House of Representatives

Taxation Laws Amendment Bill (No. 5) 1992

Taxation Laws Amendment Act (No. 5) 1992

Income Tax (Dividends and Interest Withholding Tax) Bill 1992

Income Tax (Dividends and Interest Withholding Tax) Amendment Act 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Reduced accelerated write-down for horse breeding stock

Summary of proposed amendments

Purpose of amendment: To amend the special option available to horse breeders for valuing breeding stock on hand at the end of a year of income.

Under the proposed amendments:

·
male horse breeding stock will be able to be written-down at a maximum rate of 25% on a prime cost basis; and
·
female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12, with a maximum write-off of 33 1/3% of cost price.

There is no change to the options available for valuing live stock (other than horse breeding stock) on hand at the end of a year of income. Such stock will continue to be valued at cost price or market selling price at the option of the taxpayer.

Date of effect: 19 August 1992.

Background to the legislation

The existing law requires horses that are more than three years old and are not geldings or spayed females, referred to as "eligible horses", to be taken into account as live stock at the end of the year of income. The value at which these horses are to be taken into account is, at the option of the taxpayer: cost price, market selling value, a general closing value or, for mares only, a special closing value. Only horses acquired under a contract entered into after 20 August 1985 can be valued using the general or special closing value. (Section 32)

The general closing value allows eligible male and female horses to be written-down on a diminishing value rate of 50% and 33 1/3%, respectively. Female horses valued at the special closing value can be written-down on a prime cost basis, so that their value is not less than $1 by the end of the year in which the horse is age 12, with a maximum rate of write-down of 33 1/3% of cost price.

Explanation of proposed amendments

The Bill will amend the Principal Act to repeal the existing arrangements that allow eligible horses acquired under a contract entered into after 20 August 1985 to be valued at "general closing value" and "special closing value".

The Bill will provide a new option to horse breeders for valuing breeding stock on hand at the end of a year of income. This new option will be available for horses that are over three years old and are acquired under a contract entered into on or after 19 August 1992.

Under the new option:

·
male horse breeding stock will be able to be written-down at a maximum rate of 25% on a prime cost basis; and
·
female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12, with a maximum write-off of 33 1/3% of cost price.

The Bill proposes to effect these amendments by repealing existing section 32 and inserting new sections 32 and 32A. New section 32 will contain the same options for valuing all live stock other than horse breeding stock as the existing section 32. New section 32A will apply to horse breeding stock and will contain all the valuation options available to horse breeders in relation to their breeding stock [Clause 23]

The live stock valuation provisions have been restructured in the interests of clarity and simplicity.

live stock other than horse breeding stock

Live stock on hand at the end of a year of income will continue to be taken into account for the purpose of determining taxable income at its cost price or, at the taxpayer's option, its market selling value [New subsection 32(1)].

A taxpayer will continue to be able to adopt a value other than cost or market selling value for the whole or part of the live stock if the taxpayer satisfies the Commissioner that there are circumstances which justify another value [New subsection 32(2)].

In determining what other value is to be adopted, the Commissioner will allow named and identified stud stock to be taken into account at market selling value, even if the balance of the breeder's stock is valued at cost. As a general rule, valuing such stock at an estimated market selling value that is obtained by writing 20% off the cost price each year would be acceptable, provided there is no concrete evidence that the animal's value had in fact been maintained or increased.

Where a taxpayer does not exercise one of the options available in new subsection 32(1) within the time prescribed, the value of live stock to be taken into account at the end of the year of income is to be the cost price of the live stock [New subsection 32(3)].

Live stock acquired by a taxpayer before 19 August 1992, whether under a contract or otherwise, will continue to be valued under the previous section 32 as if it had not been repealed [Subclause 24(2)].

Value of horse breeding stock at the end of the year of income

The options available to a taxpayer for valuing horse breeding stock on hand at the end of a year of income for the purposes of ascertaining taxable income will be:

·
its cost price; or
·
market selling value; or
·
a special closing value.

[New subsection 32A(2)]

A value other than cost, market selling value or special closing value will be able to be adopted if the taxpayer satisfies the Commissioner that there are circumstances which justify the adoption of another value [New subsection 32A(3)].

In determining what other value is to be adopted, the Commissioner will allow named and identified stud stallions and mares to be taken into account at market selling value, even if the balance of the breeder's stock is valued at cost. As a general rule, valuing such horses at an estimated market selling value that is obtained by writing 20% off the cost price each year would be acceptable, provided there is no concrete evidence that the horse's value had in fact been maintained or increased.

Where the taxpayer does not exercise one of the options available for valuing horse breeding stock, the stock will be taken into account at its cost price [New subsection 32A(4)].

What is horse breeding stock?

Live stock will qualify as horse breeding stock to which the new provision applies if it has these three characteristics:

·
the taxpayer acquired the horse under a contract entered into on or after 19 August 1992 [new paragraph 32A(5)(a)];
·
the horse is three years old at the end of the year of income [new paragraph 32A(5)(b)]; and
·
the horse is held for breeding purposes [new paragraph 32A(5)(c)] .

Contract

The horse must have been acquired under a contract and the contract must have been entered into on or after 19 August 1992. The horse need not have been acquired as breeding stock. So horses not acquired under a contract (say, because they are bred by the taxpayer) will not have the option of being valued at the special closing value.

Age of the horse

The age of the horse will be relevant in determining whether the horse is three years old and therefore eligible to be valued at the special closing value. It will also be relevant in calculating the special closing value of female breeding stock.

The age of a horse will be the number of years after its "birth date" [New subsection 32A(10)].

The "birth date" (a defined term) depends on whether the horse was foaled before or after 1 August. If the horse was foaled on or after 1 August the birth date is 1 August in that calendar year. If the horse was foaled before 1 August, the birth date will be 1 August in the previous year. For example, a horse foaled on 1 September 1989 will have a birth date of 1 August 1989, and one foaled on 1 July 1989 will have a birth date of 1 August 1988 [New subsection 32A(13)].

Held for breeding purposes

Horses must be held for breeding purposes to qualify for the special valuation options. The horse must not merely be capable of breeding.

This requirement is different from the previous concession which was available as long as the horse was at least three years old, and was not a gelding or a spayed female horse at the time the contract to acquire it was entered into.

Special Closing Value

The special closing value will be the " opening value" less a "reduction amount" or $1 [New subsection 32A(6)].

The special closing value will be $1 where:

·
a female horse is 12 years of age or older (see earlier notes: "Age of the horse") [new paragraph 32A(6)(a)] ; and
·
a horse (male or female) has been written-down to the point where the "reduction amount" exceeds the " opening value" [new paragraph 32A(6)(b)].

Opening value

Where the horse was live stock at the end of the previous year of income and was held for breeding purposes for the whole of the year of income, the opening value will be the value of the horse at the end of the previous year of income [New paragraph 32A(7)(a)].

If the horse became breeding stock during the year of income, even if it had been previously been held as breeding stock, the opening value will be the lessor of:

·
the original cost of the horse; or
·
the depreciated value of the horse (section 62) when it became live stock of the taxpayer [New paragraph 32A(7)(b)].

Depreciated value

The depreciated value of a horse (or any depreciable asset) is its cost less the amount of depreciation allowed as a deduction, or which would have been allowable if the horse (or other asset) had been used wholly for the purposes of producing assessable income.

Where a horse that became breeding stock during the year of income was not previously used by the taxpayer for the purpose of producing assessable income, it will have a notional "depreciated value". That is, the depreciated value of the horse will be the difference between its cost and the amount of depreciation that would have been allowable as a deduction if the horse had been used wholly for the purpose of producing assessable income.

Where a taxpayer has used a horse for the purpose of producing assessable income, and then uses it for breeding purposes, its "depreciated value" will be its actual depreciated value.

Reduction Amount

The reduction amount is the amount by which horse breeding stock will be able to be written down for the year of income. An amount is deducted from the opening value to arrive at the special closing value of a horse.

The maximum amount by which male horse breeding stock will be able to be written-down will be 25% of the cost. The reduction amount for male horses will be calculated using the formula:

base amount * nominated percentage * ( holding days in year of income/Total days in year of income)

[New subsection 32A(8)]

Female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12. The reduction amount for any year, however, cannot be greater than 33 1/3% of the cost of the horse.

The reduction amount for female horse breeding stock will be calculated using the formula:

( base amount/ reducing factor) * ( holding days in year of income/Total days in year of income)

[New subsection 32A(9)]

Formula items

" base amount" is the lessor of either the original cost price of the horse, or its depreciated value. (See earlier notes on "Depreciated value")

" nominated percentage" (male horses only), is the percentage of the cost of a horse which the taxpayer nominates to write down for a particular year of income. It cannot be greater than 25%. A horse will not have to be written down by the same percentage each year.

" reducing factor" (female horses only) is the greater of:

·
three; or
·
12 less the age of the horse (in whole years) on the day it began to be held for breeding purposes. If the horse has been held for breeding purposes on more than one occasion, the number of years to be deducted from 12 is the age the horse was on the last occasion it began to be held for breeding purposes.

" Holding days in year of income" is the number of days the horse is actually held for breeding purposes unless the horse was not held for breeding purposes continuously. If there was a break in the period the horse was held for breeding purposes during the year of income, the holding days for the purposes of the formulae is the number of days from the last occasion the horse began to be held for breeding purposes.

"Total days in year of income" will mean 365 days or 366 days in a leap year.

Horse becomes live stock more than once in a year

Where the horse becomes livestock more than once before the end of the year, the horse is taken to have become live stock of the taxpayer on the last occasion before the end of the year of income on which it became the live stock of the taxpayer [New subsection 32A(11)].

Therefore, where a horse that was live stock of the taxpayer was sold but subsequently was re-purchased by the taxpayer and taken into account again as live stock, the horse will be taken to have become live stock on that later occasion on which it became the taxpayer's live stock.

Horse becomes breeding stock more than once in a year

A taxpayer may hold a horse as breeding stock more than once during a year of income. This might happen because the horse has been transferred in and out of the breeding programme since the beginning of that year of income, or it might have been breeding stock at the beginning of the year of income but was not used for breeding purposes for the whole of the year of income. In such cases, the horse will be taken to have become breeding stock of the taxpayer on the last occasion before the end of the year of income when it became breeding stock [New subsection 32A(12)].

Examples illustrating the new provisions Example 1 A male horse was acquired under a contract on 1 July 1993 for $6000. It was used alternatively for different purposes during the year as follows:

i)
1/7/93 to 1/9/93 breeding purposes
ii)
2/9/93 to 1/1/94 racing purposes
iii)
2/1/94 to 30/6/94 breeding purposes

For the purposes of calculating the special closing value, the reduction amount will calculated according to the formula in subsection 32A(8).The base amount is the lesser of the cost price or the depreciated value at the time the horse became the live stock of the taxpayer.The depreciation for the period based on the period from 2/9/93 to 1/1/94 (121 days) is calculated as follows:

$6000 * 10% * (121/365) = $198.90

Therefore the depreciated value (and the base amount) as at 1/1/94 would be:

$6000 - 198.90 = $5801.10

The number of holding days in the year of income is the period from 2/1/94 to 30/6/94 (based on subsection 32A(12) ie. 180 days.Assuming the taxpayer's nominated percentage to be 25%, the reduction amount is calculated using the formula in subsection 32A(8):

$5801.10 * 25% * (180/365) = $$715.20

Therefore, the opening value (paragraph 32A(7)(b)) is the lesser of the cost price of the horse or its depreciated value. In this case the opening value is the depreciated value which is $5801.10.The special closing value (ie, opening value less reduction amount) is:

$5801 - 719 = $5082

Example 2 A female horse was acquired for breeding purposes under a contract on 1 September 1992 for $8000. The horse was foaled on 1 October 1987. Its birth date is 1 August 1987 and it is therefore 5 years old when acquired. When determining the special closing value at 30 June 1993, the reduction amount is calculated under subsection 32A(8) as:

($8000/12-5) x (303/365) (days from 1/9/92 to 30/6/93) = $948.73

The special closing value would be:

$8000 - 948.73 = $7051.27


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