Edited version of private advice

Authorisation Number: 1051806326366

Date of advice: 24 March 2021

Ruling

Subject: Taxation issue rising from horse racing activities

Question 1

Do the horse racing activities conducted by Trustee A of Unit Trust A (The Taxpayer), constitute the carrying on of a business such that revenue from those activities is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 ("ITAA 1997") and non-capital outlays and other expenses are deductible under section 8-1 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

XX/YY/20ZZ

Relevant facts and circumstances

BACKGROUND

Trust A is an Australian unit trust (the Taxpayer) that was established by a Trust Deed.

The Taxpayer runs a Scheme which consists of acquiring and racing horses.

The Taxpayer was established to offer investors an opportunity to participate in horse racing.

All of the stock owned by the Taxpayer are racehorses and there are no associated breeding activities.

The trustee of the Taxpayer is Trustee A.

Trustee A has engaged Manager B (the Manager) to manage the Scheme.

The Investors pay fees to the Manager to cover establishment, operating and compliance costs and costs related to the training and upkeep of the horses.

The income derived by the Taxpayer consists of prize money from horse racing and the proceeds from the sale of the horse after it has ceased its racing career.

The Taxpayer does not have its own any assets in respect of its activities other than the horses.

The Manager has limited in-house expertise and is heavily dependent on the expertise and advice of third parties when choosing what horses to purchase and race for the Scheme.

The Manager is heavily dependent on the judgement of third parties as to which races the horse will compete in in order to maximise the amount of prize money.

Prior to the commencement of the Scheme there was no preparation of a detailed business plan or projections of profit and commercial viability.

Since the commencement of the Scheme on XX/YY20ZZ the Taxpayer has received a small amount in prize money which has been significantly exceeded by the expenses, thus each successive income year has generated a loss.

The Manager is also responsible for marketing the Scheme to potential investors. The marketing material has emphasised the enjoyment of experiencing horse ownership rather than making a profit from it.

Relevant legislative provisions

Section 6(1) of the Income Tax Assessment Act 1936

Paragraph 8-1(b) of the Income Tax Assessment Act 1997

Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

After taking into account all the factors in Taxation Ruling TR 97/11: am I carrying on a business of primary production? (TR 97/11) and TR 2008/2 Income tax: various income tax issues relating to the horse industry, including whether racing, training and breeding activities (carried out as stand-alone activities or in combination) amount to the carrying on of a business (TR 2008/2) the Commissioner is of the view that from X/YY/20ZZ the Taxpayer's activities in acquiring, racing and selling horses do not amount to the carrying on of a business.

Detailed reasoning

Paragraph 8-1(1)(b) of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purposes of gaining or producing your assessable income.

If a taxpayer's operations amount to the carrying on of a business, the gross proceeds derived from the activities will be assessable income under section 6-5 of the ITAA 1997, being income according to ordinary concepts (ordinary income).

Section 995-1 of the ITAA 1997 defines the term business to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Section 995-1 of the ITAA 1997 defines the term primary production business to include maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

The question of whether a particular activity constitutes a business is one of fact and degree.

TR 97/11 lists the following indicia (which are based on legal precedent) to assist in determining whether a business exists:

•           whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•           whether the taxpayer has more than just an intention to engage in business;

•           whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•           whether there is repetition and regularity of the activity;

•           whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•           whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•           the size, scale and permanency of the activity; and

•           whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In addition, paragraph 18 of TR 97/11 states that the following three items are factors that support the main indicators as to whether a business is being carried on:

•           a business plan exists;

•           commercial sales of product; and

•           taxpayer has knowledge and skill.

After consideration of the above indicators, it follows that the Taxpayer is not carrying on a business of horse racing for income tax purposes.

The Taxpayer acquires and races horses as part of a vigorously pursued sporting activity rather than it being carried out in a businesslike manner such that it could be characterised as having the potential to make a profit.

The Manager has limited in-house expertise and is heavily dependent on the expertise and advice of third parties when choosing what thoroughbred horses to purchase and race for the Scheme.

The Manager is heavily dependent on the judgement of third parties as to which races the horse will compete in in order to maximise the amount of prize money.

The use of third party expertise does not guarantee any success on the racetrack as this is very much a sport of chance, with no certainty of income from any race or horse.

Whether the Taxpayer will realise a profit on the sale of its horses at the end of their racing careers is highly dependent on luck, namely whether the horse has had a successful racing career.

Prior to the commencement of the Scheme there was no preparation of a detailed business plan or projections of profit and commercial viability.

Since the commencement of the Scheme on XX/YY/20ZZ the Taxpayer has received a small amount in prizemoney which has not been enough to offset the expenses, thus each successive income year has generated a loss.

The Taxpayer has not demonstrated that there is any system or organisation that would enable profits to be made in the future and to negate the view that any prize money earnt is highly dependent on luck;

The Manager is also responsible for marketing the Scheme to potential investors. The marketing material has emphasised the enjoyment of experiencing horse ownership rather than making a profit from it.

As the Taxpayer is not carrying on a business of horse racing for income tax purposes, the income from its racing and selling activities is not regarded as assessable income and the associated expenses cannot be claimed as deductions.

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