TIPS BEFORE BUYING YOUR FIRST YEARLING
Our good friend and Racing’s Night
of Champions supporter, Paul Carrazzo of Carrazzo Consulting,
has provided his views
on the abovementioned issue.
I’m sure there are many
of you out there contemplating your first yearling purchase
in the months ahead. Good luck to all of you and enjoy the
However, what many overlook is the tax considerations
that should be considered before the first investment is
made – for
many this investment can be in the many thousands of dollars.
Get the tax ins and outs of this investment wrong and you
can imagine the tax that may find its way to Wayne Swan instead
of remaining in your bank account….
To try and get you
all off on the right tax note, I provide below 5 important
tips for new buyers of yearlings.
Tip 1: Find out - are you
a business or hobby?
This is a crucial question as it will
1. Your activities will be subject to income
tax. Especially crucial as tax losses may be incurred in
the formative years
and a deduction for these will be most welcome; and
activities will be eligible for GST registration. GST is
generally levied on the sale of horses and everyday
maintenance and training expenses, thus registration will
allow the claiming back of these GST amounts.
ATO tax ruling
TR 2008/2 is a good reference in determining this issue.
If wanting to start a tax business, I would also
draft a Business Plan demonstrating how you will be profitable
in the future as it will help enormously with any ATO review
of your activities.
Tip 2: If you are a “hobbyist”,
consider Capital Gains Tax (CGT) exemption
There is a popular
myth out there that a hobby owner does not pay CGT on the
profitable sale of a horse. This is simply
not the case.
However, there can be some joy if proper
planning takes place. Under the CGT laws, a racehorse (or
acquired for $10,000 (inc. GST) or less is exempt from CGT
Accordingly, if buying a horse with your
spouse or partner, give consideration to joint ownership
if it means
respective shares cost less than $10,000 each, e.g. if a
horse costs $19,250, it should be owned 50/50 so each person
has a cost base of $9,625 (50% @ $19,250).
Tip 3: Use the
right tax structure
If you are a tax business and can take
advantage of tax losses in the early years, give thought
to buying in a structure
where these losses can be used immediately to offset against
your other income. e.g. a partnership of you and your spouse/partner
or in your own name. N.B. If asset protection is your main
priority, this may not suit.
If buying as a “hobbyist”,
give thought to buying jointly to take advantage of the CGT
exemption (see above).
Furthermore, be mindful that buying in a company will not
give you access to the general 50% CGT discount.
this is often overlooked), a racehorse (i.e. a personal use
asset) held by an individual does not get
counted in determining if your net asset value is within
the $6 million requirement so as to enable access the CGT
Small Business Concessions.
Tip 4: Losses may not be automatically
deductible - review
Even where you meet the tax business criteria
at Tip 1, a tax loss may not be automatically deductible
if you do not
meet the “Non-Commercial Loss” rules, thus I
urge you and/or your adviser to review these rules prior
to entering the market.
If your “Adjusted Taxable Income” (ATI)
is less than $250,000, four objective tests need to be met
a loss deduction can be claimed or special grounds for relief
are met (see below).
Per the latest 2009 Budget, if ATI is
over $250,000, the loss cannot be claimed immediately unless
a special viability
request is approved by the ATO or special circumstances
prevented a profit from occurring.
Tip 5: Have your buying structure
Under the GST “attribution” rules,
GST can only be claimed by the entity that acquired the horse.
Accordingly, a tax business should have
the appropriate structure ready before you buy the horse(s).
I have often seen instances
where a horse is acquired by an individual and in the ensuing
weeks/months, the structure is set-up to ultimately hold
this horse and other tax business horses acquired. However,
as the horse was acquired by the “hobby” individual,
no GST can be claimed on the original purchase.
You are welcome
to contact me if you wish me to clarify or expand upon
any of the matters raised in this article.
DISCLAIMER: Any reader intending to apply
the information in this article to practical circumstances
should independently verify their
interpretation and the information’s applicability
to their particular circumstances with an accountant specialising
in this area.Prepared by:
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
22 BLACKWOOD ST, NORTH MELBOURNE VIC 3051
TEL: (03) 9329 7044
FAX: (03) 9329 8355
MOB: 0417 549 347
Web Site: www.carrazzo.com.au