CONSULTING FEATURE: THE NEW HORSE LOSS RULES – UPDATED
TIPS FOR RULING APPLICATIONS
It is now nearly 3 years since the new horse
loss rules for high income earners were introduced on 1 July
2009 and over
the past 18 or so months our office has lodged and reviewed
many of the applications required to have these losses approved.
has now reached the point where I’m in an ideal position
to share with the industry some of the specific issues our
office has encountered when applying for these rulings, many
coming to the surface only once the ATO has been challenged
to interpret the meaning and spirit of these new rules.
1 – A horse business that has made a tax profit
cannot apply under the “Nature Of Activity” ground
these rules, a person (alone or in partnership), cannot claim
an immediate loss for their breeding and/or racing
losses if they have an “adjusted taxable income” (ATI)
in excess of $250,000.
Where the $250,000 income test is failed,
the only way the person can claim the loss is if they apply
to the ATO to
exercise its discretion to allow the loss in either of the
- Circumstance 1 - The business was
(or will be) affected by special
circumstances beyond the
control of the
the business (e.g., a fire, flood, drought, diseases affecting
livestock or crops (e.g. EI), a pest plague or a hailstorm;
- Circumstance 2 - The business, because
of its nature (read “Nature
Of Activity”), is not expected to become commercially
viable until some time after it has commenced. Horse Breeding
and many primary production activities very much fit into
What must be noted is that the latter Nature
ground is available to assist start up businesses that due
to their inherent nature, can take many years to generate
a tax profit.
Accordingly, a business that has already generated
a tax profit in its earlier years cannot seek to apply under
as they have already made a profit within the accepted industry
lead time period.
Maxine is a high income earning breeder
who has been breeding horses for 5 years (i.e. since 1 July
2005) and in the
2010 tax year incurs a tax loss of $100,000.
tax year was the “ray of light” for Maxine
as a nominal tax profit of $5,000 was derived, due
to the enormous price received for a foal out of a mare acquired “in-foal”.
However, all other years have generated losses and
realistic projections indicate that the business will only
be profitable in the 2013 tax year, some 8 years after
the activity commenced
(being within the accepted industry 8 year lead time
for a breeding business).
In this example, Maxine could not
apply under the NOA ground for the tax years 2010-2012
losses to be accepted
profit (albeit a nominal profit) has already been
derived in the
2008 tax year, this being within the 8 year lead
The only ground that Maxine could apply
to have her 2010 loss deducted is via the stricter “Special
Issue 2 - ATO not considering
a NOA application where business has generated income
only, even though a profit
Our office found this problem moreso in the
early days of these applications being processed, but be
aware that the
take a while to get their case officers properly
This problem was created when the ATO thought
that an activity could not apply under the NOA ground
if it commenced
generate income within the 8 year lead time period.
confused the concept of “income” and “tax
Bottom line – if the ATO refuses
to process your NOA application using this wrong
rationale, you very much have
the law on your side!
Gerry is a high income earning breeder
who commenced his breeding activity on 1 July 2008.
private ruling projections indicated that he would make
a tax profit from his activities during the tax
year ended 30 June 2014, within the 8 year
lead time period.
However, during the 2010 tax year, Gerry lost
a valuable foal via a paddock accident and received
$100,000. This was his only income for that year,
however it still did not cover expenses and a
in the 2010 tax year.
The ATO tried to argue that
as he had generated some income prior to his application
a NOA application could not be considered.
diligent accountant successfully argued that
the ATO were confusing
the concept of “income” and “tax
his NOA application was duly processed.
- Make sure your financial projections are realistic
These private ruling applications must include
financial projections indicating that your business
a tax profit within
a “commercial” time frame.
finding that the ATO can be very unpredictable
in the way they assess these projections. For
has generated heavy losses within the early years,
they can be very sceptical if projections are
tax profit can be made, no matter how credible
they may be. Some
areas I would pay special attention to:
- If foals are part owned, ensure only your share
of estimated sale proceeds are included;
- Factor in that your mares may not generate a foal every
year (n.b. average live foal rate is 61% for mares
- If your expenses decrease over time, yet stock number remain
relatively constant, explain to the ATO
why this is occurring. For instance, service fees maybe decreasing
as stallion shares
have been acquired and you are taking up
service entitlements that you need not pay for.
To play it safe, I would have
a financially savvy
expert specifically verify the accuracy of
your projections, ensuring the expert
is independent of your horse affairs.
4 - ATO are taking the lead time period from the
the “business activity” commenced,
not from the time that the applicant commenced
This approach was something the
tax community definitely did not see coming!
you consider ATO rulings and facts sheets on these new rules
and the actual way in
be very reasonable to assume that the lead
time for the breeding activity commences
at the time
activity. Not so. The ATO consider the
lead time period to commence from the time the “business
started, regardless of who or what entity
was running the business at that time.
This is a crucial issue as the activity
needs to become “commercially
viable” within a “lead time” acceptable
for that industry for the ATO to rule in
your favour and allow
the immediate deduction of the loss.
(adapted from a previous Carrazzo media
Fred the horse breeder owns a
property in the Hunter Valley where a breeding business
since 1 July 2002.
Fred died on 30
June 2008 and the business was passed to his wife, Dorothy.
a number of
has never made a profit for the entire
period 1 July 2002
to 30 June 2011, some 9 tax years.
is a high income earner and is forced to apply for a private
to deduct her horse
breeding losses for the tax years
2011 to 2014 inclusive.
In her application,
Dorothy’s projections note that a
profit will first be made in
the FY 2015. This profit has been supported be expert reports
that indicate that the lead time
for her to make a profit is “8
years”. As Dorothy
commenced the business in her
own right on 1 July 2008, a profit
by FY 2015 is within this 8 year “lead
ATO accepted the “reasonableness” of
her projections, they said she
was outside the lead time of
8 years as the business activity
Fred back on 1 July 2002! Using
this older start date, the “lead
time” for generating a
profit is now increased to 13
years (based on a FY
2015 profit) and this now puts
the business well outside the
accepted 8 year lead time
application to claim the losses
5 - ATO very strict on what is a “special
As noted above, the
ATO can exercise its discretion to allow
the loss if “special circumstances” impact
on the ability of the activity to make
If applying under this ground,
it seems that every bit of bad luck that
horse is not “special” or “abnormal” to
the ATO, even though it is “outside
the control” of
the breeder or owner. These include:
• Mare abortions;
• Foals failing scope tests after sale;
• Paddock and track accidents; and
• Foals dying at birth.
Per ATO rules, “Special circumstances” are
those circumstances “which are sufficiently
different to distinguish them from the
circumstances that occur in the normal
of conducting a business activity.”
special circumstances must be outside the
control of the operators of the business
specifically defined to include drought,
flood, bushfire or some other natural disasters.
they are “unusual”, “uncommon” or “exceptional”.
In the case of other events, failure for
no adequate reason to adopt practices commonly
used in an industry to prevent
or reduce the effects of special circumstances
may point to the special circumstances
not being outside the control of
the operator. Unfortunately, this is how
the ATO are currently viewing the occurrences
I have outlined above.
Be warned, if seeking
the ATO’s relief using “special
circumstances”, the onus is on you
to prove that not only did they prevent
you from making a profit in the tax year
(preparing an adjusted P&L supporting
this is highly recommended), but that they
are “outside the normal course” of
horse industry activities.
Issue 6 - Industry
lead time for horse breeders is not strictly “six
Our office and others have
successfully argued 8 years as the lead
time for profitability
being evidenced by successful private rulings
lodged with the ATO. These rulings can
of private binding rulings.
When the ATO
began processing these applications a few years ago, it seemed
that they were
very fixed on “6 years” being
the lead time for breeding activity profitability,
however further external evidence put
to them via the industry and
these applications has thankfully changed
Don’t let the ATO
intimidate you on this issue!
note that the ATO ruling on these new rules does give the
applicant the scope
for an extension
the generally accepted lead time if
there are, in their words “…special
circumstances outside the control of
the operators of the business activity
have meant that there is no longer
an objective expectation
that within the period that is commercially
viable for the industry concerned the
activity will …produce a tax
You are welcome to contact
the writer if you wish him to clarify
any of the
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
in this area.
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
E-mail: firstname.lastname@example.org •
Web Site: www.carrazzo.com.au