Case E22

AM Donovan Ch

GR Thompson M
RK Todd M

No. 2 Board of Review

Judgment date: 27 June 1973.

A.M. Donovan (Chairman); G.R. Thompson and R.K. Todd (Members): In his returns of income derived during the years ended 30 June 1965 to 1967, the taxpayer claimed net losses arising from what was described as racehorse trading. In arriving at the losses claimed there were brought to account not only purchases and sales of horses and the value of horses on hand at the beginning and end of each period, but also the cost of training and racing them. Additionally, in the last year there was a fee for the service of a stallion to a mare owned by the taxpayer. The net losses amounted to $114, $5,209 and $3,906 respectively in the years abovementioned, and their quantum is not disputed. The Commissioner refused however, to allow the losses as deductions, and the matter comes before the Board for its consideration. On behalf of the taxpayer it was argued that the losses were admissible under sec. 51 or sec. 52. In so far as the first section is concerned, the question resolves itself into an enquiry into whether the taxpayer's activities in relation to the racehorses constituted the carrying on of a business or businesses.

2. In the course of his submissions, the taxpayer's representative argued that the taxpayer ``was carrying on business as a horse trader or breeder or both'', and by way of amplification said: ``What we have been endeavouring to show is that (the taxpayer's) activities are purchasing horses and dealing with them so as to make a profit either by racing them, reselling them or breeding from them.'' He argued that all three activities stood together and could not be separated. In this regard it might be inferred from the taxpayer's evidence that racing a horse is a necessary step in proving its ability so that its value is enhanced either as a racing or a stud animal. Nevertheless, in spite of the submission, it is proper to consider each of the three activities separately as well as all collectively.

3. The taxpayer's representative suggested that little help could be obtained from decided cases because of the marked differences in the factual circumstances considered from those existing in the present case. To an extent this observation is quite correct because most of the authorities have been concerned with betting wins as well as simple racing activities, and the present taxpayer has not bet on his own or other horses so that no question of the assessability of wagering wins and the deductibility of wagering losses arises. Nevertheless, the approach adopted by the Courts in the decided cases gives a valuable guide to the Board in the present references.

4. It is necessary to refer only to three cases which came before the High Court. The first is
Trautwein v. F.C. of T. (1935-36) 56 C.L.R. 196. At p. 206, Evatt J. observed:

``From a long time antecedent to the seven years under review, he had become interested in racing and interested from the point of view of money-making. He had begun to devote a substantial amount of time trouble and organising effort to acquire what he could from the sport. He established a stud farm for the purpose of breeding race horses. He raced his own horses and horses under lease sometimes operating to a very considerable extent. In these racing activities, he used the names of other persons so as to obtain

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better financial results. He betted frequently and systematically. He attended races regularly over all the years. He carefully selected the races on which he would bet and acquired valuable racing information from his trainers and others. He paid large sums of money in the purchase of horses in order to race them. He used agents both to bet for him and to settle for him. He used to bet in large sums of money, putting as much as £1,000 on a single race. From the years 1915 to 1923 he claimed deductions in his returns in respect of betting losses. It is contended that for him racing was merely a pastime and an amusement and he was, of course, active in the hotel trade. I have no doubt that he obtained enjoyment and amusement and sport from his racing activities especially when he was successful with his horses or in his bets. But it is not possible to find that the element of sport or pastime or amusement either dominated or was the main factor in these transactions. On the contrary, trying to look at the matter over a long period of time and having special regard to his employment and organisation of all the means of money-making that are associated with the sport of racing including prize money, betting on his own horses, and betting on other persons' horses, I reach the conclusion that, throughout the relevant period, his betting transactions were part and parcel of the carrying on of a horse-racing business by him, such business including systematic betting on his own horses and also those of other persons.''

Evatt J. was concerned in that case with the assessability of betting wins, but it is clear enough that in the particular circumstances he thought that the appellant's horse-racing activities constituted the carrying on of a business.

5. A much later case, which also came before a single Justice, was that of
Prince v. F.C. of T. (1959) 12 A.T.D. 45. One of the matters for determination by the learned Judge was the proper treatment of racing wins and losses and betting gains by a person who had previously been a bookmaker. It was common ground that horse-racing and betting went together. At p. 528, Menzies, J. said -

``During the years, the number of horses which won or were placed rose from twenty-five in 1950 to thirty-six in 1954. Training and agistment in 1950 cost £1575 and in 1954, £5252. There is evident over the period, except for the year 1951, a steady increase in racing activity. This is confirmed by Exhibit `D', Burman's yearly balances, which shows that as at 30 June 1949 the taxpayer had eleven racehorses, and by 30 June 1954 he had fifteen horses. The position is, then, that up to 19 March 1949, horseracing was part of the business of the taxpayer, and from that time on his activities increased rather than diminished. Looking at these activities alone, there is no ground for concluding that what was part of his business before 19 March 1949 ceased to be part of his business on that date. The taxpayer's case on the point depends, however, upon the character of his betting rather than his activities as an owner, and it is to this aspect of the case that I now turn.''

As part of his observations concerning the taxpayer's betting activities, his Honour, at p. 529, said: ``The taxpayer's financial methods confirm my view that betting was his business and that the racing of horses was in the main a means of successful betting'', and continued at p. 530: ``I find, therefore, that on the taxpayer's own account of his activities, it was part of his business to race horses and make what he could by organised betting.''

6. In the course of his judgment, his Honour referred to the decision in Martin v. F.C. of T., and said: ``A comparison between the events there and the events here satisfies me that the case is distinguishable''
Martin's case (1955) 90 C.L.R. 470, concerned the assessability of racing and betting wins by a person whose only connection with the turf was as racehorse owner and breeder. The matter came before the Full Court by way of appeal from the decision of a single Justice that profits from these activities were assessable. The Court, in dealing with the horse-racing aspect, observed -

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``... his Honour said: During the year 1944 and thereafter the taxpayer purchased several race horses. One called `Nitram' was bought for £892 and won six races. Another, `Halo Girl', was bought for £100 and won three races. She was bought for breeding purposes also. Three other race horses were bought for prices not stated. One, `Staffon', won five races, and each of the other two won a race. The income tax return for one year disclosed £950 prize money. The taxpayer did not keep racing stables; but he employed several trainers, from whom he obtained information for betting purposes. He also employed a man to make bets for him, so that he might get longer odds.''

Then, at p. 479, the Court continued:

``The definition of income from personal exertion includes the proceeds of a business carried on by the taxpayer, but the pursuit of a pastime, however vigorous the pursuit may be, does not usually amount to carrying on a business, and gains or losses made in such a pursuit are not usually considered to be assessable income or allowable deductions in computing the taxable income of a taxpayer. The onus, if the case is one in which onus assumes any importance, is on the appellant to satisfy the Court that the extent to which he indulged in betting and racing and breeding race horses was not so considerable and systematic and organised that it could be said to exceed the activities of a keen follower of the turf and amount to the carrying on of a business.''

On the facts it was held that the racing and betting wins were not assessable.

7. The test enumerated in the passage quoted immediately above is the one which should guide the Board in these references. It appears in a joint judgment of a Full Court and obviously is the principle which their Honours considered governed a matter of this nature. The other two cases referred to were as mentioned decisions of single Justices in which no attempt was made to state the principles to be applied. Furthermore, the facts in Martin's case bear a closer resemblance to those here present than do those in Trautwein's case (supra) or Prince's case (supra).

8. The matter for the Board, then, is whether the correct inference to be drawn from the facts is that the taxpayer was carrying on a business or businesses of racing horses, trading in horses and breeding racehorses in the three years under review. In considering the matter the Board is entitled to look not only at events of the years involved but also those of subsequent years.

9. The facts are not in dispute and can be fairly briefly stated. The taxpayer carries on a very successful business in a field quite disassociated from racing and in that business employs a manager. The taxpayer himself said that he was conducting his racehorse activities as a business and for the purpose of making money out of them. In that objective his expectations have been disappointed, for in addition to the losses in the three years with which we are concerned, losses were also incurred in the years ended 30 June 1968 to 1971, of $21,842, $16,853, $4,424 and $15,539 respectively.

10. The following table sets out the number of horses purchased each year, the stakes won by those horses up to 1972, the number of those horses sold and their sale price -

 Year Ended         Number
 30 June          Purchased  Cost Price  Stakes Won  Number Sold  Sale Price

1965                4         $4,647      $1,238          3         $2,539
1966                4         16,486      12,955          3          1,685
1967               10         29,508       8,283          8          6,624
1968               17         41,243      23,345          6          7,282
1969                2          8,313         486          1            750
1970                9         40,282       4,485          3          4,050
1971                1         18,000         -            -            -

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Of the horses sold, only four were disposed of at more than was paid for them, but the gross profit from the sale of these four amounted to only $453. The amount spent on horses was said to represent about 25% of the taxpayer's total assets. Virtually no other assets were involved in these activities because the taxpayer had no property for use as spelling paddocks or the like for his horses out of training, and nothing in the nature of a stud farm for his brood mares, all of which have been out on agistment.

11. Different trainers were engaged over the years, but the taxpayer's arrangements with them seem to have been no different from those of other owners. Some of the horses were trained and raced interstate. It was the trainers who decided what races the horses should contest and when they should be given a spell from racing. When they were taken out of training the horses were sent to spelling paddocks selected by the trainers.

12. In the course of his evidence, the taxpayer said that he had been interested in horses from boyhood, he had become a member of a metropolitan racing club and was a fairly regular racegoer, but for the most part he attended only weekend meetings. Occasionally he went to midweek racing if he wished to see a particular horse run. In the period of five months immediately preceding the hearing of the references, the taxpayer had attended only one race meeting. He said, however, that he devoted a good deal of time to the activity and before he purchased a horse he carefully studied its breeding and conformation. When making purchases of horses, which appears to have been almost invariably done when the animals were yearlings, he seems to have been accompanied by, and had the advantage of the advice of, a trainer. At times that advice has been ignored.

13. At the time of the hearing, it seems that the taxpayer had on hand 20 horses. Of these, six were colts which were let out on lease, as were four geldings and two fillies. He had three horses in training in his home State, and two in training interstate. Of the females included in these numbers there were four potential brood mares. There were also two brood mares, each with a foal at foot and in foal again. It is to be noted that when asked about one of the foals the taxpayer said that he intended to race it.

14. Probably the only additional matter that needs to be mentioned is that the fee paid for the service of a stallion during the year ended 30 June 1967, did not result in any progeny. The mare, after failing to produce a foal in two successive seasons, was sold.

15. From observation and general knowledge, racing of horses is usually indulged in by owners as a hobby or pastime or for the sake of interest in spite of the fact that owners are anxious for their horses to win and want the money which the winning stakes provide. Again from general knowledge, the cost of racing in most cases exceeds what is won and this is particularly so if the owner does not bet. The likelihood that racing will result in losses rather than profits tends against a ready inference that it is conducted as a business. But on the authority of Martin's case (supra), that inference is to be drawn if the activities are ``so considerable, systematic and organised'' as to exceed those of a keen follower of the turf. The taxpayer, although deeply involved financially, could afford what he spent on his horses; the frequency with which he went to race meetings, the time he spent deciding what yearlings to purchase and spent otherwise on his horses was on the evidence not inordinate; his arrangements with his trainers seem to have fallen into an ordinary pattern, and the trainers' management of the horses was what might be expected. We accept that the taxpayer earnestly wanted his horses to win money for him, but none of these things exceed what one would expect from a keen follower of the turf. That expectation is not changed in any way by reason of the fact that the taxpayer caused one of his employees to keep records of his racing receipts and expenditure. A careful weighing of these matters, and indeed all the evidence, leaves us unmistakably with the impression that the taxpayer's racing activities were no more than could be expected from a person vigorously pursuing a hobby or pastime.

16. There is one matter which at first sight distinguishes the taxpayer from many

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owners and that is the number of horses he has purchased within a comparatively limited period. This is to be explained in part, we think, by the fact that one of his early acquisitions proved to be very successful and the success seems to have encouraged him to buy more horses than his present trainer thought prudent in the hope that another or others would perform equally well. Many of these horses were bought cheaply as thoroughbred prices go, but before long the taxpayer had more horses than he could conveniently handle and most of them showed only limited promise. It seems to have been this situation that has led to a number of them being leased out. We think that, though the number of horses purchased was large, the taxpayer acquired them in the pursuit of his hobby and that the number alone did not convert his pastime into a business. For the reason mentioned, we are driven to the conclusion that the racing activities did not constitute the carrying on of a business by the taxpayer.

17. We now turn to the submission that the taxpayer was engaged in trading in racehorses. It is perfectly true that 47 horses have been purchased and that 24 horses have been sold, but as we have observed only four have produced profits and those only small ones. A careful scrutiny shows that the animals disposed of were those which had failed on the racecourse or which had developed or were suspected of developing defects. The most successful horse the taxpayer has owned was never offered for sale and never sold. At the end of his racing career he was given to a child as a hack. Another which had won stake money over four years was not offered for sale but at the time of the hearing was still on hand and, having suffered an injury, was out of training. A gelding purchased as a proven winner was sold within six months of purchase because he was developing a defect. Another successful horse was not offered for sale while he was in good form but only after he had become unsound. The taxpayer explained his failure to offer his successful horses for sale by saying that any offer to sell would be interpreted by possible buyers as indicating that something was amiss with the animal. On the other hand, the evidence of the trainer suggested that buyers for successful horses could be found without difficulty. Furthermore, although not a great deal was said about the terms of the leases entered into by the taxpayer, it seems fair to conclude that in the generality of cases when a horse had been leased out the taxpayer had for practical purposes put it beyond his power to sell the animal until the lease had expired. It seemed that when this happened the animal was at or nearing the end of its effective life as a performer in flat races and thus to have but a limited value for that purpose. We are firmly of the opinion that the evidence in relation to horses in both categories does not support the submission made on the taxpayer's behalf that he was engaged in the business of trading in racehorses. The inference that the horses were purchased for the purpose of selling them at an enhanced figure cannot be drawn from the facts. On the contrary, it is clear that the taxpayer acquired horses to race and those that were disposed of were the ones found to be useless or likely to become useless on the racecourse. The sale of rejected animals, though they be substantial in number, does not amount to a business of selling horses for it is no more than an incident of racing them. We accordingly find that the taxpayer was not engaged in the business of trading in racehorses.

18. The final matter is whether the taxpayer was carrying on the breeding of racehorses in the year ended 30 June 1967, so that the fee paid for stallion service in that year is deductible. We have said only one mare was joined in that period and the union did not produce a foal. The breeding of foals is as capable of being undertaken for the purpose of getting horses to race as for commercial purposes. In the years up to 1972 only two foals had been produced, although their dams were in foal again. No progeny had been sold. The taxpayer gave little evidence touching the objects he had in mind in breeding beyond saying that he intended to race one of these two foals. As has been mentioned, the taxpayer had no property on which his brood mares could be depastured and they were agisted with commercial studs. One is entitled to assume that the attendant expenditure would in the generality of cases militate against the profitability of breeding racehorses for sale. In all the circumstances,

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we are of the opinion that the proper inference to be drawn is that the taxpayer was not engaged in the business of breeding racehorses during the year ended 30 June 1967.

19. Perhaps an observation may not here be out of place. It is common knowledge that commercial studs make a practice of retaining some of the fillies produced for ultimate use as brood mares. On the basis that mares which have had a successful racing career are likely to produce valuable progeny, the fillies retained are raced either by the owner or by a lessee. In these circumstances racing may be regarded as part of the activities of the stud and partaking of their nature. That is the very converse of the taxpayer's position. With him racing was a pastime or hobby and whatever attempts were made to breed a racehorse in 1967 were ancillary to that hobby or pastime and bore the same character.

20. It should be mentioned that future events may show that the taxpayer has commenced to breed racehorses in a commercial way. In that event the income derived from that business will be assessable and the outgoings referable to it will be deductible. That much is clear. We would not like it to be inferred however from anything that we have said that it would necessarily follow that the taxpayer's racing activities would then fall to be treated as part of or ancillary to that business.

21. For the reasons mentioned, we are of the opinion that the racing of horses, the purchase and sale of racehorses and the attempts to breed a racehorse in the years under review neither individually nor collectively constituted the carrying on of a business. Accordingly, the losses incurred in those activities are not deductible.

22. Finally, reference should be made to a submission that in any event the losses claimed are deductible under sec. 52 on the basis that the activities are of the type described in sec. 26(a). We are not certain how the argument was put, whether it was suggested that the horses were purchased for resale at a profit and the racing was an incident in trying to enhance their value, or whether everything that was done was part of a profit making undertaking or scheme. The precise basis of the argument is however immaterial. Our findings in relation to the primary matters carry with them the rejection of this alternative. For the reasons explained, the horses were not purchased for resale at a profit, and racing them was not a profit making undertaking or scheme. Neither was the essay in breeding horses in the last year under review.

23. The Commissioner's decisions on the objections before the Board are correct and should be upheld and the assessments should be confirmed.

Claim disallowed

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