 THE
CARRAZZO TAX FILE - SELLING RACEHORSES - FAQs
Thoroughbred Racing and Breeding is not a pursuit for the
faint hearted, we all know that.
However, if we are fortunate
enough to sell THAT horse, in my opinion (with just a hint
of bias) the first thing we
should know is: What are the tax implications?
This aspect
of racehorse ownership is very underestimated, especially
for hobbyists, given that there as there is so
much “pub talk” out there along the lines that “you
don’t pay tax when you sell a racehorse”. You
are soon to learn that this is not always the case.
Acknowledging
the confusion in the horse world as to the tax implications
of selling horses, I’ve put together
an article addressing the most frequently asked questions
in this area. After a read, I hope many of the queries you
have in this area can now be put to rest.
This article is
designed to handle various selling scenarios, in terms of
hobbyists, tax businesses, racehorses and breeding
stock so I hope that there is something for everyone.
1. Sale
of racehorses and FAQs
Q1. I am a hobby racehorse owner and
have just sold my 1/6th share in a promising racehorse for
$50,000, do I pay tax?
Answer
The first question to ask is “how
much did your share cost”?
A racehorse is designated
by the ATO to be a “Personal
Use Asset” (PUA) and, as such, we must refer to the
tax rules relating to this class of asset. Under the PUA
rules, an asset acquired for $10,000 or less (including GST)
is exempt from capital gains tax (CGT).
Accordingly, if the
share in this racehorse cost $10,000 or less, there would
be no CGT to pay on the sale of this
horse. If the share cost did not meet this exemption, the
horse would be subject to CGT.
Q2. How do I calculate the
capital gain I just realised on the sale of my hobby racehorse?
Answer
If the horse is subject to CGT, the gain
is calculated by deducting from the sale proceeds the relevant “cost
base” elements, being:
- First element: the cost of acquiring
the asset (e.g. purchase price)
- Second element: incidental costs
on acquisition and disposal (e.g. commission, legals etc)
- Fourth element: capital expenditure
increasing or preserving the value of the asset or of installing
or moving the
asset (e.g. training)
- Fifth element: capital expenditure
to establish, preserve or defend title
The third element, being “costs of
owning the asset” are not available to Personal Use
Assets, hence racehorses miss out. Items such as agistment
are therefore excluded if third element costs are not available.
Furthermore,
a capital gain is reduced by 50% if the horse was held
for greater than 12 months. Q3. What rate of tax
do I pay on a horse capital gain?
Answer
The general rules apply for taxing
capital gains, i.e. they are taxed at the normal marginal
tax rate of the owner.
If the horse gain is subject to the
50% CGT General discount, this marginal rate is effectively
halved. For those on the
highest tax rate, this means a tax rate of 22.5% (50% @ 45%).
Q4.
What if I make a capital loss on the sale of my racehorse?
Answer
Bad news – capital losses are
not recognised on the sale of racehorses, thus only “non-horse” capital
losses can be used to offset and reduce any capital gain
on the sale of a racehorse. For example, a capital loss on
the sale of a rental property can be used to offset the gain
on the sale of a racehorse.
Q5. Can a capital gain on the
sale of a racehorse be subject to the generous CGT Small
Business Concessions?
Answer
Unfortunately no – a racehorse
is not an “active
asset” used in a taxation business, thus it fails one
of the basic criteria.
Q6. Do I have to charge GST on the
sale of my hobby racehorse?
Answer
Most “hobbyists” cannot
meet the basic GST registration test, i.e. carrying on an “enterprise”,
thus the answer is generally no.
Q7. I was gifted a racehorse
by a close family member, do I pay CGT when I sell the horse?
Answer
Though the family member paid nothing
for the horse, under the CGT deeming rules, the horse is
acquired by the family
member for its market value.If it can be argued that the
market value of the racehorse interest at the time of gifting
is in excess of $10,000 that horse is potentially subject
to CGT on sale (see Q1. above), otherwise the horse is exempt
from tax upon sale.
Q8. I am a hobby breeder and prefer to
breed my own horses for racing. If I spend less $10,000 or
less on my service
fee to breed a particular horse, is the horse exempt from
CGT on sale?
Answer If the intention was to breed the horse
for racing, yes that racehorse would be exempt from CGT on
sale.
N.B. If the intention was to breed that
horse for sale, it is likely that the horse would be subject
to CGT, regardless
of the service fee paid being less than $10,000. Some good
news - foals sold with this “profit purpose” at
least have the benefit of third element cost base items being
included in the cost base, e.g. agistment.
2. Sale of breeding
stock and FAQs
Q9. I sell my hobby broodmare, used originally
for racing. Do I pay CGT on the sale?
Answer
If her cost as a yearling was $10,000
(inc. GST) or less, there will be no CGT upon sale. If she
cost more than $10,000,
yes, CGT applies.
Q10. Would the answer to Q9 above be any
different if the mare was sold “in-foal”?
Answer
No, only the cost of the mare (first
element) is taken into account for the purpose of the “$10,000” rule.
The cost of the service fee re the stallion she is carrying
to has no effect on her CGT cost base in this scenario.
N.B.
The sale of a mare with a “foal at foot” is
seen by the ATO as being the “one asset” and
it is only the cost of the mare that is taken into account
if determining whether the sale is subject to CGT. Thus,
if the mare cost was less than $10,000, the sale of the mare
and foal would be exempt from CGT.
Q11. What is the cost base
of a hobby mare sold “in-foal”?
Answer
Assuming the mare is subject to CGT,
the cost base includes the cost of the mare, the cost of
the service fee and the
items listed at Q2 above.
Q12. What are the tax implications of “pin-hooking” weanlings?
Answer
These horses are acquired and sold
for a definite profit making purpose, thus it is highly likely
that any capital
gain would be subject to taxation, regardless of the cost
of these weanlings.
It is unlikely that the weanlings would
attract the 50% CGT discount, given that weanlings are turned
over as yearlings
generally within 12 months of purchase.
Q13. What are the
tax implications of selling stock within my integrated business
of racing and breeding?
Answer
To date, we have only been dealing
with mares, foals, racehorses etc sold by hobbyists.
If a
tax business sells any horse, the tax profit is the sale
proceeds (excl.GST) less the tax carrying value of the
stock. Furthermore, the sale has no relevance to CGT and
thus the 50% CGT discount does not apply.
You are welcome to contact me if you wish
me to clarify or expand upon any of the matters raised in
this article.
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
E-mail: paul.carrazzo@carrazzo.com.au
Web Site: 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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