ATO Interpretative Decision

ATO ID 2012/30

Income Tax

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Issue

Is prize money derived by a visiting horse trainer resident in a non treaty country assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Prize money derived by a visiting horse trainer resident in a non treaty country is assessable under subsection 6-5(3) of the ITAA 1997 as the income is sourced in Australia.

Facts

The taxpayer was a foreign resident horse trainer, resident in a non treaty country.

The taxpayer entered into a contract overseas with a horse owner to train a horse which was located in the taxpayer's country of residence. The terms of this contract specified that the taxpayer would be paid a monthly fee by the owner and in addition is entitled to any allocation of prize money to a trainer under the relevant racing rules.

The taxpayer applied for and was granted a Victorian training licence, which was valid for 12 months. When applying for the licence the taxpayer agreed to be bound by the Rules of Racing of Racing Victoria (Rules of Victoria Racing) and to comply with all requirements therein.

The horse that the taxpayer trained arrived in Australia in a late September 2010 shipment for the Victorian Spring racing carnival.

Upon arrival in Australia, the horse underwent three weeks of post arrival quarantine at the Werribee International Horse Centre (WIHC) at Werribee Racecourse.

The horse was maintained the whole time, other than race days, at the WIHC, which was fully equipped with stables, a racetrack for training and veterinary facilities.

In accordance with the Rules of Victoria Racing, the horse was taken care of by the taxpayer's head lad and other staff of the taxpayer.

The taxpayer kept in daily contact with the head lad by telephone and email.

The taxpayer arrived in Australia in early October 2010.

The horse trained by the taxpayer finished a place during the Victorian Spring racing carnival and Racing Victoria paid 10% of the total prize money directly to the taxpayer's nominated account.

The taxpayer departed Australia in early November 2010.

The horse departed Australia in a late November 2010 shipment.

Reasons for Decision

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Therefore, in order for subsection 6-5(3) of the ITAA 1997 to apply, it is necessary to determine whether the prize money derived by the taxpayer is income from Australian sources.

The term 'source' is not defined in the ITAA 1997, in which case, the term will take its common law meaning.

In Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190, Isaacs J stated:

The Legislature in using the word "source" meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

In FC of T v. Efstathakis (Efstathakis) 79 ATC 4256, in considering source of income, Bowen CJ stated at 4259:

...the answer is not to be found in the cases, but in the weighting of the relative importance of the various factors which the cases have shown to be relevant.

In Efstathakis, in considering factors relevant in determining the source of income, Bowen CJ stated at 4258:

The principles applied in English decisions relating to income derived from trade or business activities require that the most significance be attached to the place where the activity takes place (Bennett v. Marshall (1938) 1 K.B. 591 at pp. 612-613).

Further, on appeal from Spotless Services & Anor v. FC of T 93 ATC 4397, Beaumont J stated in FC of T v. Spotless Services Limited & Anor 95 ATC 4775, at 4789:

As has been noted, Lockhart J. stated, correctly in my view, that the test to be applied in determining the source of income is to ''search for the 'real source' and to judge the question in a practical way''. As his Honour went on to say (at 4409-4410), it is a matter of ''judgment'' and ''relative weight'' in each case to determine the various factors to be taken into account in reaching this conclusion.

In determining the source of the prize money, it is considered that relevant factors include:

•

the place the activities are performed

•

the place of the contract, and

•

the place of payment.

Place the Activities are Performed

The prize money was derived by the taxpayer when the horse being trained finished a place in a race held during the Victorian Spring racing carnival. The activities associated with training the horse to finish a place, is reflected in the training efforts of the taxpayer and their staff in preparing the horse for racing in Australia in compliance with the Rules of Victoria Racing.

Even though the taxpayer was not present in Australia for the whole duration of the horse's preparation in Australia, the taxpayer kept in daily contact with the head lad and conducted their training activities through their head lad and other staff in Australia.

It is acknowledged that there may be activities performed by the taxpayer and staff prior to the horse's arrival in Australia that may have contributed to the horse's preparation. However these activities are considered too far removed from the derivation of the prize money for achieving a place in the race.

It is also noteworthy that the taxpayer derives separate training fees from the owners for training the horse.

It is considered that the activities that derived the prize money are performed in Australia.

Place of the Contract

The taxpayer trained the horse in accordance with the contract entered into overseas with the owner. While entering into such a contract is a necessary part of a business of this kind, it does not necessarily follow that that the prize money in this instance is earned from this contract.

The taxpayer obtained and was granted a Victorian trainer's licence and conducted the training activities in Australia in compliance with the Rules of Victoria Racing

The prize money was derived by the taxpayer as a result of the activities associated with training the horse in compliance with the Rules of Victoria Racing.

It is therefore apparent that the conditions under which the taxpayer operated when training the horse in Australia were set in Australia.

Place of Payment

Upon the horse finishing a place, a payment amounting to 10% of the total prize money was made by Racing Victoria directly to the taxpayer's nominated account.

Whilst a trainer's nominated account could potentially be in any country, the payer of the prize money, Racing Victoria, is situated in Australia.

The place where the payment was made is Australia.

In conclusion, it is considered that the most important factor in this case is where the services were performed as payment of the prize money, based on the horse's success in the race in Australia, depended on the actual performance of the training services in Australia. Other factors are considered to be of lesser importance, although it is noted that on balance they also point to a source in Australia.

The prize money derived by the foreign resident trainer had an Australian source and is therefore assessable under subsection 6-5(3) of ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2011

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(3)

Case References:
FC of T v Efstathakis
   79 ATC 4256
   (1979) 9 ATR 867

Keywords
Horse racing
Prizes & awards

Siebel/TDMS Reference Number:  1-3RQQTCS; 1-BIMG7H8

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  20 April 2012
Date reviewed:  2 June 2017

ISSN: 1445-2782