It’s hardly any secret that it’s not easy for a person to have a business of racing and/or breeding approved by the ATO.
This has not been made any easier when you consider that from 1 July 2009 (yes, now!) high income earners (those with an adjusted taxable income greater than $250,000) will not be able to claim their losses immediately unless they can prove to the ATO that their activity has long term “viability”. I have commented ad nauseum about this new requirement since this new rule was announced in the 2009 Budget.
N.B. The “viability” request must be in an “approved form” and when I have the final ATO details be assured that I will let you know.
Regardless of whether you are a high income earner trying to meet the new budget requirement or just trying to demonstrate that your activity meets the ATO business tests, there is one constant that simply can’t be ignored – claiming a business status is far easier when you have prepared a current horse Business Plan.
From my constant dealings with the ATO, it’s obvious that the ATO has never been more serious about business plans, so it’s about time I provided a quick summary as to how to prepare a plan that can hopefully help you survive an ATO audit and, importantly, get your horse losses approved.
ATO Business Plan guidelines
For the record, the ATO recommends the following as minimum disclosures in any business plan:
- a description of the business;
- the markets to which the taxpayer proposes to sell and realistic
- estimates of quantity and volume of sales;
- income expected from the activity;
- the research that has been conducted by the taxpayer;
- information about the property on which the taxpayer proposes to conduct the business;
- information about expected expenses and capital outlays; and
- information about how the taxpayer proposes to pay for the expenses and capital outlays.
What is a business plan?
A Business Plan describes the future destination of a business and how it plans to get there. Business Planning is a three part process, detailing:
- Where your business is now;
- Where do you want it to be in the future; and
- How will it get there?
THE PARTS OF THE PLAN
Though there is no standard format for a Business Plan, though as a minimum it should include the following, which I will now individually comment upon.
1. Executive summary
The key areas of the executive summary should convey are:
- Are the operators capable?
- Do they have sufficient experience?
- Is there a market for the product or service?
- Are your financial projections realistic?
“SWOT” analysis
Simply speaking, this is an acronym for “strengths”, “weaknesses”, “opportunities” and “threats”.
In analysing the strengths and weaknesses of your business, consider:
- Marketing strategies
- Experts used in the business
- Racing knowledge of the operators
- Is the demand for your product increasing or decreasing?
- Quality and commercial appeal of your stock
- Adequacy of future funding
- Quality of record keeping
The relevant issues to consider when reviewing opportunities and threats include:
- Competitors
- Political environment, e.g. any tax changes proposed?
- Economic times and state of the industry
- State of the market – where is the leisure dollar being spent at the moment?
- Customers – do you know their profiles?
- Current state of equine viruses
Description of the business
Explain what the business does and how it does it.
How is your business set up so it can carry out its intended functions?
Areas that should be specifically included in this part of the plan would be:
- How did your business start up?
- Your overall business set up, i.e. what is the legal structure of your business?
- Ownership & management
Who owns the business and in what proportions?
Who manages the business and how do they manage it?
In this area you should also explain your level of ownership in the business, who is involved in running the business, and provide details of the experience and success of all of the operators. What can each contribute?
- Organisation
This section involves you completing a diagram of your hierarchical structure of management levels within the business.
- Property, Plant & Bloodstock
This area should involve discussion as to what the plant and property needs for your business are now and in the future.
This area should also refer to the current bloodstock of the business and what its favourable characteristics are. For instance, discuss intended mating policy for the broodmares in the next few years. What is the culling policy of the business? What do you look for when selecting racing and/or breeding stock?
- Financial
You should discuss areas such as:
- What is your financial structure?
- What is the dependency of debt?
- What financial controls do you have?
This area should talk about the extent of your accounting and record keeping.
I suggest at this point in time you put together a cash budget, as a minimum, for your first three years of operations (though five years would be preferable for a “start-up” business).
A budget is, in terms of proving to the ATO that you are conducting a business, the most important part of your business plan as it must evidence a viable long-term operation. If it doesn’t the ATO could take the view that the business will never be profitable and thus consider your activities as a hobby and adjust prior year losses claimed.
- Operations, products & services
You need to explain the operations of the business in terms that the ATO can understand. Note – there are very few people in the ATO who understand the horse business, thus the more detail, the better.
Significant points you should think about are as follows:
- What are the operations of your business?
- What is the product that your business brings to the marketplace, e.g. racing stock, weanlings, yearlings, agistment, etc.
- What will be your policy in relation to what age you sell your stock at? Will all colts be sold?
Marketing
You should enter into discussion as to how you intend to go about reaching your market and getting a market acceptance.
Will your progeny be nominated for the breeders incentive schemes available (e.g. VOBIS, BOBS, QRIS etc)?
Do you monitor the market? Are you a member of any industry associations? Do you have access to current industry figures?
- Vision
You should clearly state, in very broad terms, what the vision of your horse business is.
Simply, this is a statement stating what you want your business to look like, say, within five years.
- Business statement / mission
The business statement will define the direction and scope of your business and what product you will offer to the market to achieve your goals.
In any consideration of a business statement you should determine what your Sustainable Competitive Advantage (SCA) is, i.e. something your business does which gives value to the purchaser/consumer and which you do (or can do) better than other breeders in the market place.
Action plans
A business plan gives you a secure grasp of the details of your business activities. Once you have sorted out your ideas and data and written your details up in your business plan, you are then able to establish “action plans”.
For every weakness you identified in your “SWOT” analysis, or any other part of the plan, a plan should be formulated to correct it.
- Annexures
The annexure section gives you an opportunity to attach to your plan documentation to be included. Common annexure to a business plan include:
- Charts of organisational structure.
- Relevant personnel resumes, indicating your experience and expertise in this business.
- Documents or information relating to market analysis and market research.
- Cash flow budget.
You are welcome to contact me if you wish me to clarify or expand upon any of the matters raised in this article.
DISCLAIMER – Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information’s applicability to their particular circumstances with an accountant specialising in this area.
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
22 BLACKWOOD ST, NORTH MELBOURNE VIC 3051
TEL: (03) 9329 7044
FAX: (03) 9329 8355
MOB: (0417) 549 347
