Hobby or business?
One of my clients is a farmer, who also owns and trains a number of standardbred racehorses. He has been enjoying some success with the horses and for the year ended 31 March 2000 he received close to $70,000 from stud fees, training fees and stake money. He has also recently been offered $20,000 for one of his stallions. We have been treating his interest in racehorses as a hobby but, now that the amounts of money involved are getting larger, I am concerned that he could be facing a tax liability. ANSWER
Answer
This gives rise to the age-old
tax question ¾ is your client in business or is he merely
carrying on a hobby, albeit an apparently lucrative one?
Factors which point towards the running of a business include a genuine profit-making intention (compared with the mere prospect of profit) and a sufficient level of activity associated with that intention. Other considerations are the nature of the activity; the length of time the activity is conducted; the scale of the operation and the volume of transactions; the commitment of time, money and effort and the pattern of activity; and the financial results.
In your client's case, you must consider the proportion that his horse-breeding activities bear to his overall farming activities.
If someone were to ask your client, "What business are you in?", you should consider what his response would be ¾ "I'm a farmer" or "I'm a horse trainer." The answer will go some way to establishing whether or not his horse-training and horse-breeding activities are just a hobby.
Regarding the stake money, note that racing prize money is exempt from tax.
On the subject of the offer to purchase
the stallion, if your client were to accept the offer, the proceeds
would be taxable if your client's dominant intention when purchasing
that stallion had been to make a profit from a subsequent sale.
This would be unlikely if the stallion was bought to further his
hobby of breeding horses.
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