Accordingly, when the ATO issue their yearly release as to 'What attracts attention in privately owned and wealthy groups' , as it has just done recently, our office instantly sits up and takes notice. So, should you, especially as our industry again was specifically noted as under the microscope (refer below).
This ATO release for the privately owned and wealthy groups sector is extremely extensive and to spare you I will only comment below on the areas they touched on that we believe are most relevant to racing and breeding industry participants.
What are the general behaviours and characteristics that attract ATO attention?
These were listed as:
- tax or economic performance not comparable to similar businesses;
- low transparency of tax affairs;
- large, one-off or unusual transactions, including shifting of wealth;
- history of aggressive tax planning or regularly adopting controversial interpretations;
- lifestyle not supported by after-tax income;
- accessing business assets for tax-free private use; and
- poor governance and risk-management systems.
What are 'privately owned' and 'wealthy groups'?
The ATO considers that the following entities fall within the 'privately owned and wealthy groups' for this purpose:
companies and their associated subsidiaries (i.e. economic groups) with an annual turnover greater than $2 million, that are not public groups or foreign owned; and
resident individuals who, together with their business associates, control net wealth over $5 million.
The ATO assesses privately owned and wealthy groups as either 'lower' or 'higher' risk. Groups assessed as being in the higher risk category can expect a more frequent and more intense engagement from the ATO, the intensity of which will be also be influenced by the degree of willing co-operation offered to the ATO.
Horse breeding, racing and training activities – mischaracterised as 'business' activities!
Under 'Lifestyle Assets', the racing industry activities were specifically noted as often being characterised as 'business' activities when they are really, at tax law, of a 'hobby' nature.
This again puts the industry on notice that claiming 'hobby' horse losses or GST, where no 'enterprise' exists, does not go unnoticed by the ATO (we can vouch for that!) and proper advice should be sought in this specialist area.
Non-lodgement of income tax returns and activity statements
Entities that will attract attention are those that:
- have high cash inflows and outflows not lodging a tax return (e.g. BAS returns lodged regularly with this profile, yet an income tax return not lodged for that same entity);
- fail to lodge returns for some years and not others;
- lodge BASs in an income year but no income tax returns;
- have failed to lodge BASs; and
- have failed to lodge a return in the year under review and have instalments that are low relative to previous years.
Record keeping is seen as a significant 'business' factor by the ATO, and what is outlined above should be avoided if wanting to demonstrate a horse breeding and racing business.
Property and construction – Property development activities
Our firm is well known in the property industry and many of our racing and breeding industry clients are also property players, so we must note below concerns the ATO have in this industry:
whether income should have been returned as ordinary income or as a capital gain;
- property development activities including where:
- undertaken in or funded by a SMSF;
- the property is disposed of soon after completion and the amount is treated as a capital gain;
- there is a history of property development in the wider economic group but sales are returned as capital gains;
- undertaken by an entity related to the landowner – to ensure proper recognition of profit; and
- they are multi-purpose and have both a revenue and capital purpose – to ensure that costs are appropriately applied.
Please don't hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
801 Glenferrie Road, Hawthorn, VIC, 3122
TEL: (03) 9982 1000
FAX: (03) 9329 8355
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web: www.carrazzo.com.au
