Edited version of your private ruling

Authorisation Number: 1012574423559

Ruling

Subject: Am I in business of horse racing and are the horses considered to be personal use assets

Question 1

Is your horse racing activity considered to amount to the carrying on of a business in the year ended 30 June 2013?

Answer

No.

Question 2

Is the sale of your horse a capital gains tax event in relation to a personal use asset as defined in paragraph 108-20(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the private ruling application form

· letter, outlining questions, facts and technical arguments

· media articles about the horse

You have no racehorse training or industry experience, never having worked in the horse racing or breeding industry.

Some years ago, you joined a horse racing syndicate to have a one part share in horses. The horses were mostly unsuccessful on the race track and were retired from racing. The training and other ownership costs greatly exceeded any minor prize money won by the horses.

Since then you have joined other syndicates with one successful horse.

You have exclusively relied on your horse trainer to manage all aspects of the training, spelling, vetting, transportation and race day management.

You have also bought some horses outright in your own name. One of these proved to be successful and has been sold for a substantial amount at the end of its racing career. On advice, you engaged a bloodstock agent to arrange the sale.

You have not owned any land or property used in the horse racing activity. No expenses have been claimed in your income tax returns in relation to the horse racing activity. You have not undertaken any breeding activities of any form. No financial statements have been prepared in relation to the activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-24

Income Tax Assessment Act 1997 Paragraph 108-20(2)(a)

Reasons for decision

Summary

Your activity of racing horses is not considered to be the carrying on of a business or a profit making activity. Any payments received from prize money would not form part of your assessable income and no expenses relating to the racing activity are deductible for income tax purposes.

A horse is a CGT asset and a depreciating asset. CGT event K7 will apply on disposal of the interest in the horse and the difference between the horse's cost and termination value will be subject to capital gains. A horse that is not used in a business or not otherwise used for the purpose of producing your assessable income, is used or kept mainly for personal use or enjoyment. Consequently, it will be a personal use asset.

Detailed reasoning

Income and expenses of horse racing activity

The assessability of income and the deductibility of expenses will depend on whether you are considered to be carrying on a business of horse racing. The Commissioner's view on whether racing horses as a stand-alone activity may amount to the carrying on of a business is set out in Taxation Ruling TR 2008/2, specifically in paragraphs 75 to 85.

Whether the racing of horses as a stand-alone activity may amount to the carrying on of a business is a question of fact, having regard to all the relevant indicators discussed at paragraphs 7 to 11 of TR 97/11.

The racing of horses must be planned and carried out in a businesslike manner and be so considerable, systematic and organised as to exceed the activities of a keen follower of horse racing.

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. The chance of one owner's horse winning is dependent to an extent on considerations as to which no system or organisation would usually apply.

After applying the indicators and the other observations from court cases to your set of facts, it is considered that your horse racing activity is a mere pursuit of a hobby and not a business activity or a profit making activity.

Payments on disposal of an interest

The CGT consequences if a taxpayer's horse-related activities do not amount to carrying on a business are set out in Taxation Ruling TR 2008/2 at paragraphs 66 to 74.

A horse is a CGT asset and is also a depreciating asset. Subsection 118-24(1) of the ITAA 1997 disregards a capital gain or loss a taxpayer makes from a CGT event that is also a balancing adjustment event that happens to a depreciating asset whose decline in value was worked out under Division 40 of the ITAA 1997. However, under subsection 118-24(2), such a gain or loss is not disregarded if it is from CGT event K7. CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset held by you, and at some time the asset was held, it was used or installed ready for use for a purpose other than a taxable purpose.

Where the horse-related activities are not carried on as a business by a taxpayer or otherwise for the purpose of producing the taxpayer's assessable income, the use of those horses is for a purpose other than a taxable purpose. Consequently, CGT event K7 happens if a balancing adjustment event occurs for the horse. Where CGT event K7 happens, a taxpayer makes a capital gain to the extent that the asset's termination value is more than its cost.

Your racing activity is not considered to be carrying on a business or for the purpose of producing your assessable income, therefore when the interest in the horse was sold a balancing adjustment event occurred and CGT event K7 occurred. You will be assessable on the capital gain.

A horse, that is not used in a business or not otherwise used for producing your assessable income, is used or kept mainly for personal use or enjoyment. Consequently it will be a personal use asset. A capital gain made from a CGT event happening to a personal use asset is disregarded if it is also a depreciating asset with its first element of cost being $10,000 or less. In your case the cost is in excess of $10,000, therefore the capital gains tax provisions would apply to any capital gain on disposal. If you have held that interest as an individual for a period of 12 months or more, the 50% discount rule would apply.