High stakes for horseracing industry THE TAX OFFICE IS HOT TO TROT REGARDING THE BUSINESS STATUS OF RACEHORSE OWNERSHIP

The horseracing and breeding businesses are set to clash with the Tax Office. Industry representatives including Thoroughbred Breeders Australia, the Thoroughbred Racing Board and tax specialist Paul Carrazzo CPA, were set to take their grievances to the regulator last month as INTHEBLACK went to press.

Their message is that the Tax Office's attitude to the racing business is inconsistent, and is having a negative impact on the industry. It could result in major Arab and Irish investors scaling down their activities Down Under. "There are thousands of high-net-worth individuals who invest in the racing industry," says Carrazzo, who has thoroughbred favourites such as Haradasan, Court Command and Fast 'n' Famous in his "tax stable".

Carrazzo says the problem is that high-profile fully fledged racing and breeding businesses run by hihg-net-worth individuals are being dubbed as hobbies by the Tax Office.

In 2003 the Tax Office announced it was targeting racehorse owners, trainers, breeders, jockeys and farriers for audits. Initially, it was only targeting the NSW industry, comprising about 7000 people. Now it's extended its audits nationwide affecting more than 15,000 people - including some 10,500 owners. About 62 per cent of field audits have resulted in adjustments.

By asking whether they have business plans, use consultants or own a breeding property, the Tax Office is trying to ascertain whether the activities in question are legitimate businesses. Owners are under particular suspicion because horseracing is seen as high risk by the Tax Office. However, the sport also has the potential for abnormally high returns.

Between July 2005 and August 2006 the Tax Office sent out 3000 letters and questionnaires to owners, and has at least 500 audits planned.

The Tax Office classifies racehorse owning as a hobby rather than a business because it views the sport as a game of chance. For breeders it set the criteria for business status in 1985 (confirmed in a 1993 ruling) at six commercial broodmares - or less if the horses are of excellent quality.

At stake is millions of dollars. About $400m of prizemoney and bonuses is awarded to racehorses in Australia each year, making it the third-largest market outside the US and Japan. In 2005 Makybe Diva was the industry's highest earner, winning $5.18m.

By producing 16 per cent of the world's foals, Australia is second only to the US. Average foal cost is $52,232. Yearling average cost at the elite Easter sale this year was $288,497.

Breeding costs are equally high. Broodmares cost on average $40,000, and at the top end, more than $200,000. For top end stallions to service a mare, it can cost tens of thousands of dollars. The stud fee for Redoute's Choice is $275,000 - $25,000 of which is GST. The stallion's progeny have to date earned more than $24m.

Encosta de Lago, whose progeny have earned more than $38m, costs $176,000 ($16,000 GST).

Naturally some owners and breeders would like to claim that GST, and write off expenses against income. "The ATO is playing real hardball," Carrazzo says. "I think they're looking for a few high-profile scalps."

To date the tax cases won by the Tax Office have been unrepresentative of the industry as a whole, and have been small-scale operators.

Carrazzo says that many high-net-worth individuals run their racing and breeding activities as second-string businesses rather than hobbies. Some may be spending $500,000 to $1m plus at yearling sales, and more than $100,000 a year in service fees.

Carrazzo represents a large portion of major owners and breeders in the business. He says that his clients are ready to fight the Tax Office in court.

Carrazzo believes that in the next 12 to 18 months, major breeders and owners will challenge the Tax Office. "For me," Carrazzo says of the current situation, "it's just tax on four legs."

- by Ed Charles