Ato Announce – They’re Chasing Your Losses!

The release emphasizes that a large number of businesses in the small-to-medium enterprise (SME) market segment are reporting tax losses following the global economic downturn. Due to this, the ATO are “stepping up” their focus on businesses reporting losses.

The major focus of the ATO will be to ensure losses are incurred and used in accordance with the tax law, and they intend to:

• help SMEs understand their obligations; and
• deal with non-compliance by reviewing and auditing higher risk cases.

ATO “losses” project strategy

As part of the ATO tax loss initiatives for 2011, they will be undertaking the following campaign activities in the coming weeks.

Pre-lodgment awareness campaign

The ATO will write to selected SME companies (via their Accountant) with carried forward tax losses in their 2009 income tax return. Their letters will provide “educational” guidance about common issues associated with revenue losses.

Verification campaign

The ATO will write to selected SMEs (via their Accountants) in early April that generated, deducted or carried forward significant tax losses in the 2008 or 2009 income year. This letter will notify them that they may seek further verification of those loss amounts through a questionnaire, or where necessary, a more formal review or audit process. The ATO will notify those SMEs they select for verification purposes via their tax agents in late April early May 2011.

What do you need to do?

If your racing and/or breeding entity has reported losses in either the 2008 or 2009 income year, I strongly suggest you take the opportunity to check these losses to ensure that they are still eligible to use them. Some common mistakes the ATO have indentified, or are likely to identify, include:

• the company is not carrying on a tax “business” and thus the losses are not eligible (refer below);
• losses used where the company does not satisfy either the ‘continuity of ownership’ or ‘same business’ tests;
• records not accurately kept to support or reconcile the loss; and
• carried forward losses not checked to ensure they are correctly calculated, including amendments to prior-year tax returns or losses cancelled.

What is a horse business for ATO purposes?

It goes without saying that my office has seen many instances over the years where SMEs have had their business status questioned by the ATO and their tax losses put at risk. I don’t expect this ATO project to be any different and I’m sure many breeders and owners will come under scrutiny, thus it’s crucial that your tax losses are reviewed for eligibility before the ATO darkens your doorstep…

In summary, the primary business factors the ATO wants demonstrated for a horse breeding business and/or racing business to be accepted are listed below and are sourced from guidelines within the ATO tax rulings TR 2008/2 and TR 97/11 and related case law in this area:

• whether the activity has a significant commercial purpose or character;
• whether the taxpayer has more than just an intention to engage in business;
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
• whether there is repetition and regularity of the activity;
• if racing, are they “integrated” with the breeding activities?;
• whether the activity is of the same kind and carried on in a businesslike manner such that it is directed at making a profit;
• the size, scale and permanency of the activity;
• existence of a breeding property;
• if the activity started with limited numbers, is their consistent growth in the scale of the activities (e.g. increase in mare numbers and/or foals);
• whether the activity is better described as a hobby, a form of recreation or a sporting activity;
• prior horse industry experience;
• the keeping of proper records;
• the existence of a business plan evidencing viability (see comments below);
• time expended on the activity;
• are mares being regularly serviced;
• progeny must be sold on a commercial basis;
• stallions used for breeding need to have market appeal (commerciality);
• are progeny being regularly sold in order to generate a profit;
• are stallion rights (if applicable) being utilised;
• registration of a business name;
• establishing a separate bank account;
• the regular use of experts and consultants; and
• does the taxpayer exercise “control” of his/her stock?

N.B. The taxpayer need not demonstrate all of these factors, however the existence of a business is enhanced by the activity demonstrating as many of these factors as possible. Whether an activity is a taxation “business” will always be decided as a question of fact.