D'Arcy and Commissioner of Taxation
[2008] AATA 709
•13 August 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 709
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/1838
TAXATION APPEALS DIVISION ) Re GREGORY D'ARCY Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr S E Frost, Member Date13 August 2008
PlaceSydney
Decision The objection decisions are affirmed. .....................[sgd].........................
Mr S E Frost
Member
CATCHWORDS
TAXATION - goods and services tax - enterprise - activities done "in the form of a business" - horse breeding activities - taxpayer not carrying on an enterprise – objection decision under review affirmed
TAXATION - Australian Business Number - enterprise - activities done "in the form of a business" - horse breeding activities - taxpayer not carrying on an enterprise – objection decision under review affirmed
TAXATION - income tax - "business" - horse breeding activities - taxpayer not carrying on business – objection decision under review affirmed
A New Tax System (Goods and Services Tax) Act 1999 – Sections 9-20, 195-1
Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1
Puzey v Commissioner of Taxation [2003] FCAFC 197; (2003) 131 FCR 244
Re Applicant for an Australian Business Number and Registrar of the Australian Business Register [2007] AATA 63
Re Block and Commissioner of Taxation [2007] AATA 1897
Miscellaneous Taxation Ruling MT 2006/1
Taxation Ruling TR 2008/2
REASONS FOR DECISION
13 August 2008 Mr S E Frost, Member Introduction
1. Gregory D’Arcy is involved in the breeding of thoroughbred horses. Because he took the view that he was "carrying on an enterprise", he applied for, and was granted, an Australian Business Number (ABN) and GST registration. Over a period of time he lodged Business Activity Statements (BASs) on the basis that he was entitled to input tax credits on the purchases that he made for the purposes of his horse breeding activities.
2. In due course, the Commissioner took a contrary view. He said that Mr D'Arcy was not carrying on an enterprise; that he was not entitled to an ABN; that Mr D'Arcy's input tax credit claims were wrong; that he had underpaid his GST; and that the losses that he had claimed on his income tax returns were not available to him.
3. The Commissioner therefore cancelled Mr D'Arcy's ABN, made an assessment of Mr D'Arcy's "net amount" for GST purposes for the period 1 October 2002 to 30 September 2006, and amended Mr D'Arcy's income tax assessments for the 2003, 2004 and 2005 income years.
4. Mr D'Arcy objected against these various decisions, and on disallowance of his objections he applied to this Tribunal for review of the objection decisions.
The issues
5. The main issue in these proceedings is whether Mr D'Arcy was carrying on an enterprise during the period 1 October 2002 to 30 September 2006. Although that is not the only question for my consideration, the answer to that question will determine how each of the objection decisions should be decided.
What is an "enterprise"?
6. The word “enterprise” is defined in s 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Relevantly, subsections (1) and (2) provide:
(1) An enterprise is an activity, or series of activities, done:
(a) in the form of a business; or …
…
(2) However, enterprise does not include an activity, or series of activities, done:
(a) … ; or
(b) as a private recreational pursuit or hobby; or
(c)by an individual … without a reasonable expectation of profit or gain;
…
7. The word "business", appearing in paragraph (1)(a), is itself defined in s 195-1 of the GST Act, in identical terms to the definition in s 995-1 of the Income Tax Assessment Act 1997, namely:
business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
8. There is no shortage of cases dealing with the notion of what is a "business". In Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 at 8-9, Mason J spoke of “activities engaged in for the purpose of profit on a continuous and repetitive basis”. In Puzey v Commissioner of Taxation [2003] FCAFC 197; (2003) 131 FCR 244, Hill and Carr JJ said at [48]:
In deciding whether or not a business is carried on, courts have pointed to what have been called in the United Kingdom the “badges of trade”, indicia which, while no one of them will be determinative of whether a business is carried on, collectively will demonstrate a business. These include the profit motive (although a non-profit company may still carry on a business), acting in a business-like way (although many businesses may be found which operate in a non business-like way), the keeping of books of account and records (although the fact that there are none will not necessitate the conclusion that a business is not carried on), and repetition (although a fixed term project may still be a business).
9. Those cases, and many others like them, have dealt with the expression "carrying on a business", rather than the particular expression with which I must deal, which is "carrying on an enterprise". As to that part of the definition of "enterprise" that refers to an activity or series of activities done "in the form of a business", the Commissioner says in his Miscellaneous Taxation Ruling MT 2006/1 at paragraph 170:
… The definition clearly includes a business and the use of the phrase ’in the form of’ indicates a wider meaning than the word ‘business’ on its own. …
10. Whether the notion of "carrying on an activity or activities that are done in the form of a business" is broader than "carrying on a business" is an interesting question. Downes J, sitting as the President of the Tribunal, does not appear to have drawn any distinction between the two expressions in Re Applicant for an Australian Business Number and Registrar of the Australian Business Register [2007] AATA 63, but that is probably because any distinction would have been irrelevant in the circumstances of the case. Whether there is a distinction or not, the question for me is whether Mr D'Arcy's activities are done "in the form of a business" and that is the question on which I will focus. It follows as a matter of logic that if I am not satisfied that he passes that test, he must also have fallen short of establishing that he is "carrying on a business".
Mr D’Arcy’s activities
11. Mr D'Arcy made a statement for the purposes of the Tribunal proceedings in which he said the following:
My decision to commence horse breeding in 2002 stems from a long-standing general interest in primary production and horses. I believe the horse industry has great potential both in Australia and overseas.
I decided to commence a business with a view to eventually establishing my own stud farm. My basic strategy is to learn more about horse breeding, bloodlines and the marketplace before purchasing a property.
I have an association with [my uncle, who] … has a wealth of knowledge, many contacts within the industry and acts as a good mentor from whom I am learning.
Our collective aim is to gather a group of top quality mares through various means and produce foals for sale utilising marketable and fashionable stallions.
We make informed decisions after seeking and obtaining advice from industry experts including Bloodstock agents [names deleted], Top trainers [names deleted] and the specialised staff from Commercial Studs [names deleted] on a regular basis.
We have regular discussion about the mares, foals and fillies on all aspects of horse life. Decisions on stallions, matings, welfare issues, vets decisions, sales location decisions and many more are discussed and agreed to.
I am a member of the NSW thoroughbred owner and breeders association and receive regular updates from [names deleted] regarding upcoming sales and related industry events.
My main interest is breeding rather than racing.
…
12. Mr D'Arcy's case did not progress beyond that level of generality.
13. In cross-examination Mr D'Arcy confirmed that his full-time occupation is as a building project manager. He earns a significant salary and also, apparently, bonuses from that occupation. He said that he spends around 8 to 12 (although his statement of facts and contentions said eight) hours a week on his horse breeding activities. That time is spent reviewing the results of "black-type" races (that is, races that are the more prestigious, “listed”, Group One, Two or Three races) and also (Transcript, page 17) –
… looking at the breeding history of progeny that are coming up for sale, looking at the sales statistics of what's selling in the marketplace, reviewing the stallion fees and the success that they've had in the marketplace and on the track, things of that nature.
14. This research helps him to make decisions on whether he should purchase an interest in any particular mare, and eventually, also, to make decisions relating to the servicing of mares, the selling or racing of progeny, all directed towards his overall ambition to “produce top quality stock for a niche market" (Transcript, page 38).
15. Over a period of time Mr D'Arcy has held an interest in up to 8 mares, which have produced 22 progeny in total. All of the progeny, except one, have been sold, the exception being a horse named "Garden Island" which was bound for the saleyards but which, because of injury, was not ready to be sold.
16. Mr D'Arcy's "interest" in these mares has varied from 10% or 12.5% to as much as 30%. He has never had what could be described as a "controlling" interest in any of them, although he said that he and his uncle together generally have an interest of more than 50% in any given mare (Transcript, page 50). The various co-owners of the horses, generally numbering four or five, were said to be in an "alliance".
17. He said that he was "in the business to make money" (Transcript, page 22). Counsel for the Commissioner gave Mr D’Arcy the opportunity to put some flesh onto the bones of that assertion by asking him whether he had prepared a business plan before he commenced his horse breeding activities in 2002. Mr D'Arcy said that he had produced a “memorandum”, either before commencement of the activities or in the first year. He described the memorandum as "a document that really just communicates that I’m going into horse breeding and, you know, some basic strategies" (Transcript, page 20). That document was not produced to the Tribunal. Apparently he also prepared some profit and loss forecasts for the years 2002 to 2005, but these were not produced to the Tribunal either.
18. Profit and loss forecasts for the later years of 2006 to 2010 were indeed produced to the Tribunal (T21, page 44) but, with one exception (2006), they do not relate to the years in dispute between Mr D'Arcy and the Commissioner, and they are unrealistically optimistic.
19. It is difficult to assess just how much influence Mr D'Arcy has over the breeding activities that are undertaken. Counsel for the Commissioner suggested that Mr D’Arcy was in no position to “make decisions” about the way his “business” – if he has one – is conducted; the best he could do was provide input to the decision-making process. Mr D’Arcy answered this way (Transcript, page 25):
Because I have an opinion which is expressed, which is considered by others, taken on its merit, weighed up in the mixing pot of expertise and collectively we make a decision.
20. Later I asked him how his opinion would prevail if the other co-owners disagreed with his views. He said:
… in reality, there’s a meeting of the minds. If we have – we haven’t had a situation where we've had a dispute …
21. Although Mr D'Arcy resisted the suggestion, I was left with the impression that very little thought had been given to the way in which disputes between the co-owners, if they arose, would be resolved. In fact, there appears to be no written agreement between the various co-owners so as to set out, in a businesslike way, what is the relationship between them, or how decisions will be made, or any of the other issues likely to arise in such circumstances. There also appears to be very little kept in the way of written documentation of the decision-making process. Mr D'Arcy said that he has "a lot of conversations" with the other members of the alliance, but he acknowledged that he did not keep notes of all the conversations. As far as written correspondence between the alliance members is concerned, he said that they exchange e-mails but "a lot of it is just independent research" (Transcript, page 18).
22. Mr D'Arcy has not produced a profit from his horse breeding activities at any time during the period under review. His expenses have far outweighed his receipts. Of course, that result in itself is not determinative of the question whether he has been carrying on activities "in the form of a business". However, what weighs heavily against him is the fact that, on the information before me, his entry into these activities appears to have been ill-considered (at least in the context of a proposed business activity) and was not likely to return a profit within any reasonable timeframe. The activities have not been approached in a businesslike way. Almost nothing has been produced to the Tribunal in the way of books of account and records.
23. In closing submissions, Mr D'Arcy's representatives emphasised the following matters:
· The Commissioner's case that there is no prospect or intention of making a profit has been put without consideration of the findings of the Tribunal in Re Block and Commissioner of Taxation [2007] AATA 1897;
· The Commissioner’s release of Taxation Ruling TR 2008/2 has "softened" the Commissioner's position on horse breeding activities by, among other things, dealing with fractional interests in horses;
· Co-ownership is common in the horse breeding industry;
· On the question of the business plan, the Tribunal should find in Mr D'Arcy's favour based on the decision in Block;
· The lack of a business plan is less critical given the relationship between Mr D'Arcy and his uncle;
· TR 2008/2 removes the six mare breeding business indicator;
· Mr D'Arcy's cash outlays are quite substantial;
· Finally, "it would be inconceivable that our client would enter into such a significant expenditure with the intention of maintaining a hobby. I could probably suggest a lot cheaper hobbies for him to participate in [than] the breeding and racing industry. And I think the significance of the amount of outlays there indicate the professionalism and the intention of the taxpayer to make a profit" (Transcript, page 79).
24. Only the reference to TR 2008/2 (dealing with the question whether certain racing, training and breeding activities amount to the carrying on of a business) warrants any specific comment. Taxation rulings must be seen for what they are – attempts by the Commissioner to provide some practical explanation of the meaning of the law. So, when the Commissioner removes a “rule of thumb” that ownership of less than six mares cannot amount to the carrying on of a business (as he arguably did when he issued TR 2008/2), or acknowledges that fractional interests in horses can be classed as “live stock” or “trading stock”, one must be careful not to attribute too much significance to the statement. For example, in relation to fractional interests, what the Commissioner says in TR 2008/2 is this (at paragraph 136):
[I]t is considered that a fractional interest in a horse that is held by an entity carrying on a horse breeding business does come within the definition of ‘live stock’ and ‘trading stock’ and will be treated on the same basis as is ownership of the horse by a single entity.
25. That is not to say that every person who owns a fractional interest in a horse is carrying on a horse breeding business. The “business” status of the owner of the fractional interest is to be determined, as the cases and the ruling itself emphasise, by reference to the actual activities that the person undertakes.
26. Ultimately, as his representatives acknowledged, the question whether Mr D'Arcy is carrying on an enterprise is a question of fact. The factual material presented in support of Mr D'Arcy's case has fallen far short of satisfying me that his horse breeding activities are done "in the form of a business". I am unable to distinguish his activities from those of a person who, with a keen interest in horses and their breeding, chooses to become a part-owner of broodmares for the purpose of pleasure or recreation, or as a hobby.
27. I am satisfied that his horse breeding activities do not amount to the carrying on of an enterprise, and as a result, he is not entitled to the input tax credits that he claimed during the period 1 October 2002 to 30 September 2006. In addition, his horse breeding activities do not entitle him to an ABN, and they do not amount in the relevant years to the carrying on of a business for income tax purposes.
28. For these reasons I affirm the objection decisions under review.
I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member
Signed: ................[sgd]................................................................
AssociateDate/s of Hearing 26 May 2008
Date final submissions received 30 May 2008
Date of Decision 13 August 2008Applicant’s representatives Mr M James and Mr M Galouzis, Barnes Dowell James
Counsel for the Respondent Mr B Kasep
Solicitor for the Respondent Ms J Damyan, ATO Legal Services
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