As any horse owner will tell you, there is possibly no greater joy than seeing your horse winning and sharing that joy with your fellow co-owners.

However, the romance and emotion involved in being a winning racehorse owner is not the only positive to consider when buying all or part of a racehorse.

As a tax adviser who consults extensively in the racing industry, I’m going to dedicate this article to raising some of the “hidden” tax benefits of owning a racehorse too. The costs of owning a horse can be quite significant and it’s important that every effort is made to take advantage of the tax benefits that are available to owners.

The major tax benefits of owning a racehorse are outlined below.

1.      Winnings not taxable

A hobby racehorse owner is not taxed on winnings, regardless of how much prizemoney is earned.

I must emphasise this latter point as we take many enquiries here from concerned racehorse owners who have been racing on a hobby basis for years and just because they get lucky with a good racehorse, believe that the ATO will of a sudden tax them on their winnings!

2.      Capital Gains Tax exemption if horse interest cost $10,000 or less

Hobby owners who buy a share in a racehorse that cost $10,000 or less will not pay Capital Gains Tax (CGT) when they sell the interest in the horse – regardless of how much is received.

N.B. The cost price also includes any GST levied on acquisition.

Example:

Mark buys a 1/6^th share in a racehorse for $9,900 (inc. GST). The horse wins a stakes race and he decides to accept an offer to sell his share for $100,000.

The horse cost less than $10,000, thus no CGT is paid by Mark. If Mark had bought all of the horse for $9,900, the same CGT exemption applies.

Tax Tip – if the horse cost greater than $10,000, CGT can be avoided if that interest is split between other parties, e.g. husband and wife. For example, if a horse share cost $17,600 (inc. GST), no CGT will be paid where that interest is split 50% between a husband and wife, resulting in each having an interest that costs $8,800 each.

3.      GST and tax deductions can be claimed if you conduct a racing “business”

Not everyone will enter the world of horse racing merely with the intention of being a “hobby” owner.

If your horse racing activities are of a significant scale and meet certain other ATO criteria, your activities may be considered a “business” for tax purposes and will also meet the criteria for GST registration. This means:

• Losses on your horse racing activities are tax deductible; and
• Any GST incurred in buying and maintaining your racing stock can be claimed back.

 The primary business factors the ATO wants demonstrated for a horse breeding business and/or racing business to be accepted are listed below:   

• whether the activity has a significant commercial purpose or character;
• 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 businesslike manner such that it is directed at making a profit;
• whether the activity is better described as a hobby, a form of recreation or a sporting activity. The taxpayer must demonstrate that the activity does not rely primarily on chance as distinct from business acumen;
• the size, scale and permanency of the activity;
• the use of experts and consultants;
• the keeping of proper records;
• the existence of a business plan evidencing viability. In particular, it may be necessary to outline whether, given the number and quality of the horses, it is reasonable to expect that the taxpayer can make a profit if the horses are reasonably successful;
• prior horse industry experience;
• if the activity started with limited numbers, is their consistent growth in the scale of the activities (e.g. increase in mare numbers and/or foals, racing stock);
• time expended on the activity;
• registration of a business name;
• establishing a separate bank account; and
• does the taxpayer have control of the stock?

The current ATO horse industry tax ruling indicates that it is now easier for horse racing activities to be accepted as a “business” if they are integrated with a breeding activity also being conducted. Generally speaking, it is difficult to demonstrate a racing business with the ATO unless it is associated with breeding or training activities.

There are many significant tax deductions available to a legitimate racing business, including lease premiums on bloodstock.

4.       If horse owned more than 12 months, 50% CGT discount applies on sale

A hobby owner that owns a horse share that is subject to CGT on sale (i.e. share cost more than $10,000) can take advantage of the general 50% discount applying to capital assets. The discount applies if the horse is owned for at least 12 months prior to sale.

Example: 

Gabriella buys a yearling colt for $13,200 (inc.GST). After some very promising trials, he is sold to Hong Kong for $80,000 unraced. 

The colt is subject to CGT as it cost greater than $10,000. The prima facie gain is calculated as $62,800 ($80,000 less horse cost of $13,200 less other eligible costs of $4,000). 

Gabriella owned the colt for 14 months prior to sale and thus a 50% discount applies to the gain of $62,800, resulting in a discounted gain of $31,400 ($62,800 @ 50%).

 5.      Normal capital losses can be offset against a capital gain on a racehorse sale

Under the general CGT rules, a capital loss on the disposal of one asset can be offset against a gain on another asset.

For some reason, many think this rule does not apply to a capital gain made on the sale of a racehorse – gladly I can tell you that it does!

So, in our above example, Gabriella could offset her $62,800 capital gain against another capital loss she may have, say $10,000 relating to shares sales of a prior year, to reduce her prima facie horse gain to $52,800. After the 50% discount, her gain is reduced to $26,400 ($52,800 @ 50%). 

6.      Personal use assets not part of small business CGT concession “net assets” calculation

The CGT rules now contain special concessions for small business owners who dispose of capital assets (e.g. goodwill, buildings etc).

These concessions are very generous and often mean that no capital gain is paid on the sale of a profitable business (especially where the owner is over 55).

However, to access these concessions, small business owners must meet 4 “basic” tests, one of these tests being that the net value of the owner’s CGT assets must not exceed $6 million dollars just before the time of sale.

It is not well known, but the CGT assets counted for this test excludes the value of what are known as “personal use assets”. A racehorse is designated by the ATO as a personal use asset.

This could be very helpful to an owner who owns a very good racehorse, worth say greater than $500,000, as such an asset is excluded from the net assets test and could result in the owner staying under the required $6 million dollar threshold and thus meeting the net assets test and accessing the small business CGT concessions. 

7.      Non-residents are not taxed on capital gains on racehorses

Racehorses are excluded from the class of assets that non-residents must pay Australian Capital Gains Tax on.

Thus if the non-resident lives in a tax regime where Racehorses are also not subject to tax on sale, the disposal of an Aussie horse for a large profit will be 100% tax free.

8.      If starting a horse breeding business, you can transfer a filly into the business @ market value and utilise the 50% CGT discount 

Many hobby racehorse owners get the breeding bug as a result of racing a successful filly (or two) and decide to commence a commercial breeding business. Refer above as to the ATO indicators needed to demonstrate a breeding business. 

Under special trading stock rules, the race filly can be transferred to the new business at either cost or market value, depending on what suits the owner best. If the filly was acquired for $10,000 or less, say, her transfer to the new business at a high market value will not only avoid capital gains but result in larger “write-off” claims (see below) for the mare within that breeding business. 

For example, eligible mares can be systematically written-down to $1 by the age of 12 years. Mares acquired at age 12 or greater can be written down to $1 in the year of purchase. These are excellent incentives for anyone contemplating commencing a breeding business.

N.B. Even where the transfer of the filly to the new breeding business at market value attracts capital gains tax, the gain will most likely be subjected to the 50% CGT discount discussed above.

You are welcome to contact Paul Carrazzo CPA of Carrazzo Consulting - Thoroughbred Taxation Experts - if you would like him to clarify or expand upon any of the matters raised in this article, as follows:

Tel:     61 3 9982 1000

Mob:  0417 549 347

Fax:   61 3 9329 8355

Email: paul.carrazzo@carrazzo.com.au

Website: www.carrazzo.com.au

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.