Mare and Stallion write-offs – FAQ
Carrazzo Media Release
Welcome to the new tax year!
Let’s start the 2016 tax year with some positive tax news with a discussion of the generous mare and stallion write-off rules relating to eligible breeding stock. In tax world, these are referred to as the “special closing value” rules.
Carrazzo Consulting is regularly asked to review the horse tax accounts of breeders and it still amazes me as to how poorly these rules are applied by the general tax community, so let’s hope this contribution clarifies the many misinterpretations of these rules that are out there.
N.B. All of these questions assume that the breeder is conducting a legitimate horse business for taxation purposes.
Q1. – I have future broodmare in training, can we apply the “write-off” rules whilst she is still racing?
Answer
No.
The mare must not only be “capable” of breeding, but it must also be “used” for that purpose.
The same principle also applies to a stallion in training.
Q2. – I was gifted a lovely commercial mare by a friend to add to my breeding herd, can I use the “write-off” rules for her?
Answer
No.
Only breeding stock acquired “under a contract” can be subject to the “write-off” rules.
The fact that a horse must be acquired by the taxpayer “under a contract” means that a horse acquired in some other way, e.g. by way of gift, inheritance or natural increase, cannot qualify as horse breeding stock for the purpose of these rules.
For instance, a filly acquired via natural increase that is raced first by the breeder cannot have the “write-off” rules applied when she eventually goes to the breeding barn.
Q3 - If I acquired a broodmare that was bred overseas to Northern Hemisphere time, what is her “date of birth” for the purposes of the “write-off” rules?
Answer
The Tax Act does take account of this situation as it states that ahorse which is foaled on 1 August has a birth date of that date and the birth date of a horse foaled on any other date is the 1 August immediately preceding the date it was foaled.
For instance:
(1) A horse foaled on 1 September 1992 has a birth date of 1 August 1992.
(2) A horse foaled on 31 March1993 (i.e. to Northern Hemisphere time) has a birth date of 1 August 1992.
(3) A horse foaled on 1 August 1992 has a birth date of 1 August 1992.
Q4. – I have just bought a 7 year old mare straight off the track for my breeding business, so what “write-off” p.a. will I get for her?
Answer
If this mare was owned by the breeder for the whole of the tax year (i.e. acquired on 1 July) and the horse is under 12 years of age, the horse reduction (i.e. “write-off”) amount is calculated as follows:
base amount
Mare “write-off” amount = ---------------
reduction factor
The ''base amount'' is the lesser of the cost of the horse and the ''undeducted cost''. The ''undeducted cost'' of a horse is, broadly speaking, the notional depreciated value of the horse.
The ''reduction factor'' is the greater of three and the difference between 12 and the horse's age when the breeder acquired it. Thus, under this rule, a mare acquired at either age 10 or 11 can only be written-off at the maximum rate off 33.33% p.a.
Example 1 - 7 year old broodmare
Assume that:
- a breeder acquires a mare under a contract made on 1 September 2015;
- the cost of the mare is $100,000; and
- the birth date of the mare is 1 August 2008.
The “write-off” amount for the year ended 30 June 2016 is:
$100,000 303
---------- x ----
12 - 7 365
= $16,602
As the mare is acquired part way through the year (i.e. 1 September 2015), the “write-off” amount is pro-rated.
The “write-off” amount for each subsequent year is:
$100,000
------- = $20,000
12 - 7
Q5. I have a big tax problem and I hear that “older mares” can be written down to $1 in the year acquired, is this correct?
Answer
Yes, but the mare must by 12 or older when acquired or must turn 12 years of age within the tax year that you buy her.
Furthermore, the “write-off” need not be “pro-rated”. Thus, a 13 year old mare acquired on 29 June 2016 can be written-down to $1 on 30 June 2016.
Q6. If I have one mare valued under the “write-off” provisions, do they all have to be?
Answer
No, the other mares can be valued under the other valuation options available, e.g. cost. The same rules also applies to stallions.
Q7. If I buy a mare “in-foal”, what cost is her “write-off” based upon? Is her cost reduced by the value of the foal she is carrying?
Answer
The mare’s cost for “write-off” purposes is not reduced to take account of any foal being carried. The trading stock provisions do not differentiate between a pregnant broodmare and one that is not pregnant.
Q8. My commercial breeding farm has just acquired a new stallion, what “write-off” options do I have for him?
Answer
This stallion can be written-off at up to 25% p.a. on a prime cost basis.
N.B. Stallion shares acquired by a breeder can also apply this stallion “write-off” option.
Q9. My breeding business owns 50% of a mare, which originally cost me $50,000. The other 50% was recently sold for $200,000. Can I revalue my 50% interest to $200,000 and claim a higher “write-off” amount?
Answer
No, only unless that mare is transferred to another breeding entity. Though, tax consequences of such a transfer must be considered.
Q10. If I am using the “write-off” rules for a particular mare or stallion and decide it is not the best valuation method as its current market selling value is well below the closing value these rules are providing, can I switch to the “market selling value” method in the next tax year?
Answer
Yes, you can.
A breeder is at liberty to change their “closing stock valuation” method on a yearly basis, i.e. they aren’t stuck with the write-off rules forever if they doesn’t suit a particular breeding horse.
End of release.
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.
Prepared by:
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
LEVEL 1, SUITE 102, 21 BELFORD STREET, NORTH MELBOURNE
TEL: (03) 9982 1000
FAX: (03) 9329 8355
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Web Site: www.carrazzo.com.au
