As a bloodstock tax adviser, I’m continually reviewing new tax cases to find those

that have special significance to the tax issues facing the racing and breeding

These cases need not only to do with industry players taking on the ATO (or vice

versa!) but also cases where the issues and principles apply very much to our

industry, even though they relate to a different business activity.

One such case is “Hartley’s” case, decided only in the past 12 months. This case

deals with not only the relevant industry issue of “Business or Hobby”, but, of more

significance to the horse industry, it ultimately turned on whether Hartley had

prepared a proper Business Plan. In this instance Mr.Hartley (“Hartley”) was a

share trader trying to demonstrate that he was running a professional share trading

The existence of a Business Plan is crucial for horse industry players wanting to

demonstrate a business and/or GST enterprise with the ATO and where you have

court cases that also reinforce this, the industry must sit up and take notice.

Hartley primarily lost the case due to his inadequate business plan and I’ll now

take you through a brief summary of this case and draw out some valuable lessons

for the industry along the way.

The facts in Hartley’s case

Hartley had been actively involved in the share market, and his share trading

activity occupied him for about 15 hours per week. He was also a full-time council

Hartley asserted that his share trading activities constituted a business for tax

purposes. For each of the tax years ending 30 June 2009, 2010 and 2011, he

claimed significant amounts as deductions against the share trading business.

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Following an audit, the ATO determined that Hartley was a share investor and was

not carrying on a business of share trading. Accordingly, Hartley’s deduction claim

was rejected.

Hartley objected against the ATO’s audit decision.

At issue was whether Hartley was carrying on a business of share trading in the

2010 and 2011 years. Hartley asserted that he was carrying on a business as a

share trader, while the ATO contended that he was a share investor or, possibly,

a speculator.

Some additional relevant facts of this case were:

He averaged 30 trades a year for about $40,000 per parcel in tax years 2009,

2010 and 2011; and

Activities declined in those years due to GFC and a property purchase draining

his cash resources

The case went to the Administrative Appeals Tribunal (AAT) and Hartley was again

unsuccessful in trying to demonstrate a business.

The AAT decision

The following factors were relevant considerations in determining whether a share

trading business existed, many of which are just as relevant to horse industry


the nature of the activities and whether they had the purpose of profitmaking;the complexity and magnitude of the undertaking;an intention to engage in trade regularly, routinely or systematically;operating in a business-like manner and the degree of sophistication


whether any profit/loss was regarded as arising from a discernible pattern

of trading; and

the volume of the person’s operations and the amount of capital employed

by him.

repetition and regularity in the buying and selling of shares;

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turnover;whether the person was operating to a plan, setting budgets and targets,

keeping records; and

whether the person was engaged in another full-time profession.

While the matter was finely balanced, having regard to the evidence and the

relevant factors, those factors pointing against the existence of a share trading

business were more significant than those pointing in favour of the existence of a

share trading business.

In finding against Hartley, the AAT specifically noted:

Hartley was more than a “mere hobbyist” and had a definite profit intention;He only dealt in “blue-chips” and AAT didn’t consider the activity to be

“complex”, though magnitude of turnover significant considering his modest


There was a lack of regularity of activity (no purchases for 7 months in FY10,

only 8 purchases in a 3 month period in FY11);

N.B. From a breeding business perspective, this observation is relevant due

to the many breeders who race too many of stock that they’ve bred and

regular selling does not take place. Irregular mating of mares is also a poor

look with the ATO; and

He used an office at home with modern technology and used credible research

houses. Commsec was his main broker.

Lack of a proper Business Plan – the killer blow!

The AAT concluded that whilst Hartley had

“a plan of sorts, it was neither

“particularly sophisticated nor intricate, and for the most part seemed largely to


in the taxpayer’s head as it was in writing”

. Furthermore, it was only belatedly

committed to writing as a “business plan” during the course of the ATO dispute,

and not at or around the commencement of the share activity.

In a case where the facts were “finely balanced”, I have little doubt that Hartley’s

failure to produce a credible business plan (together with associated financial

projections) was a turning point in this whole case and it serves as a crucial

reminder to horse industry players that entering into battle with the ATO without a

proper plan is becoming fraught with danger and, on many occasions, could be

fatal if trying to argue an income tax business/GST enterprise.

Carrazzo Consulting CPAs

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