Budget update – ATO crackdown on ABN registrations

With a Government desperate for revenue to find a ‘pathway’ back to surplus, it comes as little surprise to this office that last night’s Budget contained a pledge by the Government to devote greater resources to the more thorough screening of ABN registrations prior to issuing.

The racing industry should take this pledge very seriously as it is very common for our industry to have ‘hobbyists’ incorrectly applying for GST registration, only to have them revoked down the track, and prior year GST credits refunded, when they become subject to greater ATO scrutiny. Any industry, such as ours, where there is a fine line as to what is a tax business or GST enterprise and what a ‘hobby’ is, will be in the firing line with this increase in ATO compliance activity.

Specifically, the Government will provide $80.2 million dollars in extra funding to strengthen ‘up-front’ checks for issuing of ABNs and encourage the use of AUSkey (the access point for online services of the Australian Business Register).

I will release more details on this measure when the ATO formalise what this greater scrutiny will involve. However, for the time being, I will provide a timely update below as to what the factors the ATO expect from a racing and breeding activity for it to be considered an ‘enterprise’ for GST purposes.

  1. 1.What is a Racing or Breeding GST ‘enterprise’?

An enterprise, amongst other things, is any activity or series of activities carried on in the form of a “business”. The definition of business “includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee” This is identical to the definition of “business” used in the Tax Act.

1.1 Racing without associated breeding or training activities

The general rule is that racing horses on a ‘stand-alone’ basis, without training or breeding activities, is not accepted as a business. In the reported cases where horse racing was held to be a business, the racing was either associated with concurrent breeding or the taxpayer was also a horse trainer.

To overcome the general rule you must demonstrate that the racing activity:

  • is conducted as a business with the intention of making a profit and not primarily for pleasure;
  • is so considerable, systematic and organised as to exceed that of a keen follower of the sport;
  • is conducted in such a way that it is reasonable to expect it to become commercially viable,
  • does not rely primarily on chance as distinct from business acumen.
  • It may be necessary to outline whether, given the number and quality of horses, it is reasonable to expect that you can make a profit if the horses are reasonably successful. It is relevant to look at whether:
  • the taxpayer acts on expert advice or has expertise in relation to the training and racing of horses;
  • records are maintained in a businesslike manner; and
  • the activities do not rely primarily on chance to be commercially viable.

1.2 Breeding, whether or not combined with racing

The same tests as outlined above apply to taxpayers involved in breeding or breeding and racing horses. Relevant factors would be:

  • the quality and number of horses;
  • the turnover of horses (for example in yearling sales);
  • regular service of mares;
  • the use of stallion rights;
  • progeny must be sold on a commercial basis;
  • prior horse industry experience;
  • existence of a breeding property;
  • whether geldings, barren horses or non-breeding stock are kept other than for racing;
  • whether colts are sold;
  • 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);
  • if racing, are they “integrated” with the breeding activities?;
  • stallions used for breeding need to have market appeal (commerciality);
  • whether the activity is combined with other income-earning activities such as training other people’s horses;
  • registration of a business name;
  • establishing a separate bank account; and
  • does the taxpayer exercise “control” of his/her stock?

Less relevant factors which may be addressed are:

  • time put into the operation;
  • assets; and
  • the level of success.

Operation of the activity via a company or trust structure is not decisive. The activities of racing and breeding may be considered together or separately. In D’Arcy v FC of T 2008 ATC, the AAT held that a taxpayer’s part-time horse breeding activities did not constitute an enterprise for GST purposes.

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.

1.3 An activity ‘in the form of an adventure or concern in the nature of trade’

Of relevance to the racing industry, an ‘enterprise’ can also be an activity ‘in the form of an adventure or concern in the nature of trade’. In a case involving rather exceptional facts (‘Swansea’), a company controlled by an art collector/investor, which over a period of eight years spent $4.8m on artworks but sold only a very small number of lesser works, was held to be carrying on an enterprise where: (1) its activities were apparently systematic and organised on a businesslike basis; and (2) there was an intention to sell, where appropriate, when the circumstances were right.

The principles in Swansea’s case opens up many opportunities for industry participants to register and proper advice should be sought as to its application.

You are welcome to contact me if you wish me to clarify or expand upon any of the matters raised in this article.

End of release

DISCLAIMER

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.

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