of panel vans refers to passenger car derivatives which have the same body configuration as a car forward of the windscreen. Delivery vans are not considered to be panel vans but may qualify as a car provided, they are designed to carry loads of less than one tonne or fewer than nine passengers. Utility trucks The meaning of “utility truck” in the Tax Act was considered in a Tax case. The court held that a utility truck is a vehicle which is a derivative of a car and does not include vehicles which are made along the same lines as a truck, i.e., which incorporate a chassis to which a variety of goods-carrying sections can be fitted. Other road vehicles A motor vehicle of any kind will be a car if it is designed to carry a load of less than one tonne and fewer than nine passengers. The method of calculating the designed load carrying capacity of a vehicle was considered in a Tax case. In that case, the board held that the question of what load a vehicle is designed to carry is to be determined in the light of the Australian design rules. Thus, in the case before the Board, a Volkswagen delivery van model No 214 which had a maximum loaded vehicle weight of 2,300 kg and an unladen weight of 1,195 kg was held to have a design load of 1,105 kg and would therefore not be a car. 3. WHEN DOES AN EMPLOYER “HOLD” A CAR? The car must be “held” by the employer, or by an associate of the employer, or by the third party with whom the employer or associate arranges for the car to be provided, a car is “held” by a person if it is: owned by the person leased by the person, or otherwise made available to the person by another person. An example of where a car would be otherwise made available is where a car owned by one member of a group of companies is lent to another member and is applied to or available for the private use of an employee of the second company. Long-term leases A car which is leased by the provider will be held by the provider. The term “lease” means “let on hire (including a letting on hire that is described in the relevant agreement as a lease) under an agreement other than a hire-purchase agreement”. A “lease” also includes a sub-lease. Short-term hire The hire of a taxi does not amount to the provision of a car benefit since the taxi is not “held” by the provider. Car under hire purchase A car held by a person under a hire-purchase agreement is deemed to have been purchased at the time it was first taken under the agreement and to have been owned by that person at all material times. This means that a car provided by an employer for the private use of an employee will give rise to a car benefit where the employer has hired the car under a hire purchase agreement. 4. CAR APPLIED TO A PRIVATE USE For a benefit to apply, the car must be applied by the employee for private use. A car is applied to a private use if it is used in accordance with the employee’s directions, instructions or wishes. Meaning of “private use” A “private use” is any use of the car by the employee that is not exclusively in the course of producing assessable income of the employee. “Producing assessable income” includes gaining assessable income or carrying on a business for the purpose of gaining or producing assessable income. Therefore, any employment-related use of the car by the employee would not be private use. Further, any use giving rise to other assessable income of the employee not related to employment would also not be private use. Example: A company allows an employee to use a company car on weekends. The employee runs a private income-producing business during his spare time. If the employee’s only use of the car over the weekend is in relation to the conduct of the business, then there will not have been any private use of the car. Travel between places of employment/business Travel between two places of employment, two places of business, or a place of employment and a place of business will generally be accepted as business travel where the person does not live at either of the places and the travel has been undertaken for income-producing purposes. Where the person lives at one of the places said to be a place of employment or business, the nature of the travel will depend on the nature of the income-producing activity carried on at the person’s home. Where a person carries on part-time income-producing activities at home and is employed full-time elsewhere, travel between home and work will not be a business trip unless some aspect of the travel is directly related to the part-time activity (e.g., a part-time orchardist delivering fruit). Similarly, travel to unrelated part-time employment by a person with a full-time business at home will not be a business trip. Where a self-employed person uses his or her home, or part of it, as a base of business operations (e.g., painters, plumbers, electricians), travel between home and another place of employment or business will be accepted as business travel where it is part and parcel of the income-producing activities. Business trips on way to or from work Where an employee makes a business call on the way to or from work, the whole home/work trip may in some cases be accepted as a business trip. This is where the employee has a regular place of employment, the travel concerned is to an alternative destination that is not a regular place of employment, and the employee performs substantial employment duties at the destination. Transport of equipment In limited cases, where an employee needs a car to carry bulky equipment around, and there are sound reasons for keeping the equipment at home, the use of the car may be attributable to the carrying of the equipment rather than home/work travel, and therefore be accepted as a business trip. 5. FBT PAYABLE— CAR FRINGE BENEFITS Employers have a choice of using either the statutory formula method or the cost basis method for calculating the taxable value of a car fringe benefit. If the employer wishes to use the cost basis method for a particular car, an election must be made otherwise the statutory formula method will apply. Given that a log book must be prepared by the employee to apply the cost basis, the statutory formula is easily the most common basis for calculating FBT. The actual FBT payable is arrived at by multiplying the “taxable value” by the FBT rate, this rate is currently 47%. Any FBT payable is tax deductible to the employer. 5.1 Statutory formula method for calculating car fringe benefits The statutory formula method applies where no election is made to use the operating cost method. The taxable value of a car fringe benefit using the statutory formula method is calculated by applying a statutory percentage of 20% to the base value of cars. Where a car is not held for the whole of an FBT year it is necessary to calculate the annualised number of kilometres travelled unless the 20% statutory percentage applies. The base value is calculated differently depending upon whether the car is owned or leased. However, the base value is generally the sum of the cost price and the expenditure on non-business accessories fitted after the car is first held. The taxable value is reduced by the proportion of days during the FBT year when the car was not applied to, or taken to be available for, private use and any payments made by the recipient of the car fringe benefit. 5.2 The cost basis formula for valuing car fringe benefits An employer may elect to use the cost basis method for valuing car fringe benefits relating to a particular car. The employer may make the election in relation to a particular car; the election does not have to apply to all cars held by the employer. If no election is made, the statutory formula will apply to the car. Elements in the cost basis formula for valuing car fringe benefits Under the cost basis method, the taxable value of a car fringe benefit is based on the operating costs of the car during the period over which the benefit arises. That cost is apportioned between business use (refer below) and non-business use of the car during that period. From the portion relating to non-business use, any payment of operating costs or consideration for use of the car by an employee (the recipient’s reimbursement payment) is deducted to arrive at the taxable value of the car fringe benefit. Business use percentage – log book required. The “business use percentage” for valuing a car fringe benefit using the operating cost method is the percentage of the total distance travelled by the car during the relevant period that relates to business use. It is based on a reasonable estimate of the number of business kilometres travelled by the car in the FBT year having regard to the keeping of a valid log book, odometer records, etc. Employers with a fleet of 20 or more cars can use a representative average business use percentage, provided certain conditions are satisfied. Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article. End of release.

Investors in the racing and breeding industry are not alone in continually being challenged to demonstrate an income tax or GST business with the ATO. It certainly keeps our office busy enough! An industry that draws similar attention is the building industry, which, like the racing and breeding industry, draws a wide cross section of players, big and small, in search of often generous returns. These industries also, obviously, operate under the same tax rules, especially re what the ATO expects a ‘business’ activity should look like. Bottom line, the ‘business or hobby’ principles in these industries share many commonalities and where I see a new ABN property “business” case that considers this issue, I will bring it to your attention. The case I will raise in this article, ‘Chami’s case’, was decided at the Queensland Administrative Appeals Tribunal (AAT) in the shadows of Christmas. The AAT found that builder Chami, who had obtained an ABN, registered for GST and claimed refunds in BASs was not carrying on an enterprise as defined in the GST Act. Accordingly, net GST refunds totalling approximately $35,000 were disallowed by the ATO. As an adviser, this case particularly resonated with me as the taxpayer kept little or no records, which is a real negative in trying to demonstrate a GST enterprise, thus I feel further vindicated continually emphasising what a strong business factor the keeping of ‘proper records’ is. Overview Chami was unable to provide any independent or supporting evidence to establish the existence of an enterprise, therefore he was not entitled to an ABN, and had not made taxable supplies or creditable acquisitions for GST purposes. Chami was unable to provide the following crucial information: particulars of any transactions to support the figures in the BASs; evidence of attempts to reconstruct his records or obtain substitute documents; and evidence of any precautions taken to prevent the loss or destruction of his records.

Back in April last year I wrote, with unbridled joy, about the Land Tax victory Godolphin had with Revenue NSW. The “victory” involved Godolphin successfully arguing on appeal to the NSW Supreme Court that, for the purposes of securing land tax exemption, the dominant use of two of its properties in the Hunter Valley was for the maintenance of animals for the purpose of selling their bodily produce or natural increase, notwithstanding the racing related activities that occurred on the properties. As background, Revenue NSW had originally assessed Godolphin for land tax for the 2014 to 2019 tax years in respect of its two properties (Kelvinside and Woodlands) in the Hunter Valley, contending that although the dominant use of the properties was for the maintenance of animals, that use was not for the required statutory purpose of selling those animals, their natural increase or bodily produce. The NSW Supreme Court agreed with Godolphin that it conducted an integrated stud operation (involving both breeding and raising thoroughbred horses) such that the dominant use of both properties was for the maintenance of animals for the purpose of selling their bodily produce or natural increase. In the Court's view, the objectives of winning races and pursuit of stallion excellence were part of the overall objectives of increasing the value of Godolphin's stud operations (being nomination fees in particular and sale of the majority of Godolphin's progeny) and that the sales were sufficiently proximate - if that was a required element - to the maintenance of the animals on the properties. More particularly, on this view there was no requirement for a dominant purpose of sale, so long as there was a purpose of sale associated with the maintenance of animals on the land. Evidence before the Court indicated that the combined breeding and racing model was unusual for the industry. The sum at issue was $1.438 million. COURT OF APPEAL DECISION To the disappointment of many of us, Revenue NSW, on appeal, recently had this Godolphin decision overturned. The Court of Appeal has held that rural land used for a business that combined the breeding and racing of thoroughbred horses was not entitled to the exemption for land used for primary production. In other words, they successfully argued that the dominant use of the land was not for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce. The appeal court argued that the text and structure of the exemption rules as a whole, and the relevant authorities, indicated that the concepts of “use” and “purpose” are connected and should not be considered separately. In their words “use of land cannot be mixed into a conglomerate “animal maintenance” to which a purpose of sale then adheres.” The court was prepared to accept that maintenance of animals could be made up of integrated uses but those could still have separate purposes. However, it was considered that the maintenance of animals on the land was comprised of integrated uses of breeding and racing, and each was conducted for dual and complimentary purposes, expressed succinctly in the Darley business credo “breed to race, race to breed”. In short, it was held that Darley had failed to show that one of those purposes predominated over the other. Maybe all is not lost for industry players that seek land tax exemption who have a similar business model to Godolphin as the industry giant has sought leave to appeal to the High Court. Using an old racing adage, the race is far from over! Carrazzo will continue to monitor this case closely and update the industry on all major developments. The case illustrates the issues that can arise when primary production land is used under business models that involve interrelated activities or integration of business activities. As it stands today, the test for exemption for primary production land is an all-or-nothing-test and this case shows that the purpose for which land is used can be just as important as the land use itself. WHAT DO WE LEARN FROM THIS CASE This area of land tax exemption needs to be carefully considered by advisors, especially when dealing with State revenue authorities wishing to crack down on so called “abused” privileges. Breeders who race too many offspring can not only compromise potential land tax exemption, but also income tax and GST business/enterprise status. A Business Plan should always be prepared that expressly state the dominant use of the land and on what basis that is determined. Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.  End of release.

Over the many years I’ve been writing tax articles for the horse industry, there has been a handful of articles that I rate amongst my all-time favourites, one of these being the 1998 article I wrote about the tax win of the David Hains battle with the ATO, all to do with the tax status of the sale of his champion racemare, “Rose Of Kingston”, to his related horse trust. The memory of David Hains and his immense contribution to the breeding and racing industry is top of mind today after learning of his sad passing – the industry owes a great debt of gratitude to this man, a true innovator whose business skills and success obviously went well beyond the racing industry. Nearly 25 years have passed since David Hains had this tax win, but, importantly, the principles surrounding this case have not changed, i.e., the income tax “business” status of an individual and his horse entity, in this instance a family trust, can vary depending on the circumstances. As a timely tribute, below I reproduce that article, virtually to the word. Enjoy the read and I urge you to still keep it at the top of your horse tax references. Vale David Hains, gone but never forgotten. OVERVIEW It is not very often that a horse industry tax case makes news within the mainstream media - unless the aggrieved party happens to be of the profile of millionaire merchant banker and incredibly successful breeder/owner David Hains. As a tax adviser to the industry, I welcomed the relative prominence this case received earlier this year as the final outcome further highlights that financial means and success does not guarantee a taxpayer will be considered as conducting a "business" of horse racing and/or breeding for tax purposes. Mr. Hains, with the assistance of his tax counsel, Mark Leibler, successfully argued that the sale of his great racehorse, and later broodmare, Rose of Kingston, to his family breeding company was not assessable to taxation on the basis that during the tax year in question, 1987/88, he was not carrying on the business of racing, breeding, training or trading in racehorses. Like many of my clients, I'm sure you're curious as to how Mr Hains, who has been so successful and invested so much money into the industry, could successfully argue that tax was not payable on the disposal of one of his high profile horses, especially given the amount of tax in dispute. The greater majority of this article will be spent summarising the facts of this case and reinforcing the principles that emerged from it. What became obvious to me on review of all of the facts is that it is definitely the profit intention of the taxpayer that emerges as the key determinative used by the ATO when deciding if a taxpayer is conducting a business of racing and/or breeding for tax purposes; this conclusion being consistent with the tax cases and ATO rulings in this area. FACTS OF THE "HAINS" CASE Sale of "Rose of Kingston" to David Hains for $50,000 In May 1981, Mr Hains acquired legal ownership of "Rose of Kingston" from his family breeding company, Kingston Park Studs Pty Ltd ("KPS"). The parties settled on a value of $50,000 as the transfer price, a price considered as being realistic given that she had already won 2 races since she commenced racing on 11 October, 1980. Mr Hains did not make a habit of acquiring racing stock from his breeding company, however he chose to acquire and race "Rose of Kingston", based primarily on his mother's affection for it as a foal. Counsel for Mr Hains noted that during his period of ownership of the mare, he owned no other horse in connection with the activities of KPS. What should be noted at this time is the pre–Capital Gains Tax acquisition date (May 1981) of the filly by Mr Hains. Therefore, the ATO could not argue that capital gains tax applied on her future disposal as this tax only relates the disposal of assets acquired after 19 September 1985. "Rose of Kingston" acquired by KPS for future breeding It is history now that "Rose of Kingston" was one of our great racemares, winning a further 8 races (including the VRC Oaks, AJC Derby and Australasian Oaks) and $513,800 dollars in the ownership of Mr Hains. When the mare was no longer fit to race, Mr Hains made the commercial decision of permitting KPS to acquire the valuable mare as a future breeding proposition. The transfer took place in August 1987, the horse being sold to KPS for $650,000, a reflection of her future value as a broodmare. 1988 Tax Return - request for ruling lodged In April 1989, Mr Hains lodged his tax return for the 1987/88 financial year, the tax year in which he had disposed of "Rose of Kingston" to KPS. The 1987/88 return was accompanied by a special request to the ATO to rule upon the tax assessability of the "Rose of Kingston" sale. The very fact that Mr Hains sought a ruling on the matter reflected his good faith in this matter and his desire to comply with the tax laws on this issue. Incredibly, it was not until May 1995 that the ATO ruled on the matter. Much to the chagrin of Mr Hains, the ATO concluded that the sale was assessable and accordingly his 1987/88 return was amended to include the $600,000 ($650,000 - $50,000) profit on the sale. Per publicly available documents filed on this matter, the ATO amended his tax return on the basis that Mr Hains was carrying on a "… business of racing, breeding, training or trading of horses or their bodily produce… and the profit on disposal of the horse… constitutes assessable income." As a result of the amendment, $212,128.68 of additional tax was payable. Appeal against the amended assessment A serious tax principle was now in the spotlight; was, as the ATO now contended, Mr Hains conducting a business of horse racing or breeding in his own right? Mr Hains and his tax counsel obviously thought not and in June 1995 lodged an objection against the amended assessment. Their argument was simple - Mr Hains was a racing "Rose of Kingston" as a mere hobby and thus the profit on the sale was of a capital nature. In February 1996 Mr Hains received a letter from the ATO stating that the objection had been disallowed. Within this ATO response, Mr Hains was reminded of his legal right to appeal the decision via the Administrative Appeals Tribunal or Federal Court. An appeal was lodged with the Federal Court. As part of the legal formalities relating to the intended appeal, in September 1996 the counsel representing Mr Hains filed an "Applicant's Statement Of Facts, Issues and Contentions." The grounds for appeal were clearly stated in this document, amongst the more important being: the $600,000 profit on the sale of the horse is of a capital nature and not to any extent assessable; the horse was not acquired for the purpose of profit making by sale or in carrying on or carrying out any profit undertaking or scheme; Mr Hains was not carrying on the business of racing, breeding, training or trading horses for their bodily produce; and as the horse was acquired pre-20 September 1985, the profit was not subject to Capital Gains Tax.

There is no shortage of horse racing and/or breeding operations who want to maximise the usage of their property through the providing of agistment services. What is often overlooked in this pursuit, from a tax perspective, as that the activity also must meet the ATO business tests in its own right, it is simply not enough to argue that running a ATO approved racing or breeding business, on the same property or within the same entity, will automatically mean that an agistment activity is also an income tax business. A recent tax case, we’ll refer to it as the “DQTB” case, decided in the Brisbane AAT reinforces this point. The Tribunal in DQTB affirmed the ATO’s objection decision that the DQTB husband and wife partnership were not carrying on a business of agistment activities— therefore the deductions claimed were limited to the amount of the agistment income derived. Facts The Taxpayers were formerly employed by the same organisation. KHMQ had health issues, and from October 2015 was accepted by Comcare as permanently impaired. DQTB’s position was made redundant in November 2016. The taxpayers (DQTB and KHMQ) acquired a 75-hectare property in Tasmania in 2017 on which to live and run a grazing business. For that purpose they set up a company of which DQTB was secretary and KHMQ was sole director. DQTB held qualifications in veterinary science and had published extensively in scientific journals, having a particular focus on sheep reproduction. However, she was not a licensed vet. Within the first few years of purchasing the property the couple spent nearly $120,000 constructing additional fencing, dams, water tanks and a laneway, and subdividing paddocks. The company “paid” the taxpayers $20,000 per annum as an agistment fee to conduct the grazing business on their property, including full payment for the 2017 year in which agistment only occurred for a few months. To make that payment the $20,000 was loaned to the company by the taxpayers. The loan was not documented and there were no agreed repayment terms. DQTB held high-level tertiary qualifications in veterinary science, with a focus on sheep. DQTB also had a mental illness, and her psychiatrist suggested returning to activities relating to her scientific background could be therapeutic and form part of long-term rehabilitation goals. In this context, the Taxpayers considered the idea of running a sheep farm. The Property comprised 75.42 hectares (186.37 acres) and included a dwelling and sheds.35 They also acquired chattels for $30,000, including a tractor with various attachments and two generators. Following advice, they set up a company (incorporated on 10 May 2017) with the intention of running a farming business. The Taxpayers were the shareholders. DQTB was the secretary and KHMQ the sole director. In the 2016–17 income year, the Taxpayers incurred significant costs — including $42,720 on fencing, as well as adding several large dams and large water tanks. Each taxpayer returned $10,000 as agistment income in the income year ended 30 June 2017 and claimed significant deductions for expenses said to be associated with their carrying on a business of providing agistment and full care animal husbandry and veterinary services to the company. The ATO issued the taxpayers with amended assessments, assessing them in each case on the footing that the deductions allowable were limited to the agistment income of $10,000 derived in the 2017 year. In DQTB’s case, an administrative penalty at the rate of 50% of the shortfall for recklessness was also imposed (amounting to $15,404). The ATO disallowed the taxpayers’ subsequent objections in full and the taxpayers sought review. Primarily at issue was whether the taxpayers, in conducting the agistment arrangements, were carrying on a business. The ATO submitted that the taxpayers’ activities on the property were in the nature of a hobby reflecting the professional background and veterinary interests of DQTB, and that in any case they had not discharged the burden of proving they were carrying on a business. It was contended that there was insufficient evidence to prove the arrangements between the taxpayers and the company were such that the $20,000 agistment fee was in return for both making the land available for agistment and the provision of animal husbandry services and veterinary care as the taxpayers maintained. Judgement findings The tribunal accepted that an annual fee of $20,000 was not an uncommercial amount to charge for agistment on the property (albeit not in respect of the 2017 year when agistment occurred for only a few months), and that the taxpayers did actually provide some animal husbandry and veterinary care services for the calves and lambs on the property. However, there was an absence of persuasive evidence that they had agreed to provide any particular level of care in return for the agistment fee. Further, there were services that DQTB, not being a licensed vet, could not provide and which were instead provided to the company by a local vet. That the external veterinary services were provided to the company rather than to the taxpayers was also inconsistent with a conclusion the taxpayers provided “full service” husbandry and veterinary care service. Although there was some evidence that would support a conclusion that the company had a profit-making purpose, the same could not be said of the taxpayers’ agistment activities. In the absence of detailed direct evidence from the taxpayers, any sound basis on which relevant inferences could be drawn and any profit ever emerging, a determination that they had a profit-making purpose for the agistment arrangements could not be made. The agistment transactions were conducted in an uncommercial manner, any business plan the taxpayers may have formed did not address the fundamental aspect of how their business activities might generate a profit, and the expenditure incurred was disproportionate to the income likely to be derived from agistment fees. The weight of the evidence pointed against a conclusion that the taxpayers were conducting a business. It was not in dispute that the Company carried on a grazing business, agisting stock on the Property. The company paid the Taxpayers an annual agistment fee of $20,000. At the end of the 2016–17 income year, KHMQ created and signed (both as director of the Company and on behalf of the Taxpayers) a document which provided for payment of the fee by the Company, stating that there would be no pro-rating of the annual fee for part years. An agistment activity can be considered an income tax “hobby”, such as that conducted by DQTB, regardless of the sophistication or size of the property. The property sales listing described the property as approximately 140 acres of grassed and 50 acres of light bush land which is level to undulating with a restored character home. Eleven paddocks, numerous spring filled dams of which there are 8, and 3 waterholes with a winter creek. Strong steel stock yards and several usable outbuildings including a barn/machinery shed. Summary It can be gleaned from the decision that the taxpayers failed to argue an agistment business based on: A business model with limited or no prospect of profit; A business plan was prepared, which is a positive, but the plan was not specific enough as to how a profit could be derived; The activities were conducted in an “uncommercial manner”, i.e., there was a disproportionate level of expenditure based on earnings potential; and The activities promised to the company were not delivered, i,e., the veterinary services were provided by the local vet and not the taxpayers. The ATO acknowledged, though, that there is no special rule relating to whether providing agistment arrangements constitutes carrying on a business. That is a question of fact to be decided by reference to all the relevant evidence and having regard to well-known indicia of a business referred to in numerous case authorities which include: the existence of a profit-making purpose; the scale of the activities; the commercial character, or otherwise, of transactions; and whether the activities are systematic and organised, often described as carried out in a business-like manner. Mere agistment or agistment with animal husbandry and veterinary care services? This case decision reflects that DQTB was conducting a “mere agistment” activity, as distinct from a commercial agistment activity. As a useful reference, a tribunal member, within this decision, drew a distinction between mere agistment and agistment with management and care of animals, stating: “Agisting another’s livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where a land owner is charged with the management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals. For example, if a landowner agreed with the owner of a herd of cattle to ensure their good health, proper veterinary care and husbandry of the progeny, marketing of their bodily produce and maintenance of the herd, then that landowner may be carrying on a business of primary production.” You are welcome to contact me if you would like me to clarify or expand on any matters I have raised in this article. End of release.

Regardless of what type of business we set-up for clients, always the most important consideration is what tax structure we should use. The structure we are asked most often about are companies – no great surprise as they would be the most common of all the small business tax structures. Though they are the most common small business structure, but companies may not suit every client’s circumstances. There are common structures such as sole trader, trusts, partnerships and joint ventures to also consider. This article will outline the Frequently Asked Questions (FAQ) I receive in relation to companies, and hopefully my responses will give you a sound basis in determining whether a company is right for your horse business. The tax laws have changed significantly in relation to companies in the past 20 years, you maybe surprised what an article like this will reveal. Overview I will begin by summarizing the main issues and characteristics of a company. Establishment – Directors/Shareholders are bound by a constitution Who controls – the Directors/Shareholders Cost to establish and operate – in comparison to other entities, low to medium Governing Law – Corporations Act Tax Rate from 1 July 2020 – 30% or 25% for smaller turnover (“base rate”) companies Distribution of Losses – Trapped in a company Carry forward of losses – Continuity of ownership and same business restrictions apply Income splitting – via dividends, especially so if a trust is the shareholder Access to 50% Capital Gains Discount – No Small Business Capital Gains Tax concessions – Yes Can the principal be employed – Yes Can loans be made to principals – Yes, but strict rules for the more profitable companies Shareholders – can be individuals or other related entities, such as a family discretionary trust