Case U72
Members:JE Stewart SM
Tribunal:
Administrative Appeals Tribunal
J.E. Stewart (Senior Member)
The question for decision in this application is whether the applicant was conducting a business of racing and breeding horses in the years of income in issue, namely those ended 30 June 1980, 1981 and 1982. In all of those years he sustained losses in carrying out those activities, and offset them against his salary income derived as property manager for a large insurance company. An ancillary matter related to a claim in the 1981 year for motor vehicle expenses incurred in earning his salary.
2. The taxpayer conducted his own appearance and the Commissioner of Taxation (the respondent), was represented by one of his officers. Both parties agreed that the issues for the three years be heard concurrently.
3. For all of the years in issue, and it would seem from the year 1976, the applicant acted as property manager for the X insurance company in Melbourne. Prior to 1976 he had acted for his employer company in that same role in New Zealand. It was there that he learnt of the substantial profits to be made out of horse breeding. After making a study of the industry he became convinced that New Zealand racehorses were successful in Australia because of their superior bloodlines. Resulting from that study he purchased a mare, M, which had the sort of bloodlines that he found appealing. Lacking the funds to pay for service fees, he made an agreement with a stud whereby the proprietor would have the first foal from mating his mare to the well regarded stallion F, which had strong bloodlines to the English sire, "Nearco", as did also his own mare; he would then receive the second foal free of the usual service fee. That second foal, a filly, was called N and the applicant brought it to Australia when he returned in 1976. The applicant contended that he entered into the business of breeding horses upon the purchase of M in 1971.
4. The filly, N, was trained by one of Victoria's leading trainers and had approximately 38 race starts in Victoria between the period September 1977 to October 1980 and had 5 wins and 4 placings but it seems that none of the wins took place in the metropolitan area. N was retired to stud in 1981 when a seven year old but she died before producing a foal. A schedule accompanying the applicant's 1981/1982 taxation return reveals that N had an imputed value of $1,080 and was disposed of at that same figure.
5. Another horse, A, a colt, was brought in from New Zealand in February 1981 at a landed cost of $5,682. The applicant raced A for a short time but again misfortune struck when the horse broke a leg and had to be put down.
6. Additional to owning in New Zealand the brood mare M, and racing in Australia both N and A, the applicant also owned in New Zealand in 1980/1981 further progeny of M, a yearling P and a two year old, T. P was later gelded and brought over to Australia and raced with only token success over the period September 1983 to February 1985. It was subsequently sold for a figure of $800. Similarly T was brought to Australia, but after only one race start was found to be fractious and was retired to a stud. Thus over the years in issue it seems that the applicant bred three horses with only one sale, the mare N, bred in New Zealand in 1974/1975.
7. The applicant told us that he did not own the property on which he conducted his horse breeding activities but agisted all of his stock and paid the appropriate fees. His plan was to have his mares successful on the racetrack so that they would be acceptable for mating purposes to well-regarded stallions. He pointed out that lacking the funds to buy expensive bloodstock he took the only course open to him of racing relatively inexpensive stock in the hope that they would win, and so be in demand for breeding purposes. He stated that:
"With a winning mare, you can be selective of stallions for service, so that their offspring bring high prices, and are easy to sell."
8. He pointed out too that unless one's racing activities were trouble-free and attracted a measure of success, the lead time before achieving a viable operation in the economic sense was necessarily of considerable dimension. On the trading figures supplied in the applicant's taxation returns, it has to be said that the operation was far from being viable as no income (save a small amount in 1980) had been derived in any of the years in issue, and expenses were at a level of approximately $3,000 per annum.
ATC 448
9. The word "business" is defined in sec. 6 of the Income Tax Assessment Act 1936 to include "any profession, trade, employment, vocation or calling". The occupation as an employee is expressly excluded. It seems clear that the above definition is sufficiently wide to include horse breeding/horse racing if carried on with a commercial purpose. In the instant case, the applicant did not derive any profit in any of the years in issue, and in fact made ever-increasing losses comprising 1979/1980 $2,830, 1980/1981 $3,090 and 1981/1982 $3,101. The incidence of those losses is however not necessarily fatal to the applicant's claims so long as his activities were of the same kind and carried on broadly in the same way as those which indicate a business activity (see
I.R. Commrs v. Livingston (1926-1927) 11 T.C. 538 at p. 542).
10. In some aspects the situation of the applicant is not dissimilar from that of the taxpayer in
Martin v. F.C. of T. (1952-1953) 90 C.L.R. 470. The case is notable for the difference in the conclusion reached on an uncomplicated set of facts by Webb J. in the court of first instance, and by the Full High Court when the case came before it on appeal by the taxpayer. As in the case before us, the years in issue in Martin were three and in all three years, the taxpayer had a full time occupation apart from an interest in betting on racehorses which the Commissioner asserted was a business. During the first of the years in issue, he was an hotel-keeper and for the latter two years he was a farmer. Mr Martin employed a registered tax agent to keep his books of account and prepare his income tax returns. He gave the tax agent particulars of his betting activities and the agent prepared balance sheets of the taxpayer's affairs which were sent to the Commissioner with his income tax returns. Those balance sheets showed as part of Mr Martin's capital account the total amount of winning bets, losing bets and the balance. The total credit balance for the three years was £8,928 5s 0d. Significant for present purposes is the fact that in the last two years, the taxpayer raced and bred horses. His capital account in those years showed entries of prize money and racing and stud expenses. Not only did he win prizes but he made profits, his prize money totalling £1,041 16s 8d for the two years whilst his expenses were somewhat lower at £838 10s 2d. The Commissioner included those receipts and expenditures in the adjustments to be made when issuing the respective year's assessments.
11. As to the taxpayer's horse racing activities, the evidence was summed up by Webb J. as follows at p. 472:
"During the year 1944 and thereafter, the taxpayer purchased several racehorses. One called `Nitram' was bought for £892 and won six races. Another, `Halo Girl' was bought for £100 and won three races. She was bought for breeding purposes also. Three other racehorses were bought for prices not stated. One, `Staffon' won five races, and each of the other two won a race. The income tax return for one year disclosed £950 prize money.
The taxpayer did not keep racing stables; but he employed several trainers, from whom he obtained information for betting purposes. He also employed a man to make bets for him so that he might get longer odds."
12. On the above facts Webb J. held that the taxpayer was carrying on a business of betting on racehorses during the first income year in question and the business of horse racing and betting on horse races during the remaining two years. He came to that view because of the considerable time spent by the taxpayer on those pursuits coupled with the magnitude of assets employed in them and the systematic approach adopted by the taxpayer.
13. The Full High Court however took a different view. That Court found that the taxpayer's racing and betting transactions were the normal and usual activities of a person who derived pleasure from betting on a racecourse, and racing under his own colours and that consequently those activities did not constitute the carrying on of a business.
14. It seems to me that if the Full High Court held on the facts before it that Mr Martin was not in the business of racing horses, it would certainly hold that the taxpayer in the instant case was not in that same line of business. On the other hand, it would seem that the taxpayer before me was in the business of breeding horses to a greater extent than was Mr Martin. However, it is my view that his involvement was still only minimal and therefore I believe that his activities could not be said to amount to a business. The applicant pointed out that in his
ATC 449
position as a married man with three children attending school with the only source of maintaining his family being his salary, he could not afford the luxury of racing and breeding horses as a hobby. He saw his activities in those areas as always amounting to a business. He summarised his plans in the following words:"... if you plant walnut trees you do not get walnuts the first year, it is the same in the racing industry. I was spending money, the same as buying shares, hoping to retire into that type of business and make big money which they were doing in New Zealand. And the only way to do that is... buying something that you can afford, try to have success at the race track, which in turn gives us success in the breeding industry."
15. The taxpayer was a truthful witness, I believe, and spoke with deep sincerity. I consider that he was correct in contending that he was not carrying on a hobby. Many people currently race horses whether on their own account or in syndicates for the thrill of seeing their own horse win and to enjoy a bet; that sort of involvement in the racing industry amounts to no more than indulging in a pleasant pastime or hobby. The applicant's interest in racing, I believe, was of a different order. He raced horses in order that they would come under notice by winning and so be mated to superior stallions and so improve his chances of doing well as a breeder. Unfortunately for the applicant, it does not necessarily follow that because he was not a hobbyist he had to be seen to be carrying on a business. My view of the evidence was that over all the years in issue the applicant was seeking to establish a breeding business but that business had not been established at 30 June 1982.
16. I turn now to a consideration of the applicant's claim for a deduction of motor vehicle expenses. That claim was made in the 1980/1981 year only, and amounted to $1,765 after deduction of a private use component estimated to be 34% or $910. The gross expenditures comprised:
$
Petrol and oil, Registration,
R.A.C.V. Subscription
and insurance 1,593
Repairs and maintenance 407
Depreciation 675
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$2,675
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17. Of the total number of kilometres travelled on business, 4340km or 69.33% was stated to have been spent on his employer's business and 1,920km or 30.67% spent in attending to his horse racing/horse breeding pursuit. The respective money values are $1,224 and $541. Resulting from my decision that the horse racing pursuit did not amount to a business, the amount of $541 is disallowed, and thus the remaining issue is the validity of the deduction of $1,224.
18. It seems that the applicant used his own car in visiting and inspecting various subdivisional properties owned by his employer company in the outer suburbs of Melbourne. It seems that a manager with the responsibility for those areas prior to the applicant's appointment had embezzled considerable sums of his employer's moneys, and in the furore that followed, the applicant used his own car and incurred normal running expenses in carrying out his duties on the understanding that he would be reimbursed for those outlays. However a large scale structural reorganisation took place in the company soon after the events described above, and the applicant considered it inappropriate, and indeed a waste of his time, to pursue his claim. The applicant's evidence was not contested, and as indicated earlier, I believe him to be a witness of truth. Accordingly I am of the view that the amount of $1,224 was incurred in deriving his salary income and therefore the components making up that total are properly deductible under sec. 51(1), 53(1) and 54(1).
19. As the express words of sec. 53(1) for the years of income in issue (since repealed for expenditure incurred after 18 April 1984), do not permit the cost of repairs to an asset to be apportioned between income-producing and non-producing use, nor require the repairs to be to an asset used exclusively for income-producing purposes (see Case Q98, 83 ATC 487), the figure of repairs and maintenance, $407 is deductible in full. Accordingly the amount deductible under sec. 53(1) is increased by the private use component, $158 i.e. 34% of $407, and the total allowed under the respective sections is increased to $1,382.
20. For the above reasons, the Tribunal varies the decisions of the Commissioner upon the applicant's objections to his assessments for the years of income ended 30 June 1980, 1981
ATC 450
and 1982 by allowing a deduction of $1,382 in the year of income ended 30 June 1981. In all other respects the Tribunal affirms those decisions.| Date: | Version: | Change: | |
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