CASE 54/96

Members:
G Ettinger SM
GD Stanford

Tribunal:
Administrative Appeals Tribunal

Decision date: 12 September 1996

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G Ettinger (Senior Member) and GD Stanford (Member)

The matter before the Tribunal was an application for review of the decision of the Commissioner of Taxation (``the Commissioner''), the Respondent in these proceedings, to disallow an objection dated 24 March 1992 against notice of amended assessment issued on 23 January 1992 in respect of the years ended 30 June 1988, 1989 and 1990.

2. The Tribunal had before it documents (``the T-documents''), lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') and the following exhibits:

The documents prepared pursuant to                           T1 - T22
section 37 of the Administrative Appeals
Tribunal Act 1975

Statement of Applicant (deletions as per    7 December 1995  Exhibit A1
transcript of 19/2/96 pp 11-21)

Cash Book for Smash Repair Business                          Exhibit A2
and Horse Breeding Activities

Cash Receipt Book                           1988 - 1990      Exhibit A3

Kalamazoo - Horse Account                   30 June 1986     Exhibit A4

General Ledgers                                              Exhibit A5

Cheque Books from Applicant's business      1 July 1987      Exhibit A6

Horse Expense Invoices                                       Exhibit A7

Printout for Horses - showing service                        Exhibit A8
dates/Records from Australian Stud Book

Pages of a catalogue                                         Exhibit A9

Promotional Brochure                        8 December 1995  Exhibit A10

Statement of Mr R (deletions as per                          Exhibit A11
transcript 19/2/96 pp 64/65)

List of horses owned by Applicant                            Exhibit A12
      

3. The relevant legislation in this matter is the Income Tax Assessment Act 1936, (``the Tax Act''), in particular sections 6(1), 51(1) and the Taxation Administration Act 1953, in particular section 14ZZK(b)(i).

4. It was noted that both members of the Applicant couple were involved in the application before the Tribunal and that there were six matters before the Tribunal relating to tax returns of each of the Applicant couple for the tax years 1988, 1989 and 1990. The matters were heard contemporaneously, as each raised the same issues in dispute, and involved related evidence.

5. The Applicants were represented by Mr G Pagone of Counsel and the Respondent by Mr W Muddle of Counsel. Oral evidence was given by the male Applicant and Mr DHR, a thoroughbred horse breeder.

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Issues before the Tribunal

6. The issues before the Tribunal were:

• (a) whether the horse racing and breeding activities of the Applicant and his wife in the tax years 1988, 1989 and 1990 could be characterized as a business within the terms of the Tax Act; and if so,
• (b) whether certain losses were necessarily incurred in carrying on a business for the purpose of gaining or producing income and were not of a capital, private or domestic nature within the terms of section 51(1) of the Tax Act.
• (c) whether additional tax imposed for incorrect returns pursuant to section 223 of the Tax Act could be remitted.

Legislation

[ CCH Note: The paragraph numbers have been reproduced as received in the official transcript]

6. The relevant legislation in this matter is the Income Tax Assessment Act 1936, in particular the sections which follow.

• ``6(1) In this Act, unless the contrary intention appears:

• ...

• `business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee;

• ...''

• ``Losses and outgoings

• 51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

7. Taxation Administration Act 1953, in particular section 14ZZK(b)(i):

``14ZZK On an application for review of a reviewable objection decision:

• (a)...
• (b) the applicant has the burden of proving that:
  • (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
  • ...''

Evidence of the male applicant

8. The Applicant told the Tribunal that his principal occupation was a partnership with his wife in the business of smash repairs and horse breeding. He had prepared a statement of 7 December 1985 which was admitted before the Tribunal as Exhibit A1 after certain parts had been deleted.

9. The Applicant told the Tribunal that he first became interested in horses in 1974, and first acquired an interest in a horse, DV in 1984, with the intention of racing it as a hobby and making money. At Easter in the same year, he and his wife acquired a filly, AM for $8,000. Both were used for racing, the latter for approximately three years, and both won races. The Applicant said that he ceased racing AM in 1988 because she was injured, and put her to stud after seeking advice from trainers. He said he had been told she was a valuable brood mare. The Applicant said that he studied ``blood lines'' when selecting a horse. He told the Tribunal what he knew of the importance of blood lines to establish what risk he was undertaking with regard to winnings, stud and returns.

10. As to the smash repair business; the Applicant said he had commenced thirty three years previously in an old disused service station and that this had now grown to the extent of employing approximately twenty eight employees working in a half acre property. When asked, the Applicant said he had never written out a business plan. He said: ``I have just got it all in my head, I just go along and do it as we do things... I have never... I don't keep a diary or write a story and plan ahead type of thing. I just know how my bank account is going and what I can do''.

11. The Tribunal notes that although the Applicant was subpoenaed to produce documents relating to breeding plans or breeding programs, he had been unable to do so and agreed in cross-examination that he did not have any. The Tribunal notes however from further clarification given by the Applicant that he did know his horses were capable of participating in approximately eight to ten races a year. He also told the Tribunal that these races were selected according to the horse's age and

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ability, that prize money varied considerably and was a factor in the selection of races. Advice was sought from trainers several times a week and the Applicant said that they would keep plans on his behalf.

12. During cross-examination, the Applicant told the Tribunal that he thought $50,000 might be a figure he had thought of investing in horses in July 1987, but agreed that in fact the figure may just have been a guess. He said he expected to lose money in the first year, and that breeding horses would not return money until after the first three to five years approximately, but that he expected there could be prize money from racing within that time.

13. The Applicants had available cash books, a record of income and expenditure which dealt with both the smash repair business and horse transactions. These were before the Tribunal as Exhibit A2. It was noted that the date claimed for the commencement of the business of horse racing and breeding was 1 July 1987. There was also a cash receipt book, Exhibit A3, covering the period 6 July 1984 to 30 June 1990 dealing with smash repairs initially, and including coverage of horse breeding activities from the end of 1988. It is noted that there was a change of system to Kalamazoo, and that the records relating to the horse activities from 1988 to 1990 were before the Tribunal as Exhibit A4. Exhibit A5, a general ledger dated to 30 June 1986 had various entries for both smash repair and horse activities dating back to that time. Exhibit A6 was cheque books dealing with both activities and Exhibit A7 was a record of ``horse expense invoices'' dating from 1 July 1987. Exhibit A8 was a record from the Australian Stud Book recording breeding activities over a period of time. The Applicant also gave evidence regarding insuring his horses. He was knowledgeable about the insurance and informed the Tribunal that he insured approximately 80% of them every year. He spoke about the extent of cover and the difference between agreed value and market value. It is noted that the Applicants handled their own insurance rather than having trainers or advisors do it.

14. As to how planning for the horse business was conducted; the Applicant said that this was a longer term process due to gestation periods. There was also planning advice obtained from Mr DHR, thoroughbred horse breeder, amongst others. He told the Tribunal that AM had produced only one foal; she had died soon afterwards (on 24 April 1990). He said that he conducted a large part of his horse activities in Melbourne, although some horses were also kept in New South Wales. It is noted the Applicants do not have their own stables.

15. The Applicant also told the Tribunal about the activities of stallions and the finances involved in serving mares, and the offering of that facility amongst breeders. He replied to Counsel's questioning that at 1 July 1987, he anticipated that he would be making a profit from breeding activities within five to six years. This depended on brood mares having progeny, selecting trainers, and getting the progeny to the race track to prove themselves. As to breeding activities; in cross-examination the Applicant referred to records which showed that he had no precise written plan for breeding, but that four or five mares had been serviced during the tax years 1988, 1989 and 1990.

16. As to whether foals were kept for racing or sold; the Respondent established through questioning the Applicant that in the three years 1988-1990 he had retained foals for preparation for racing, and sold or given some away if they were unsuccessful. Since that time, these arrangements had changed, and the Applicant was selling 95% of foals. This was due he said, to having to build up a stock of good brood mares and to be able to attract good trainers.

17. The Applicant was questioned about an insurance payment for a horse of $180,000, received in the financial year 1990 which had not been included in that year's tax return. It related to the horse AM which had been purchased in 1984 when the Applicants had considered their horse activities as a hobby. The Applicant said that his accountant had considered it a ``capital gain'' rather than income, and not included it. He was later advised by his present accountants that it should have been included. He agreed in cross- examination that he had declared the sum as assessable income in anticipation of the hearing of his objection. The Tribunal notes Mr Pagone's submission that the amount had been included in an amended return 18 months previously.

Evidence of DHR

18. Mr R farmer and thoroughbred horse breeder, of Melbourne, whose written statement was Exhibit A11, dated 8 December 1995, gave oral evidence before the Tribunal. He told the

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Tribunal that for nineteen years he had been a committee member of the Victoria Racing Club (``the VRC''), which is the official body administering racing in Victoria. Mr R said he was chair of the Melbourne Cup marketing information sub-committee for twelve years, held other committee positions and had for the last seventeen years been one of two VRC representatives on the Australian Stud Book. He had both national and international exposure to breeding and racing he said.

19. Mr R described for the Tribunal, differences between participants in the industry. He said they ranged from people who had one or two mares, to people who owned many horses. He said he considered the Applicants to be in the ``medium range''. He said he had dealt with them since 1965, and that the association with them through the progeny of AM, commenced in early 1985. Mr R said that the Applicants had culled and improved their stock over the period he had dealt with them. He explained the way that horse owners buy and sell, and told the Tribunal he had approximately half of the Applicants' horses at his stud in Victoria while the other half were in New South Wales.

20. Mr R said he would generally communicate with the Applicant once or twice a week but depending on what transactions were occurring, it could be two or three times per day. They would discuss racing, servicing, the movement of horses and other topics. He sent out monthly accounts for agistment and these would detail all the activities he said. Mr R said he had been complimented on how detailed and regular his reports and accounts were.

21. Mr R told the Tribunal that money from breeding could be made from buying a good filly (the luck associated with that), and racing and breeding her, and from servicing fees for stallions.

22. Mr R told the Tribunal that in 1987 the Applicants' horse AM was a very highly prized horse but that some of their other mares at that time may have been of lesser quality because the Applicants did not know pedigrees as well then. He told the Tribunal about the risks of racing a filly who did not turn out to race well; however if she had good blood lines, she could be sold for breeding he said. As to geldings; they could race for longer, say seven or eight years or if they were not successful at racing, might be sold for riding. He agreed that there was always risk involved, and to keep all of one's foals for racing made any venture riskier than racing some and selling some as yearlings.

23. In reply to questioning about the viability of the Applicants' business and return on capital in breeding and racing, Mr R said that the development of business in this field was not like having a factory. It varied greatly. He referred to the value of AM and her progeny.

24. When asked:

• ``... would it be fair to say having regard to the amount that the - [Applicants] have invested in the years past, the amount that they have in fact lost as losses in those years and the amount they have tied up, you could not confidently predict at this stage that they will ever make sufficient profit to make up those losses and provide them with a commercial return on the amount they have invested?''

Mr R replied:

• ``Yes I think they most definitely will. They've got very good stock and they're all going to commercial stallions. The - [Applicants] are spending quite significant sums of money on their service fees and I would be very disappointed if they don't make a very good return in the future.''

Submissions and conclusions

25. The Tribunal must take into account the evidence, legislation and case law before it and determine whether the Applicants were in the business of horse racing and breeding in the financial years 1988, 1989 and 1990. If so, then the Applicants would be allowed deductions for losses and outgoings necessarily incurred in earning assessable income in their horse racing and breeding activities (section 51(1) of the Tax Act).

26. The Tribunal notes that the taxpayers have the burden of proving pursuant to section 14ZZK of the Taxation Administration Act 1953 that the assessment made by the Respondent is wrong.

27. The Tribunal notes that the case for the Applicants was argued around the commencement of the business which was said to have taken place in the financial year commencing 1 July 1987. It was submitted the first horse AM had been purchased as part of a hobby project in 1984/5, the hobby converting to a business from 1 July 1987.

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28. The Tribunal notes from the documents before it that the income the Applicants claimed to have earned from horse racing and breeding in the years 1988, 1989 and 1990 was approximately ten thousand dollars in one year, and less than $3,000 for the other two, while the net losses claimed by the partnership were in the order of $96,090 in 1988, $106,166 and $185,642 in 1990. For the sake of completeness, the Tribunal notes that a half share each of the losses was claimed by each of the Applicants, the husband and wife. The Tribunal notes further that for the 1990 year, the taxpayers' amended return which was not accepted by the Respondent, had included as income (not previously declared), an insurance payment of $180,000 received for a horse which had died.

29. It was not in dispute that the taxpayers carry on a business of panel beating/smash repairs, and operate a towing service as well as derive income from property investment although the latter two were not discussed in detail before the Tribunal.

30. The Tribunal notes that section 6(1) of the Tax Act defines business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The Tribunal notes however that reference to the case law, in particular the principles set out in
Ferguson v FC of T 79 ATC 4261 are important in determining whether a business of horse breeding and racing was being carried on by the Applicants during the relevant years.

31. Mr Pagone for the Applicants drew the Tribunal's attention to the tests given consideration when assessing whether a business is being carried on. He referred to Lord Clyde in
Inland Revenue Commissioners v Livingston & Ors (1927) 11 TC 538 who had said:

``I think the test which must be used to determine whether a venture such as we are now considering is or is not `in the nature of trade' is whether the operations involved in it are of the same kind and carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was made...''

32. He also referred to
Tweddle v FC of T (1942) 7 ATD 186 quoting from that case ``it is not for the Commissioner to tell the taxpayer how to run a business''.

33. Mr Pagone submitted that it was not essential that a person who engages in a business should do so with a motive of profit making in the short term (Ferguson (supra) and Tweddle (supra)). He said that the horse business was analogous to the fruit business; time was involved before it bore fruit. The court in Ferguson (supra) had held that the naval officer who conducted a cattle leasing activity constituted a business Mr Pagone said. He also referred the Tribunal to
Thomas v FC of T 72 ATC 4094 where a barrister had been held to have been in the business of being a primary producer.

34. The Tribunal is mindful that it was the submission of the Respondent that the profit motive was an important consideration in discerning whether a business was in progress, and the Tribunal taking into account the principles from Ferguson (supra), agrees.

35. Referring to Tweddle (supra), Mr Pagone submitted that there, the court had found that the farmer had not intended to conduct a business in the long term, and yet his was recognised by the High Court as a business. That was a far weaker case and quite unlike the case of the present Applicants who certainly intended to run a business, he submitted.

36. Mr Pagone submitted that these were cases where general principles regarding the conduct of a business were expressed, but said that in relation to horse racing and breeding, he would refer the Tribunal to Case X28,
90 ATC 276.

37. Mr Pagone submitted that the proper legal treatment with regard to a business where there is a lead time such as in the breeding of horses, was to determine the point at which a business commenced, albeit that losses were sustained at that time. He said that he accepted that courts would normally also view whether the activities had a significant commercial purpose or character and whether it was a pursuit for profit or gain rather than pleasure or recreation. There was further reference to Case W122,
89 ATC 967 where the tests set out went to the scale of operation, the elements of repetition and system, whether a significant commercial purpose existed or whether it was a hobby, and whether there was a profit purpose.

38. As to Case W122 (supra), Mr Pagone submitted that in that case, Deputy President McMahon (in finding for the Applicant), had said that the Applicant there ``had been aiming

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at establishing a business'' and then that ``the scale of operations was small but not insignificant''. As to the Applicants' activities, he said: ``They were carried on throughout the whole of the period in which the objection decision under review relates, and have continued to be carried on ever since in a thoroughly systematic manner''.

39. Mr Pagone also referred the Tribunal to Case Q73,
83 ATC 368, the subject of which was horse breeding. He submitted that although the taxpayer in the above case was found to be in business and entitled to claim expenses as deductions, his case was not as strong as that of these Applicants. Unlike the present Applicants, the taxpayer in Case Q73 (supra) in contrast to the present Applicants, had ceased business by the time of his hearing due to a break-up of his marriage. These Applicants, he submitted, had commenced their horse activities as a hobby, had acquired a horse (AM) for $8,000 in 1984/5, and from 1987 when it could no longer race, had brought this valuable horse to account by commencing a horse breeding business. AM had been served in late 1987. (Mr R had given evidence that mares were served in October/ November each calendar year.) The horse had been insured for $200,000.

40. As to profit; Mr Pagone submitted that it was undoubted that the Applicants intended to make a profit. They had assistance and advice from trainers and from Mr R. He said that the Applicants took a risk and raced their horses to be able to prove them as good stock. They went about the business in a systematic way; they kept records; they sought advice, made inquiries and raced all their horses to establish their credentials.

41. As to when the acquisition of horses for racing and breeding changed from a hobby to a business; the Tribunal noted that the Applicants commenced modestly. It is noted from the documents that the number of horses although not large, increased over the years from 1988, and that consistent activity was recorded and good records were kept. The Tribunal noted the evidence of Mr R that he handled the Victorian aspects of the Applicants' horse activities, and that they handled the Sydney side themselves. The Tribunal accepts Mr R's credentials as to horse racing and breeding, and both his and the Applicants' evidence regarding the advice sought and given. The Tribunal accepts that keeping a considerable number of the horses in Victoria is consistent with trying to maximise exposure and return, and that had the venture been for pleasure only, the Applicants would more likely than not have kept most of their horses nearby, in New South Wales, where they could enjoy them more easily.

42. Mr Muddle for the Commissioner submitted that the overall effect of the evidence was that no single document could be produced (even after subpoena), relating to any breeding program or racing program or overall business plan with regard to the venture conducted by the Applicants. Mr Muddle submitted that the Applicants had neither in their own minds nor in writing, a budget for outgoings. Mr R had been asked for advice with regard to breeding and to horses generally, but his evidence showed that he had never considered whether losses would be made up, let alone what the Applicants would get out of it as a return on investment.

43. Mr Muddle said that the Applicant had been unable to recall how much he and his wife intended to invest to commence the business. The above were the most important criteria the Respondent submitted as to how one could test whether this was a business venture other than by working out what profit would be made and what return would be made on the capital invested. Mr Muddle submitted that the witness thus had the motivation of a keen enthusiast, a fanatic perhaps, but not that of a businessman. He was motivated by other than profit return, it was submitted. Mr Muddle referred to the evidence of the Applicant that his wife had told him they needed an interest; he submitted that this had remained their dominant motivation throughout. Mr Muddle submitted that from the evidence it could be noted that the scale of the activity might have increased, but that the motivation of the Applicants was not one of deriving commercial profit. He did not doubt that anyone who owned a horse wished that it would win. He submitted however that the motivation was as found in the cases where deductions had been disallowed.

44. Mr Pagone submitted that it was clear from the evidence that there was a time lag in the horse breeding and racing business, but that it was reasonable to expect that profit would be made. Mr Muddle said he did not consider that the time lag factor based on the evidence that one might wait for up to five years for profitability, was fatal to the case. The Tribunal

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noted that there was no fundamental disagreement about the fact that in the business of horse racing and breeding there was a time lag as one might also expect in fruit growing which had been given as an analogy.

45. However Mr Muddle submitted that to run a business of horse breeding and racing, one would have to be astute, and keener than ever to ensure that profits would make up the losses, and cover time and money expended. Mr Muddle submitted that the taxpayers, if in business, would have kept records, and budgetary controls and would have known the extent of the losses.

46. Mr Muddle continued: ``They just paid all of the expenses as they went along and they hoped like everyone would, that they would win some races and they would sell some horses. That does not make it a commercial venture. He accepted that only 5% of thoroughbred horses that are raced show a profit. Notwithstanding that, he raced all of their foals. He accepted that that increased the risk''.

47. Mr Muddle, referring to Taxation Case E22,
73 ATC 168 submitted that comparing the facts in Case E22 (supra) with these taxpayers, showed that the taxpayers in Case E22 (supra) had engaged in far more horse buying and selling activity, and yet had been found not to have been engaged in business. Mr Pagone submitted that in Case E22 (supra), the facts were quite different. There he said, the Tribunal had found that the taxpayer was engaged in horse racing, and that breeding was an incidental activity. Mr Pagone submitted that this was not the case with the present Applicants who actively and deliberately engaged in racing and breeding. The Tribunal accepts from the evidence before it that Case E22 (supra) can be distinguished on its facts and that the Applicants were both racing and breeding horses.

48. As to documentation and plans; the Tribunal accepts that the Applicants managed their horse racing and breeding business similarly to their smash repairs, and in a way that many small business people do, that is without specific budgets and plans. The evidence before the Tribunal of both the male Applicant and Mr R, was that the Applicants sought advice regularly from experts in the area, and then made their decisions about breeding and buying and selling horses. The male Applicant who gave evidence before the Tribunal gave the impression of someone who understood his businesses. He had had an impressive growth in his smash repair business over 33 years, from starting ``in an old disused service station, the rear of one'' to employing 26-28 people. His description of how he calculated profits for his horse activities was similar to how he described his calculations for his smash repairs business by reference to turnover of work.

49. Mr Pagone then turned to Taxation Case Q113,
83 ATC 580 where he submitted it had been held that the taxpayer was indulging in a hobby his wife had developed - a situation quite different from the Applicants' case here. Mr Muddle also referred to Case Q113 (supra), saying that the wife in the Case Q113 (supra) was a recognised horse expert and yet there the taxpayer had been held not to be in the business of horses. Mr Muddle submitted that this demonstrated how much stronger the case of Q113 (supra) was, noting that the present Applicants had no training in regard to horses. The Tribunal was mindful that the Applicants had no formal training with regard to horses but that the male Applicant who gave evidence demonstrated he knew about the industry, the servicing of horses, the value in gelding, and other matters related to horse racing and breeding. When questioned about ``policy change'' regarding his change from keeping the majority of his progeny in 1988 to selling the majority by 1990, notwithstanding he did not appear to understand what was meant by the formal words ``policy change'', the Applicant explained quite clearly to the Tribunal his reasons for the changes.

50. Mr Pagone then referred the Tribunal to AAT Case U72,
87 ATC 446 where a taxpayer's claimed deductions had been disallowed on the basis that his activities could not yet be said to have amounted to a business. This was in contrast to the activities of the Applicants, who Mr Pagone submitted, commenced them on 1 July 1987 and had continued to expand and increase.

51. Mr Muddle submitted that initially the Applicants had been keeping all their foals, whereas they now sold approximately 90%, in line with what Mr R had described as industry practice. Mr Muddle took that as an indication that the Applicants had not been in a business of horse racing or breeding initially. They had chosen to buy a cheap horse and take a punt,

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and good fortune (a large insurance payment) had eventuated from the bad fortune, its death. That however did not indicate that what the Applicants were doing was part of a commercial venture. The Tribunal accepted the Applicants' explanation as to why they kept their foals initially, that is that they wanted to build up a stable of good horses in order to develop good blood lines, a good reputation, and to be able to attract good trainers.

52. Mr Muddle submitted that even if the situation (with regard to disposition of progeny) had subsequently changed, that was not able to be taken into account by the Tribunal. He submitted to the Tribunal that each tax year was a discrete entity. He added: ``That means that as at 30 June the characterization of each of the events which occurred is fixed. It cannot be affected by what happens thereafter''. He cited as authority,
British Mexican Petroleum Co v Jackson (1932) 16 TC 570 and
Hart v Lancashire and Yorkshire Railway Co (1869) 21 LT 261 (with regard to negligence and the effect of adopting a new plan in order to prevent recurrence of accidents).

53. Mr Pagone turned then to make submissions with regard to the 1990 year and thereafter. He cited
CMI Services Pty Ltd v FC of T 89 ATC 4847 and
FC of T v Harris 80 ATC 4238; (1980) 10 ATR 869 in support of being able to look beyond the tax years in dispute. CMI Services Pty Ltd v FC of T (supra) had later been endorsed by the Full Court where, he submitted, the Full Court had agreed that later sales [of real estate] could be taken into account. He submitted that in Case E22 (supra) the Taxation Board of Review also considered that it could look to events of subsequent years. He submitted: ``The issue is whether future events tell you something about the past events''. Mr Muddle submitted that this point had not been argued in Case E22 (supra).

54. Further, as to relevance regarding weight being put on events in subsequent years; Mr Muddle submitted that the sale of a foal in a particular year did not indicate what business activity had occurred in the previous year. Mr Muddle submitted that it was not applicable to extract isolated facts from later years as support for the general proposition that a business was being conducted from the outset. Mr Muddle submitted that the Applicant's own evidence was that his horse activity had commenced as a hobby and that it was, in the relevant period, a developing venture, even though the evidence showed that the Applicant had failed to consider any of the matters which a commercial person would ordinarily do.

55. Mr Muddle cited
Martin v FC of T (1952) 10 ATD 37; (1953) 90 CLR 470 with regard to the proposition that:

• ``The pursuit of a pastime, however vigorous the pursuit may be, does not usually amount to carrying on a business and gains and losses made in such a pursuit are not usually considered to be assessable income or allowable deductions in computing the taxable income of a taxpayer...''

56. Martin (supra) was also a case which concerned horses he said. He submitted that there was a difficulty with the horse cases because there was no doubt that in place of the usual profit motive, one found a vigorous pursuer of this pastime, a keen enthusiast, a sports fanatic. As to Martin (supra), Mr Muddle submitted that operations could be substantial, but then wealthy people had expensive hobbies. Records may be kept in relation to hobbies and the Applicant had kept records, but he had never considered what he was going to make out of the venture Mr Muddle submitted. He submitted: ``the scale is irrelevant if the purpose is an interest, hobby or sport''.

57. Mr Muddle referring to case law, and the evidence before the Tribunal submitted that these taxpayers would have to fail because ultimately all they could show was that they had kept their records well and that they had spent a large amount of money. Mr Muddle submitted that in matters relating to horses it was general knowledge that the cost of racing in most cases exceeded income. There was a common thread amongst horse owners that they raced horses and wanted them to win. That did not mean they were conducting a business. He noted that there was no systematic betting in this case.

58. Mr Pagone acknowledged that the Applicants kept good records. As to the Respondent's comment regarding a lack of business plan for the Applicants' horse breeding and racing activities; Mr Pagone emphasized that he did not have a business plan for the highly profitable smash repairs business either. The Applicant had however sought and received regular and detailed reports from Mr R, his advisor, and consulted with his advisors on a regular basis. There was no indication he

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did not know what he would spend on the horse activities; rather he would see what was feasible from time to time, and would buy as he could. Mr Pagone submitted that small business people did not commence with grand plans; evidence before the Tribunal was that the Applicant had started his smash repair business in a disused service station, and that it had grown substantially from there.

59. The Tribunal accepted Mr Pagone's submission on behalf of the Applicant and had no reason to doubt the evidence given that the smash repair business had started in a very small way and that it was, by 1988, a thriving and growing business. The evidence regarding the Applicants' horse breeding and racing activities can also be characterized to have progressed from small beginnings, and grown. The Tribunal accepted that formal business plans were just not part of the Applicant's agenda, for any of his activities (smash repairs, or horse racing and breeding), but noted that regular reporting, advice and planning with regard to the horse breeding and racing activities was done with the assistance of Mr R and others.

60. The Tribunal is mindful that many cases have been decided characterizing the activities of horse racing and breeding as either business ventures or hobbies. Little would be gained from traversing all those decisions. However in deciding whether the Applicants in this case were in the business of horse racing and breeding in the relevant years, this Tribunal has considered their activities in the light of the main decided cases and the principles therein espoused. The Tribunal has noted the indicia as enunciated in Ferguson (supra) and considered how they were expressed in Case X28 (supra). The Tribunal has considered the size of the Applicants' horse activities, having commenced from one horse in 1984 and growing with the purchase and breeding of others. Evidence given was that in the early days of the business the Applicants retained most horses, attempting to develop good lines, and disposed of unsuccessful horses by giving them away or selling them cheaply. This could be characterized as a disposal of non-performing assets. The Tribunal finds that there was consistent growth, albeit the operation was not on a large scale by some standards. The Tribunal finds from the evidence before it also that there was regular contact with and advice sought from Mr R and others, often several times a week, with regular reports emanating from Mr R. The Tribunal also found from the evidence given that the Applicant was knowledgeable about matters relating to the racing and breeding of horses. A comparison with the production of fruit was made by Mr Pagone for the Applicants. It is recognised also that like fruit, it might take some five to six years before a profit on the horse racing and breeding activities of the Applicants was able to be shown. In the meantime making a loss does not mean the Applicants did not meet the tests for being in the business of horse racing and breeding as well as in the smash repair business. The Tribunal finds that for the relevant years, the Applicants were in the business of racing and breeding horses, and that the business was carried on for the purpose of gaining assessable income. The Tribunal accepts that there was a commercial purpose and profit motive in the Applicants' activities.

61. As to penalties; the Tribunal noted Mr Pagone submitted that should his client be successful, then penalties would not be in issue. He submitted that should he not be successful, then the penalties should be remitted on the basis of the findings in Case X28 (supra).

62. Mr Muddle submitted that whatever the explanation regarding advice sought or received; the fact was the $180,000 insurance payment was not returned originally. He submitted this in itself was indicative of the fact the taxpayers did not consider they were in the business of horse racing or breeding, and that they considered the receipt of the insurance payment not to be income.

63. Mr Pagone submitted that the situation regarding the insurance payment was as Mr Piggott had said he understood it. The horse AM had been purchased in 1984/5 when the Applicants had thought they wanted a hobby, and they had been successful with it. Subsequently, they had brought the horse to account in the business, and intended to run their horse racing and breeding as a business. Mr Pagone gave a number of examples of situations where an activity such as this might start as a hobby and become a business. Just because an activity had started as a hobby did not mean it could not become a business he said. Mr Pagone submitted that the Applicant had given evidence on oath about his motivation, and that there was no reason to

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disbelieve him. The Tribunal accepts Mr Pagone's submission regarding the motivation of the Applicants.

64. As to the insurance payment; the Tribunal is mindful that on the advice of an accountant, said to be deceased, the Applicants did not include the insurance payment as income at the relevant time. The Tribunal is also mindful of the evidence of the male Applicant before the Tribunal, and his lack of formal training in understanding terms such as ``capital gain'' and ``policy''. The Tribunal is mindful that it was only after consulting another accountant, and after communications with the Commissioner that the amount ($180,000) was included in an amended return. The Tribunal accepts that the Applicants are astute business people but not schooled in preparation of taxation documents, and finds that the non-inclusion of the insurance payment in the original tax return is not an indication that the Applicants did not consider themselves in the business of horse racing and breeding.

65. The Tribunal finds that the Applicants were in the business of horse racing and breeding during the relevant years 1988, 1989 and 1990. The Tribunal sets aside the decision of the Commissioner and remits the matter for the calculation of losses and outgoings as appropriate, taking into account the provisions of section 51(1) of the Income Tax Assessment Act 1936. The penalties are thus remitted.