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Edited version of your private ruling

Authorisation Number: 1012567308874

Ruling

Subject: Am I in the business of breeding animals

Question

Would the proposed partnership's breeding activity for the year ended 30 June 2014 be considered a business for income tax purposes?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You provided a comprehensive business plan setting out each of the steps in the process and forecast budgets for your activity.

You intend to breed with the one animal that you already own.

You will have to develop the goodwill of your activity over a period of time. This will be done by racing some of the offspring.

You will meet all the requirements of the industry.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

The activity is not considered to be a business for tax purposes in the 2013-14 income year. It is considered that the activity is still in a preparatory stage prior to the commencement of a possible business. The most important aspect of a breeding activity is the acquisition of quality livestock, to produce a sufficient number of offsping for sale, to have a potential to make a profit. Your breeding business activity cannot be said to have commenced until suitable breeding animals are available.

It is considered that you are not conducting the breeding activity at a commercial scale with the one animal that you have previously raced without success. You are in the preliminary stage of establishing whether this animal can produce quality offspring and also establishing your name as a potential breeder. You have stated that you have limited goodwill and will need to race the majority of the offspring in order to build this goodwill. You are entering into an activity of racing the offspring to establish the credentials of yourself and your breeding stock.

Detailed reasoning

Carrying on a business

We believe that when a business activity commences is like the question of whether a business is being carried on at all and depends on the large or general impression gained (Martin v. FC of T (1953) 90CLR 470 at 474; 5 AITR 548 at 551).

For a business activity to have commenced a person must have:

The term business is defined in section 995-1 and includes any profession, trade, employment, vocation or calling but does not include occupation as an employee.

The definition does not provide guidance to determine whether the taxpayer's activities amount to carrying on a business, rather case law is considered.

Taxation Ruling TR 97/11 addresses the indicators relevant in determining whether a business is being conducted. These indicators are considered in combination and a decision is made based on the overall impression which is gained.

The courts have indicated the following indicators are relevant;

The sole purpose of the proposed business activity is to breed and sell animals to make a profit.

Your budget forecasts for a number of years show total expenses greater than your potential sales income. Increase in income is dependant on the racing success of the offspring. The racing of animals in generally not considered to be a business activity.

Based on the facts above, the general impression gained, is that a business activity of breeding animals will not have commenced before the 2015-16 income year. This status needs to be reviewed on an annual basis and the relevant indicators in determining whether a business is being carried on applied to your facts.

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