|
08 July 2010
Many horse enthusiasts are thrilled and excited to have their horse especially on its first year. That is not a problem because having a horse is meant to give you enjoyment for the ride!
But there are a few important things that most horse buyers overlook before they made this investment which normally costs thousands of dollars. If you are not very familiar with the ins and outs of this investment, you may be surprised that much of your bank account balances would find their way to Wayne Swan.
In order to prevent such unfortunate experience, we are outlining five tips for new horse buyers.
#1 – Is the horse for a business or a hobby?
The answer to this crucial question will determine if your horse’s activities will be subject to income tax. You may incur tax losses in the early years and a deduction may be most welcomed.
If for business, activities will be entitled for GST registration which is generally levied on the sale of animals as well as the daily maintenance and training costs. If you have registered, you can claim back these GST amounts.
The ATO tax ruling 2008/2 will be a helpful tool to determine this issue. A Business Plan will also help demonstrate how you will be successful in tax business in the future as it will be a lot of assistance with any review of your activities by the ATO.
#2 – If the acquisition of the horse is for a hobby, consider the CGT (Capital Gains Tax) exemption.
Some people think that a hobby owner need not pay CGT on a gainful sale of a horse; this is so not true.
But there can be some reason to be happy if there was proper planning. As the CGT laws state, a racehorse (or shares in a racehorse) bought at $10,000 or less, including GST is CGT-exempt when sold.
And if you will buy a horse with a spouse or partner, you can apply joint ownership as it will mean 50/50 share. So if a horse is bought at $19,250, your personal cost base is $9,625 which is the 50%. Since it is less than $10,000, it is exempt from CGT.
#3 – Use the appropriate tax structure.
If you are into business, you can take advantage of tax losses in the first years by purchasing in a structure where you can use the losses directly by offsetting them against your other income. However, note that this may not suit is asset protection is your main objective.
If you are a horse hobbyist, you can take advantage of the exemption for CGT. But take note that when you purchase in a company, you do not have access to the general 50% discount for CGT.
Lastly, horse owners often overlook that a racehorse under the care of an individual in not counted in determining if the net asset is within the required $6 million to qualify for the CGT Small Business Concessions.
#4 – Losses may not be deducted automatically.
Meeting the tax requirement mentioned in tip #1 alone does not mean that a tax loss is automatically deductible. You have to meet the rules for “Non-Commercial Loss” too. You need to familiarize yourself with these rules before entering the industry.
If the ATI (Adjusted Tax Income) is under $250,000, you need to meet four objective tests before you can claim a loss deduction. In other cases, special grounds for relief should be met.
On the other hand, when the ATI is more than $250,000, a special viability request should be approved by ATO in order to claim the loss. This is according to the latest 2009 budget.
#5 – Always prepare your buying structure.
If the horse is acquired as a hobby, you cannot claim GST on the original acquisition. Per the rules for GST “attribution”, GST can be claimed only by the entity that purchased the animal; appropriate structure should be ready before buying the horse.
Horse Finance News