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.
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
Ancillary purposes
The sole purpose test is a civil penalty provision, and trustees may be liable to civil and criminal proceedings if the provision is breached.
Superannuation funds should ensure that they carefully evaluate their compliance with the SIS investment standards.
As a general rule, a fund must:
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:
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”.
The tightened rules state that:
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.
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:
When considering the appropriateness of the investment in terms of the sole purpose test, the fund needs to consider such things as:
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:
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, 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).

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.
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:
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.
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 circumstances with an accountant or adviser specialising in this area.
Carrazzo Consulting provides high-quality accounting and tax advisory services. Our clients are typically successful, ambitious, and time-poor. They value our smart, practical advice, and trust us to safeguard their interests and assets.
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