Horse Budgeting For Dummies

Over my many years of horse tax consulting, it never ceases to amaze me how little horse industry players know about preparing a credible budget or profit forecast for their businesses.

Though budgets are always a powerful management tool, to many industry players they have now become a must do, for three major reasons, being:

  1.  A pre-requisite for banks when obtaining business finance;
  2.  The ATO require them as part of a Business Plan where income tax business or GST status needs to be verified; and
  3.  The ATO require them of high income earners who are required to demonstrate long term viability if wanting to obtain immediate tax deduction for their horse losses under the “Non-Commercial Loss” (NCL) rules.

This article is aimed at breaking down the mystique of preparing budgets and will outline the major income and expense line items that should be part of a proper horse budget, in addition to providing some valuable tips as to how to go about calculating some of these items.

1. Budgeting – the nuts & bolts

A Budget is a financial plan outlining expected revenue streams and expenses over a given amount of time. The budgets we prepare for our clients are generally over a five year period, this generally being a sufficient amount of time to demonstrate to the bank or the ATO that the business will trend towards long-term profitability. Due to the long lead time it can take to turn a profit in the breeding industry, we occasionally go out as far 10 years where necessary, especially where there have been special circumstances that have affected the business in the early years, e.g. EI, drought, bushfires etc.

The ATO have provided guidance as to what they would like included in financial projections, these being outlined in taxation ruling TR 97/11, titled “Income tax: am I carrying on a business of primary production?”. In terms of expenses to include, it notes:

  •  “information about expected expenses and capital outlays – e.g., cost of travel, electricity, gas and water, cost of plant and equipment and stock”

Furthermore, an example set of financial projections is included in this ruling, these relating to a person who was planting 2,000 passion fruit vines, for your reference, refer an excerpt of that example below:

ATO example of financial projections in tax ruling TR 97/11

Paul Carrazzo-ATO example of financial projections in tax ruling TR 97-11

This example is helpful, but in terms of a proper budget forecast for a horse breeding business, far more detail is required given the greater amount of income streams and expenses that are inherent in this type of business.


2. Horse Business – typical income and expense items

I list below amongst the most important income and expense items to be included in a horse breeding/racing budget forecast, together with associated comments where relevant.

Income items

  •  Sale of bloodstock (weanlings, yearlings, mares, tried racehorses etc)
  •  Insurance recoveries
  •  Breeders Incentive Bonuses
  •  Insurance premium refunds
  •  Racing prizemoney
  •  Stallion income and “overs” dividends


Expense items

  •  Agistment (breeding & racing stock) 

Comment

A standard daily rate should be assumed with this item. For racehorses, it is safe to assume that a horse will be 6 months in work, 6 months agisting. 

  •  Accounting/Tax Consultancy
  •  Advertising & Promotion
  •  Bank Fees
  •  Bloodstock Consultancy
  •  Bookkeeping
  •  Breeders Incentive Scheme premiums (e.g. VOBIS)
  •  Computer expenses
  •  Dips/Drenches etc
  •  Electricity & Gas 

Comment

Many smaller breeding farms have a portion of the farm that is not used for the business (e.g. private dwelling of owners), hence this amount should be apportioned for business use only, e.g. 50%.

  •  Farrier costs
  •  Filing Fees (e.g. mare returns)
  •  Fodder
  •  Horse floating
  •  Insurance (bloodstock, property etc)
  •  Interest on borrowings
  •  Journals & References
  •  Leasing expenses (bloodstock, property etc)
  •  Legals
  •  Management Fees (bloodstock, property etc)
  •  Memberships to associations (TBV, NSWTBA, TBA etc)
  •  Rates & Taxes

 Comment

Refer “Electricity & Gas”

  •  Land Maintenance
  •  Motor Vehicle Expenses

Comment

Include business use only

  •  Printing & Stationery
  •  Registrations
  •  Repairs & Maintenance
  •  Saddlery, Rugs etc
  •  Seminars/Self Education
  •  Subscriptions (e.g. stud book)
  •  Service Fees
  •  Vet Fees
  •  Web Site expenses
  •  Selling Costs, such as:

• Entry Fees
• Commissions to agents
• Sales Preparation

  •  Stallion Syndicate Levies
  •  Telephone/Fax
  •  Training Expenses

Comment

As per agistment, a standard daily rate should be assumed with this item. For racehorses, it is safe to assume that a horse will be 6 months in work, 6 months agisting.

  •  Travel Expenses
  •  Wages


Capital outgoings

In terms of a bank finance application, I suggest the following “capital” items also be noted at the end of the forecast, so as to truly reflect the cash-flow position of the firm. These items are generally depreciable or included in trading stock and include:

  •  Broodmare purchases
  •  Racehorse purchases
  •  Weanling purchases for pinhooking/racing
  •  Property improvements (e.g. fencing)
  •  Business plant (e.g. floats, computers, trucks, farm vehicles etc)

N.B. Occasionally your budget will be required to include the depreciation expense relating to these items and it is suggested that your adviser is sought to assist you with this. For instance, there is depreciation and special tax write-offs available to items such fencing, electricity connection and irrigation expenditure.

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


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.

Prepared by:

PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
339 WILLIAM STREET, WEST MELBOURNE, VIC, 3003
TEL: (03) 9982 1000
FAX: (03) 9329 8355
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web Site: www.carrazzo.com.au

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