FRIDAY NOVEMBER 19, 1999
THE AUSTRALIAN FINANCIAL REVIEW
THE AUSTRALIAN FINANCIAL REVIEW
Thoroughbreds
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Tax crackdown ready to fall on breeders Reproduced with permission from the Australian Financial Review © Copyright, 1999 Jennifer Stynes |
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The recent release of the second stage of the Ralph business tax package has put the onus
on thoroughbred breeders to meet new stringent criteria if they are to be able to claim
losses for their activities.
The criteria, proposed to apply from July 1, 2000, are clearly targeted at individual high income earners who are claiming losses for non-commercial activities, which includes hobby horse breeders, and have been modelled on comparable provisions in other countries.
The criteria, proposed to apply from July 1, 2000, are clearly targeted at individual high income earners who are claiming losses for non-commercial activities, which includes hobby horse breeders, and have been modelled on comparable provisions in other countries.
Thoroughbred taxation specialist Mr Paul CarrazzoPhoto: PETER BRAIG |
According to Melbourne-based thoroughbred
tax specialist Mr Paul Carrazzo, principal of Carrazzo Consulting CPAs, the inclusion of
these criteria appears to be tangible evidence that the ATO has failed to discourage
individual taxpayers from claiming losses from these types of non-commercial activities
and have the clear objective of avoiding, what they term, "further revenue leakage".
"In the view of the ATO, these non-commercial activities have the characteristics of hobby or lifestyle choices and are often unlikely ever to be viable and generate profits in the long-term," Mr Carrazzo said. Under the proposals, an individual can claim losses in respect of a business activity if they are able to satisfy at least one of the five criteria they have set out. Mr Carrazzo said that breeders should be mindful of the four criteria that don't relate to rental properties or share investment activities. |
Mr Carrazzo has, for the purposes of applying the "assets" criteria, sought government
clarification as to what trading stock value should be used for broodmares and stallions
which are written down under the attractive special closing value option, given that
their tax value will, in most instances, be considerably less than their cost or market
value. For example, a mare 12-years-old or more will only have a tax value of $1 under
that option, a scenario not considered in the original recommendations.
Mr Carrazzo said that the ATO intends to issue additional guidelines as to what "significant commercial purpose or character" means in the context of this criteria.
"For the meantime, the best guidelines for taxpayers are the rulings the ATO has released, the most appropriate being a 1997 ruling in relation to what they consider to be a business of primary production," Mr Carrazzo said.
"The primary business factors noted in that ruling were: scale and regularity of the activity, profit intention and support from an independent source that the activities will be profitable.".
The preparation of a business plan was also noted in that ruling, a requirement that Mr Carrazzo predicts will also form part of the ATO's final guidelines in this area. He said that he was "relieved that common sense has prevailed and that the criteria to claim losses are not strictly financial, given the nature of the horse breeding industry and the number of years it takes to be able to generate a profit".
He added that the Administrative Appeals Tribunal has acknowledged this reality in a 1996 case dealing with this area. In that case the members acknowledged that it may take some five or six years before a profit on horse breeding activities is shown.
"These criteria will obviously be easier to fulfil for existing breeders who have built up their stock numbers and business assets over many years," Mr Carrazzo said.
"If breeders fail the financial criteria they may still claim their losses by relying on the last criteria and demonstrating that their activities were undertaken with a significant commercial purpose or character.
"This safeguard criteria could be especially helpful to those breeders who have invested significant capital but are still very much in the start-up phase. All is not lost for the breeder if, in a worst-case scenario, none of the criteria can be met and a loss cannot be claimed in a particular tax year.
The loss from the activity can be carried forward indefinitely, a new initiative that Mr Carrazzo applauds.
"In a subsequent year, the loss will be available to be offset against a profit from a 'same or like business activity', or against other income when one of the criteria is satisfied," he said.
"A 'like' activity can be another primary production activity that has been pursued, such as cattle grazing."
Mr Carrazzo cautioned those breeders who may think that they can merely transfer their activities to a company or trust to avoid these stringent new requirements.
"Not only must these entities still prove that they are conducting a taxation business of horse breeding to be able to claim a loss, but other unforeseen tax liabilities, including capital gains tax, may be triggered at the time of transfer," he said.
With the July 1, 2000 introduction of the GST, Mr Carrazzo said it was very important that smaller breeders who do not meet these proposed criteria think about restructuring their activities so they can be met.
"If they don't, not only will losses not be able to be claimed, but GST registration will be refused as only 'taxable enterprises' are eligible to be registered.
"Breeders who don't register will not be able to claim back the GST they have paid on expenses, increasing their overall cost structure."
Mr Carrazzo said that the ATO intends to issue additional guidelines as to what "significant commercial purpose or character" means in the context of this criteria.
"For the meantime, the best guidelines for taxpayers are the rulings the ATO has released, the most appropriate being a 1997 ruling in relation to what they consider to be a business of primary production," Mr Carrazzo said.
"The primary business factors noted in that ruling were: scale and regularity of the activity, profit intention and support from an independent source that the activities will be profitable.".
The preparation of a business plan was also noted in that ruling, a requirement that Mr Carrazzo predicts will also form part of the ATO's final guidelines in this area. He said that he was "relieved that common sense has prevailed and that the criteria to claim losses are not strictly financial, given the nature of the horse breeding industry and the number of years it takes to be able to generate a profit".
He added that the Administrative Appeals Tribunal has acknowledged this reality in a 1996 case dealing with this area. In that case the members acknowledged that it may take some five or six years before a profit on horse breeding activities is shown.
"These criteria will obviously be easier to fulfil for existing breeders who have built up their stock numbers and business assets over many years," Mr Carrazzo said.
"If breeders fail the financial criteria they may still claim their losses by relying on the last criteria and demonstrating that their activities were undertaken with a significant commercial purpose or character.
"This safeguard criteria could be especially helpful to those breeders who have invested significant capital but are still very much in the start-up phase. All is not lost for the breeder if, in a worst-case scenario, none of the criteria can be met and a loss cannot be claimed in a particular tax year.
The loss from the activity can be carried forward indefinitely, a new initiative that Mr Carrazzo applauds.
"In a subsequent year, the loss will be available to be offset against a profit from a 'same or like business activity', or against other income when one of the criteria is satisfied," he said.
"A 'like' activity can be another primary production activity that has been pursued, such as cattle grazing."
Mr Carrazzo cautioned those breeders who may think that they can merely transfer their activities to a company or trust to avoid these stringent new requirements.
"Not only must these entities still prove that they are conducting a taxation business of horse breeding to be able to claim a loss, but other unforeseen tax liabilities, including capital gains tax, may be triggered at the time of transfer," he said.
With the July 1, 2000 introduction of the GST, Mr Carrazzo said it was very important that smaller breeders who do not meet these proposed criteria think about restructuring their activities so they can be met.
"If they don't, not only will losses not be able to be claimed, but GST registration will be refused as only 'taxable enterprises' are eligible to be registered.
"Breeders who don't register will not be able to claim back the GST they have paid on expenses, increasing their overall cost structure."