You act for Bill and Jo Smith on the sale of their 20 acre property in Bourke known as “Racecourse Road” which is well known in the town for breeding and
selling race horses. It also holds local races every couple of months. Bill and Jo also own other adjoining property and have been capturing and selling
goats, the meat of which is exported to the Middle East.
You’re not one for goat meat, but have heard it’s got quite an exquisite taste. You are aware that they acquired Racecourse Road in 2010 and has been used
as part of their overall farming business.
Jo and Bill tell you that the purchaser, a friend of theirs and a fellow horse racing enthusiast from Broken Hill and intends to run a similar horse racing
business on the property. Accordingly, and without any further thought, you prepare a simple contract for the sale and purchase of land and indicate
that the sale will be a GST free supply of farmland.
You have been flat out because you’re about to take a few weeks leave but still manage to have contracts exchanged and settled within two weeks. You are
incredibly pleased with your efforts as you drive off into the sunset and begin your holiday.
Upon returning to your office you find a mountain of paperwork, not unusual, but on top of that pile is letter from the ATO marked “Urgent” by your receptionist.
Never a good start.
You have a sinking feeling in your stomach as you begin reading the letter and realise its about the sale of “Racecourse Road”. The ATO confirm that “Racecourse
Road” was used in Bill and Jo’s overall farming business and therefore Bill and Jo qualify as having conducted a business of primary production for
a period of five years prior to the sale. You breathe a sigh of relief, and wonder what the issue could be as you quickly check the GST Act section
38.480 which states:
“the supply of …land is GST free if:
(a) the land is land on which a farming business has been carried on for….5 years… and;
(b) the recipient of the supply intends that a farming business be carried on, on the land.”
You recollect that the purchaser was also a horse racing enthusiast …
But as you read on the letter refers to TR 2008/2. The sinking feeling in your stomach returns as you take a look at the ruling which considers the question
of whether horse related activities amount to the carrying on of a business. In considering this question, racing, training and breeding activities
may be carried out as stand-alone activities or in combination.
You make a quick phone call to the purchaser’s solicitor to confirm the purchaser’s use of “Racecourse Road”. The solicitor tells you that the purchaser
owns a few race horses which he has a trainer train, and continues to hold bimonthly races for the locals. He further informs you that he plans to
breed horses but only for his own use. Clutching at straws you ask whether the purchaser is keeping any goats on the property to sell, at which the
solicitor laughs out loud and says “what, on 20 acres of scrub”? The purchaser doesn’t own any other land.
You continue reading but know the outcome already. Paragraph 28 of the ruling states that “in the Commissioner’s view, the racing of horses as a stand-alone activity would not amount to the carrying on of a business if either one of the following significant non-business features were present
(a) a significant element of chance – meaning that whether or not a profit is made will depend very largely on consideration other than system and organisation of the taxpayer; and
(b) the activities are no more than the mere pursuit of a hobby, recreational pursuit or pastime”
Paragraph 40 of the ruling states that the breeding of horses may be a primary production business for the purposes of ITAA 1997 (see definition at 995-1(1))
as it involves ‘maintaining animals for the purpose of selling them or their bodily produce…’ Therefore if the purchaser bred horses
to sell, and in conjunction with the racing, it may have come within the definition.
The letter ends how you predicted, the purchaser isn’t carrying on a business of primary production and therefore the sale is not a GST free supply of
farmland and GST is payable. You prepare yourself for the call to Bill and Jo wishing you had queried the purchaser’s intention more thoroughly.
Contracts for the sale and purchase of hobby farms need to prepared with extra care. The courts have identified a number of indicators that are relevant
in determining whether activities, including horse related activities, amount to carrying on a business including the nature of the activities, particularly
whether it is for the purpose of making a profit, whether there is repetition and regularity and the size and scale of the activity (these factors
and more are listed in TR 97/11).
This article is general information only and should not be relied on without obtaining further specific information.