Edited version of private advice

Authorisation Number: 1052161433314

Date of advice: 30 November 2023

Ruling

Subject: Trust - carrying on an enterprise

Question 1

Is the Trust carrying on a business of primary production horse breeding for the purposes of Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the Trust carrying on an enterprise for the purposes of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Company A is the trustee for the Trust.

Company A as trustee for the Trust was established and controlled by Person A.

The Trustee Company's sole Director will oversee the strategic direction, utilising his prior experience from family-owned racehorses and his personal interest in horses.

The Trust received funding from the Trust's parent entity, Company B.

The Trust operates to breed and trade horses for the purpose of racing and creating breeding lineages.

The Trust has a business plan to purchase mares who will than mate with commercial stallions. The resulting foals are to be sold as weanlings or yearlings at major Australasian weanling and yearling sales.

The Trust has insured the Trust's bloodstock with a commercial insurance provider - Insurer A.

The Trust's mares are acquired either directly during major broodmares sales and auctions, or purchased by Person A in his personal capacity, and subsequently transferred into the trust.

The Trust chooses to only purchase mares who are in foal to reduce wait times. These mares were serviced by horses with a history of producing high value foals.

The Trust seeks to add at least 1-2 broodmares a year, in order to have a medium-term target of 10 high quality broodmares. This should lead to sales of 8 yearlings a year to sell assuming 1 to 2 fail to produce a foal.

The Trust owns three mares:

• Mare A - sired from a multiple champion sire, Sire A. Mare A was acquired in April 20XX at a Dispersal Sale. She was purchased by person A in his personal capacity and was subsequently transferred to the Trust.

In the 20XX breeding season, Mare A was serviced by Stallion A and has foaled a filly. In the next season, Mare A will be serviced by Stallion B.

• Mare B - sired from a multiple champion Sire B. Mare B was acquired in May 20XX at a Broodmare Sale. She was purchased by person A in his personal capacity and was subsequently transferred to the Trust.

In the 20XX breeding season, Mare B will be serviced by Stallion C.

• Mare C - race mare, having won multiple races, including 1 race as a 2-year-old and multiple city races who has previously produced two foals. Mare C was acquired by the Trust in May 20XX at a Broodmare Sale, already in foal. In the upcoming breeding season, Mare C will be serviced by Stallion D.

The Trust had two births occur in the 20XX financial year. One of the foals passed away and the Trust collected an insurance payout. Another foal is being prepared for sale in an early 20XX yearling sale.

The Trust covered two of the mares during the 2023 financial year. Their stallion fees vary from $15,000 to $50,000.

The Trust expects to make on average $120,000 - $200,000 on sales of the foals when they become yearlings.

The Trust also plans to participate in the purchase of weanlings and overseeing them till they are yearlings. The Trust will resell them as yearlings, a practise referred to as pinhooking.

The Trust expects to buy weanlings for $50,000 to $100,000 and then sell them for a profit.

The Trust hires an advisor, Person B, with over 30 years of experience. In addition, the Trust utilises the services of Person C and Person D.

The Trust keeps Mare A and Mare B and their respective foals at Facility A for agistment. Facility A is operated by Person E and Person F who focus on the rearing and development of weanlings.

The Trust hires Firm A to act as accountant and business advisers.

The Trust is conducting marketing and branding for the business, with all foals being stamped with the branding.

The Trust's profit projections from 2024 to 2026 show profits.

The Trust supplied documents to verify the purchase and pedigree of horses.

The Trust provided a tax invoice for the services of person B.

The Trust provided a profit and loss statement for the 2023 financial year.

Since the end of the 2023 financial year, two of the covered mares have each foaled a filly and the Trust has signed services agreements for all three mares for the 2023 upcoming breeding season.

The Trust will not race the horses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for decision

Question 1

Is the Trust carrying on a business of primary production horse breeding for the purposes of Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Trust is considered to be in the business of primary production horse breeding. The Trust's activities are conducted in a businesslike manner and are of a commercial nature and have a level of expertise involved that would be expected of a horse breeding 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.

Taxation Ruling 97/11: am I carrying on a business of primary production? (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

The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v FC of T (1953) 90 CLR 470 (Martin) at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325 (Ferguson); 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Where the activity being considered is that of horse breeding Taxation Ruling 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) sets out further specific indicators which must also be addressed in determining whether the activity constitutes the carrying on of a horse breeding business, including:

• Quality and number of horses;
• Whether the taxpayer is selling stock, for example yearling sales, to generate cash flow;
• Whether the mares are being serviced;
• Whether the taxpayer is using their stallion rights;
• Whether the taxpayer maintains geldings, barren female horses or other horses which are inappropriate for breeding - excluding horses that are being raced.

The indicators outlined above are taken into consideration below in weighing-up whether all the indicators as a whole establish that the Taxpayers were carrying on a business of horse breeding.

Significant commercial purpose or character

Your activities demonstrate a significant commercial purpose for the following reasons:

• A business plan which includes growth in future purchase and expansion of the operation by incorporating pinhooking into the business
• The Director has experience with horse breeding and has consulted with different experts on how best to establish and operate a business
• The Trust has done extensive research into the industry to confirm the viability of its business plan and opportunities available in the market
• The Trust provided projections showing profits in future years
• The Trust acquired an adequate number of high quality mares with plans to add more in the future
• The Trust has participated in activities expected of a horse breeding business though the service of mares and birth of foals.

Does the taxpayer have more than an more intention to engage in business and is there activity?

The Trust's horse breeding activities have only just commenced and you did not produce a profit in the 2022-23 financial year. However, you have projected that you will commence to make a profit from the 2023-24 financial year.

The Trust engaged the services of a professional bloodstock agent Person B. Person B is highly experienced and a well-connected bloodstock advisor and consultant. Through Person B's experience he has been able to provide advice on which broodmares to purchase.

As of 30 June 2023, the Trust had 3 valuable broodmares in its portfolio. The Trust's intention is to add at least 1-2 broodmares a year into its existing portfolio.

The Trust has already agreed for service fees along with service agreements entered into for the 2024-25 financial year.

Does the activity have a purpose and prospect of profit?

The Trust has shown in its business plan what activities it intends to undertake with which it will generate a profit. Additionally, the Trust provided projections showing how it plans to become profitable from the 2023-24 financial year onwards.

Is the activity regular and repeated?

The activity of breeding horse and servicing broodmares are regular, and will increase in repetition in the future. The Trust intends to increase the broodmares by 1-2 each year.

The Trust has reduced the wait time for foals by purchasing broodmares already in foal. For the 2022 breeding season, the Trust arranged to have the broodmares serviced. The Trust also already has contracts in place too have the broodmares serviced for the 2023 breeding season.

Is the activity of the same kind that is carried on in a similar manner to that or ordinary trade in that line of business?

The Trust has displayed the following characteristics similar to other business that are engaged in horse breeding:

• A business plan which includes growth in future purchase and expansion of the operation by incorporating pinhooking into the business
• Sought expert advice within the industry
• Focused on high quality horses
• The purchase of mares in foal and servicing during breeding seasons
• Utilising Firm A for accounting and business advice.

Is the activity systematic, organised and carried out in a business-like manner?

The Trust has organised a detailed business plan and operates with an intention to make a profit, as shown in its projections. The Trust's business thus far has been managed and carried on in a similar manner to others in the industry.

The Trust has engaged accountants and business advisors who will oversee all of its reporting requirements.

The Trust engaged the services of a professional bloodstock agent Person B.

Size, scale and permanency of the activity?

The Trust has started its horse breeding activities on a small scale; however, the scale has increased and will continue to increase in the future. As of 30 June 2023, the Trust held 3 valuable broodmares and it will continue to increase the number of broodmares by 1-2 each financial year.

The Trust has also had to cover numerous expenses from caring, insurance, adviser costs and service fees.

The Trust has a detailed business plan which shows projections up to and including the 2025-26 financial year.

The activity cannot be described as a hobby, a form of recreation or a sporting activity?

The Commissioner is satisfied that the Trust is carrying on a business or horse breeding and not a hobby for the following reasons:

• The horse breeding activities are being carried on in the same manner as other similar businesses in the horse breeding industry
• The establishment of a business plan details how the activity will be conducted along with the producing of a profit.
• The Trust projects that a profit will be made in the 2023-24 financial year
• The Trust holds business insurance for its bloodstock with Insurer A to protect its future income
• All foals bred will be stamped with the Trust's brand.
• All foals from all mares will be sold as yearlings
• High quality horses, being commercial quality broodmares, have been sourced at major broodmare sales

Specific industry indicators as per Taxation Ruling 2008/2

In addition to the above analysis, certain specific industry indicators as outlined in paragraph 37 of TR 2008/2 will be considered below in determining whether the Taxpayers' horse breeding activities constitute the carrying on of a business for income tax purposes:

Quality and number of horses - The expectation of a horse breeding is to have a minimum of 6 horse or to be breeding horse of a high quality. The Trust demonstrates that the mares it utilises are of a high quality either though their pedigree consisting of a multi-champion sire or though the mare themselves winning as a racehorse.

Whether taxpayer is selling stock - As of yet, The Trust has not sold stock. With that in mind, the Trust has purchased broodmares already in foal, that had been sired by horses with a history of their yearlings selling well at auction. The Trust made its breeding decision with the mindset of getting high returns from the sales of yearlings and thus have utilised the services of sires with proven records at auction.

Whether the mares are being served - The Trust has reduced the wait time for foals by purchasing broodmares already in foal. For the 2022 breeding season, the Trust arranged to have them serviced, and already have contracts in place for the 2023 breeding season.

Whether the Taxpayers are using their stallion's rights - The Trust does not have stallions at this stage, as it has focused on mares who are served by horses from other owners. At this time, it is not factor in the Trust's business.

Whether the Taxpayer maintains geldings, barren female horses and other horses - All horses in the Trust's possession are for breeding. The foals are for the purpose of future sales. The Trust does not have any horses for the purpose of leisure or hobby activities. The Trust's business plan does not detail what it intends to do with broodmares once they can no longer breed. As they can breed till their late teens and 20's, and the Trust's oldest mare is 8 years old, this is not a cause for consideration currently.

Conclusion

After considering all the facts it is the Commissioners view that the Trust is carrying on a business of primary production with the purpose of breeding horses.

Question 2

Is the Trust carrying on a carrying on an enterprise for the purpose of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999?

Summary

The current activities of the Trust in the circumstances as explained above in question one indicates that the Trust is carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Detailed reasoning

Under subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the definition of carrying on an enterprise includes a series of activities done:

•         in the form of a business; or

•         in the form of an adventure or concern in the nature of trade

However, subsection 9-20(2) of the GST Act expressly excludes activities done as a private recreational pursuit or hobby. This means that even though a series of activities are undertaken in a businesslike manner, they will not amount to an enterprise if those activities are a recreational pursuit or hobby.

The Miscellaneous Taxation Ruling; The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of enterprise and states the following:

'174. Although the phrase 'in the form of a business' is broad it requires a focus on and understanding of the concept of a business. Section 195-1 of the GST Act defines 'business' to include:

any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

175. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997.

176. As the definition of 'business' is identical in the GST Act and the ITAAs, it can be interpreted in a similar way. The meaning of 'business' is considered in Taxation Ruling TR 97/11. Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business, at paragraph 179 explains that the process of the determining whether an entity is carrying on an enterprise generally involves the weighing of all relevant indicators.'

The Commissioner referred to Taxation Ruling 97/11: am I carrying on a business of primary production? (TR 97/11). The indicators contained in TR 97/11 and discussed above in Question 1 are also relevant for determining whether an enterprise is being carried on. Similarly, the specific industry factors relating to the horse industry in TR 2008/2 is also relevant for whether the Trust is carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Conclusion

As explained in Question 1 above, the weighing-up of the facts indicates that the Trust is carrying on a business for income tax purposes. After considering all the facts, it is the Commissioner's view that the Trust is also carrying on a business of primary production with the purpose of breeding horses for the purposes of section 9-20 of the GST Act.