Private ruling: Am I in Business
Published: March 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Do your animal breeding and ancillary animal racing activities amount to the carrying on of a business for income tax purposes? | A1: Yes

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • Your private ruling application dated 30 December 2014. You are a follower of animal racing and you have been involved in racing for many years. In recent years you have diversified your interest in racing and began breeding animals for racing or sale. From 1 July 2013 you conducted your animal breeding and in particular circumstances, the racing of specific animals (where ancillary to the 'breeding purpose'), with a commercial purpose. You had some experience in breeding prior to starting your commercial activity. Your purpose is to breed and sell mid to high-end quality animals. Bloodstock will be primarily bred for sale at the major Australian animal sales. Specific animals will be put up for sale to regularly turnover bloodstock to maintain stock at a desired age, to provide a mix to meet the prevailing or predicted market. You believe you have a prospect of profit, given the quality of animals on hand, animals used, the resources you have available and an intention to keep growing your breeding herd, including an intention to acquire another quality animal in the 2015-16 financial year. You have a detailed business plan and projections for a five-year period, indicating a profit by the 30 June 2018. You use industry experts to advise you and select stock. You do not have direct day to day supervision of your animals as all of your animals are agisted at major animal operations in another state. You engage a bookkeeper to keep your records for the activity. Any racing is intended to be limited in scale and is undertaken with a view to adding value to the future breeding activities. Your specific animal was acquired at significant cost. You propose to have your animals regularly serviced. You are keen to support your investment, sending your animals to the racing progeny as part of that strategy. You will retain animals bred or acquire high quality expensive stock with a view to a future breeding purpose. You have already outlaid a substantial amount on breeding and racing stock to 30 June 2014. Stock on hand at 30 June 2014 includes a variety of animals. You have significant business experience, having operated several successful businesses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Taxation Ruling TR 2008/2 considers when animal-related activities are carried on as a business. The Ruling states that in deciding whether a business is being carried on, regard should be had to the following indicators outlined in Taxation Ruling TR 97/11 which deals whether a taxpayer is carrying on a primary production business: • whether the activity has significant commercial purpose or character (this comprises aspects of some 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 • whether there is repetition and regularity of activity • whether the activity is similar in kind and manner to those of the ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner 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. No single indicator is decisive in these cases. 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 at 474 ) 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 ). In addition to the factors stated in TR 97/11, TR 2008/2 also provides guidance on whether animal-related activities such as racing, training or breeding activities amount to the carrying on of a business. In particular, TR 2008/2 considers certain industry specific factors relating to animal breeding activities including: • the quality and number of animals; • whether the taxpayer is selling stock, for example at specific sales, to generate a cash flow; • whether the animals are being serviced; • whether the taxpayer is using their animal rights; and • whether the taxpayer maintains various animals or other animals which are inappropriate for breeding - excluding animals that are being raced (as an integral part of a breeding business). After considering the information you have provided and weighing up all of the indicators outlined in Taxation Ruling (TR) 97/11 and TR 2008/2, we have decided that your activities do constitute the carrying on of a business of breeding animals, with ancillary racing activities. Accordingly, proceeds derived from these activities will be assessable under section 6-5 of the ITAA 1997 and expenses will be deductible under section 8-1 of the ITAA 1997, subject to the tests set out in that section and the non-commercial loss provisions in Division 35 of the ITAA 1997. It should be noted, however, that to be considered an integral part of your breeding business, any racing activities must be inherently connected to the breeding activities and be consistent with the furtherance of it. This will be a question of fact in each case (Refer paragraph 87 and Example 7 of TR 2008/2). In your case, the racing of specific animals that has no relation to any of your broodmares lacks the integral relationship with your breeding activities. Consequently, the racing of such animals is a mere hobby which is not associated with your business. The amounts derived from the racing of unrelated geldings will not be assessable and outgoings incurred in their purchase and maintenance are not deductible.