Owners and lessees
Common issues for owners and lessees include:
Racing or leasing as an enterprise
Owning and racing animals is generally an unprofitable activity that is often conducted as a hobby. Therefore, it is unlikely that you are conducting your activities as an enterprise if:
- your activity is a private recreational pursuit or hobby, or
- you do not have a reasonable expectation of profit or gain.
It is likely that you are conducting your activities as an enterprise if:
- you conduct your activities in a business-like manner and there is reasonable expectation that your activities will become commercially viable, and
- your activities generate an income based on sound business practices rather than luck or chance.
As a racing animal competes against other racing animals, there is no certainty which animals will perform better and win prize money. Therefore, winning prize money is more a possibility or a matter of chance rather than a reasonable expectation.
End of attention
If you are an individual entity and you own an animal for the purpose of racing or breeding, you must work out if you are carrying on an enterprise. You should take particular note of the activities listed that are not considered to be activities of an enterprise.
Example: Individual as a single entity
Richard owns racing animals and receives income from an extensive race animal breeding enterprise.
- Richard conducts his ownership activities in the form of a business, by:
- keeping records of his purchases, sales, prizes won and all outgoings
- maintaining a good knowledge of the racing industry and using this to have a reasonable expectation of making a profit as an owner
- racing a small percentage of progeny bred by him to promote the quality of his stallions and mares
- selling most of the progeny from his breeding activities commercially
- a history showing a profit in previous years
- owning and racing a large number of animals
- selling his animals when he believes they are no longer profitable and purchasing other animals
- having a business plan that details how a profit can be made, and
- not conducting the activity as a hobby.
Richard is carrying on an enterprise for GST purposes.
End of example
Where an ownership group consists of more than one entity, the enterprise test is applied to each individual entity to work out their GST registration requirements.
Therefore, it is possible for one or more of the entities supplying their interest in the animal to race to be registered for GST, whilst others are not.
Racing syndicates – single entity
If the syndicate is a single entity such as a partnership for tax purposes or an unincorporated association or body of persons, it is the syndicate supplying the animal to race. Therefore, it is the syndicate that needs to consider whether it is an enterprise, not the individuals that make up the syndicate.
Example: Partnership as a single entity
Richard (from the previous example) transfers 50% of the ownership of an animal to his wife. The ownership papers show both names, and the activities are now carried on as a partnership for income tax purposes. The partnership forms one entity.
For the partnership to obtain an ABN and register for GST, it must separately satisfy the enterprise test. This is regardless of whether Richard, as an individual, has already done so.
If the partnership is entitled to an ABN and GST registration, it will get a separate and unique ABN and GST registration, distinct from Richard's ABN and GST registration.
End of example
Racing syndicates – multiple entities
If the syndicate is not a single entity, for example it does not meet the partnership definition for income tax purposes, it may be the individual syndicate members that are supplying the animal to race. Each individual within the ownership group would need to consider whether they are carrying on an enterprise.
Example: Multiple entities
Richard (from the previous example) purchases a new animal. He retains 50% ownership and offers the other 50% to a group of people who have an interest in racing. This group, not including Richard, form a syndicate that is recognised by the racing body.
Assume that the syndicate does not constitute a partnership for income tax purposes but meets the tests of an unincorporated association. The animal, therefore, has two owners: Richard (as an individual), and the syndicate. The two owners constitute two separate entities.
Given the details of example Individual as a single entity Richard is likely to have an ABN and be registered for GST. Assuming the syndicate only has this 50% interest in an animal, they would not be considered to be carrying on an enterprise.
End of example
Working out GST turnover
If you are an owner or lessee of race animals and you carry on an animal racing enterprise, you are making a taxable supply to racing bodies each time you provide an animal to race.
Your GST turnover includes all monetary and most non-monetary payments you receive as a result of your racing activities.
If you are a lessor of racing or breeding animals, you are making supplies when you lease an animal to a lessee.
Your GST turnover includes monetary and non-monetary payments you receive for leasing the animal. Non-monetary payments include receiving some of the progeny or a part ownership of progeny as part of the lease agreement.
Leasing accounting requirements
There are differences between the leasing accounting requirements of the lessor and the lessee.
If you are a GST-registered owner and you supply an animal under a lease arrangement, this will generally be a taxable supply. Therefore, you need to account for GST of one-eleventh of lease payments you receive.
It is a matter between the lessor and the lessee and the details specified in the lease agreement as to the amount of the lease payments.
Example: Lessor registered for GST
John owns a horse and leases it to Phillip who is not registered for GST. Under the lease agreement, Phillip must pay one-third of the prize money he receives to John.
The horse wins a race and Phillip receives prize money (excluding GST) to the value of $1,200. Phillip pays John $400. John is registered for GST and must account for one-eleventh of this as GST in his activity statement.
Phillip's GST status is irrelevant for the purposes of John's GST liability.
End of example
If you are a lessee of a racing animal and you are registered for GST in relation to your racing activities, any supply of the leased animal you make to the racing body is taxable. Therefore, you must account for GST of one-eleventh of any monetary or non-monetary prizes you receive as a result of the supply.
If the lessor is registered for GST, the lease payments you make will include GST and you are entitled to a GST credit of one-eleventh of the lease payment. In this case you will need to obtain a tax invoice from the lessor.
If the lessor is not registered for GST, the lease payments will not include GST, therefore you will not be entitled to a GST credit for your lease payments.
Example: Lessee registered for GST
Lorraine owns a horse and leases it to Glenn who is registered for GST. Under the lease agreement, Glenn must pay one-third of any prize money he receives to Lorraine.
The horse wins a race and Glenn receives prize money, including GST, of $1,650. Glenn is registered for GST and must account for GST of one-eleventh of the prize money he receives ($150).
Glenn pays Lorraine $550 (one-third of the $1,650 prize). As Lorraine is registered for GST, she must account for one-eleventh of the $550 payment ($50) she receives as GST in her activity statement.
Glenn can claim a GST credit of $50, that is, one-eleventh of the lease payment.
End of example