 GST
WIN FOR HOBBYISTS
If you’ve been reading my horse tax
updates recently, you would have noticed there has been a
common thread – all
of the news had been bad! The new Budget changes, the ATO’s
owners project, the D’Arcy “control” case – the
negatives have had a great run lately.
Consider this release
to be a welcome circuit breaker as the findings in a new
tax case has given hope for the many
hobby breeders and owners out there looking for a little
bit of GST relief.
Some background. Under the current GST
rules, the only people who are able to register for GST are
those considered to
be running an “enterprise”. This definition includes
a person who runs an activity in the “form of a business”,
hence this is why taxation businesses can automatically register
for GST.
However, the GST “enterprise” definition
is not a strict as the income tax definition of “business” and
thus potentially many others running a “profit making” activity
should be able to register. This is reflected in the GST “enterprise” definition
where one of the grounds for registration is where a person
conducts an activity “in the form of an adventure or
concern in the nature of trade”.
“Swansea” case clarifies what
is “in the form
of an adventure or concern in the nature of trade”
Since
the inception of the GST on 1 July 2000, the tax community
has been desperate for additional guidance as to what this
term “in the form of an adventure or concern in the
nature of trade” actually means. There is no better
way to find out than to have the meaning of the term tested
in a court of law and this was duly done recently in the
WA Federal Court via “FC of T v Swansea Services”.
Thankfully, the result represents a win for common sense,
and, of more significance, the principles are very appropriate
to hobby breeders and owners, as indicated at the conclusion
of this release.
Facts of “Swansea”
Swansea (“S”)
was a private company whose activities consisted mainly of
acquiring artworks and antiques.
Between 1997 and 2005 S
spent $4.8m acquiring 225 antique items and 87 paintings,
nearly all of which were kept on
display at S’s two private residences. Most of the
expenditure was incurred after 1 July 2000 (the date GST
commenced) and the company was registered for GST. During
this eight-year period only three items were sold for a net
loss of $34,865.
In 2005, the ATO cancelled the company’s
GST registration with effect from 1 October 2001. The ATO
contended that what
S was doing was not an enterprise but rather a “private
recreational pursuit or hobby”.
S objected, claiming
that it was carrying on an enterprise. It argued that the
repetitive nature of its activities and
their frequency pointed to an enterprise, as did the large
sums of money expended. It stated that its investment strategy
was to develop a museum quality collection which doubled
in value after seven years.
S was found to be carrying on
an enterprise when it originally appealed to the AAT. The
AAT held that the Company’s
acquisitions of artwork as a process of acquiring and consolidating
a valuable collection of sound saleable artwork, in order
to turn it to account profitably, including the sale of some
pieces which were found to be below the requisite standard,
all took place as part of carrying on an enterprise, and
not only as an investment, hobby or recreational pursuit.
The
AAT also held that the acquisition of goods or property with
the intention of a future sale, hopefully at a profit,
fell within the concept of an activity in “the form
of an adventure in the nature of trade”. It said the
business and commercial activities of the Company were conducted
in accordance with a pre-formulated policy, coupled with
a carefully devised investment strategy. The ATO appealed
from this decision, arguing that the AAT’s conclusion
was not open to it on the evidence. Next round, the Federal
Court.
ATO appeals to Federal Court, Swansea wins
again!
The Federal Court found that, objectively
viewed, it was the Company’s purpose to acquire and to hold artwork
and antiques with a view to selling them when the circumstances
were right in order to derive a profit.
In summary, what also
convinced the court of the “profit
making purpose” of this activity was:
- S had sought proper
advice and
consultancy in relation to its activities;
- It always had
a purpose of sale, even though there was only three sales
in the period, one at a modest profit, two
at a loss;
- S had a “pre-formulated” investment
strategy;
- Detailed
and accurate records were kept;
- All artwork was insured;
and
- Its activities were characterized by system,
repetition and regularity.
Lessons for hobby
breeders, “pin-hookers” and
owners?
a) Mare owners
There are many instances where
a hobby mare owner will breed a foal for the purpose of sale,
i.e. a “one-off” venture.
Though the activity may not necessarily be considered a tax “business”,
the fact that the activities may have the elements noted
above will certainly give the breeder a strong basis for
registering for GST in relation to that sale or future sales.
The hobby breeder need not own the mare
either, as your general “foal-share” arrangement
is often undertaken with a “profit-making purpose”.
Hobby
breeders will welcome this opportunity as GST on items
such as service fees, agistment, veterinary, commissions
etc can be claimed back. Against that, GST must be charged
on the sale of the foal. This latter point will cause no
problem if it is reasonable to expect a registered person
will acquire the foal.
b) “Pin-Hookers”
There also many part time “pin-hookers” of
weanlings that would also welcome the Swansea case as GST
can be quite
an impost and cut into profit margins upon sale.
The horses
are acquired for a genuine profit purpose, so what stops
GST registration based on Swansea’s case? c)
Trading in racehorses
Where does Swansea sit with hobby racehorse
owners? This case certainly does open up the opportunity
for owners who
have the primary purpose of buying racing stock for future
sale to be able to register for GST. Given the difficulty
racehorse owners have with trying to demonstrate a stand-alone
racing businesses, this should be welcome news to players
with this purpose.
However, if the owner has a history of
racing horses only and sells the odd horse based on a huge
offer, such facts
would not normally indicate a “profit making purpose”.
As in all these cases, facts are king, and you need to weigh
them up carefully with your adviser prior to registering
for GST.
You are welcome to contact me if you wish
me to clarify or expand upon any of the matters raised in
this release. 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: 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.
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