Tax Tips For Horse Business Disruptions within the Thoroughbred Industry
It's fair to mention that the past few years have thrown up some enormous challenges to anyone trying to run a primary production business in regional Australia.
These challenges transcend financial and economic upheavals like the GFC, the stronger dollar and constant volatility on global share markets. What I'm talking about are the dreaded "natural disasters" that periodically disrupt the companies of primary producers, e.g. viruses, droughts, floods and bushfires.
It's not documented that our tax laws contain concessions that help victims of those disruptions to cope financially through these difficult periods. It makes the work of an Accountant that tiny bit more rewarding once we can expire and apply these concessions, too.
This article will outline and discuss the concessions and a couple of tax tips that I consider most relevant for horse owners and breeders trapped in these circumstances. albeit you cannot use them when preparing your 2011 income tax return , I'm hoping you'll tell a lover or two who needs some welcome excellent news in any case that nature has thrown up to him or her recently.
1. Insurance Recoveries for loss of livestock are often cover 5 years
If a taxation breeder receives an insurance recovery for a loss of ''live stock'' or for a loss of trees by fire, the tax act provides the breeder with an election to spread the assessment of that income over five years. However, the election is out there as long as the relevant live stock or trees are held as assets of a ''primary production business''.
N.B. This concession isn't available to those that conduct a "stand-alone" racing activity, with none associated breeding.
Example
Peter has his breeding property in Toowoomba and lost his prized broodmare within the recent QLD floods.
The mare was insured for $200,000 and these proceeds were duly received in March 2011. Peter's cash-flow has been severely suffering from the floods and he has little appetite for paying tax on this income until he can get some yearlings to the sales within the next few years.
To lessen the tax impact, Peter elects to spread his insurance recovery over 5 years, i.e. $200,000/5 yrs = $40,000 p.a. Accordingly, $40,000 was returned in FY 2011 and in each of subsequent four tax years.
2. Insurance received re destruction of a building is treated as capital proceeds
Many business related buildings were been destroyed as a results of the recent floods, bushfires etc.
The insurance recovered as a results of these occurrences aren't returned as income within the year received, instead they're treated because the capital proceeds on the disposal of those assets.
Where an asset, or a part of an asset is lost or destroyed, any proceeds received by a taxpayer under an policy in respect of the loss or destruction are taken to be amounts of cash received "as a results of or in respect of" the disposal of the asset or a part of that asset. N.B. If an asset, or a part of an asset was acquired before 20 September 1985, no a part of "> a part of the proceeds received in reference to that asset or part of that asset, would be subject to Capital Gains Tax (CGT).
Similarly, where a automobile is lost or destroyed, any insurance recovery are going to be consideration in respect of the disposal of that automobile , then not subject to CGT.
Example
A breeding company acquires ownership of a newly constructed building on 1 July 1986.
The cost base of the building is $10 million and therefore the building is treated as a separate asset for CGT purposes.
The building was subsequently destroyed by fire and therefore the breeder lodged a claim under an policy . At the time of acquisition, the taxpayer entered into an insurance agreement that might cover the taxpayer for the cost of the building. The cost at date of destruction is $18 million.
The insurance payout of $18 million is taken to be the consideration on disposal of the building and, thus, isn't 100% assessable within the year received.
"Roll-over relief" under section the CGT act could also be available where a replacement asset is acquired with the insurance proceeds, i.e. the CGT cost base of the replacement asset is reduced by the profit on disposal of the building. within the above scenario, the profit would be $8 million ($18 million insurance proceeds less $10 million cost base)
3. Insurance received for assets that are a part of a "Small Business Depreciation Pool"
Many smaller breeders claim depreciation using the tiny business depreciation pool.
For the record, alittle Business Entity (SBE) may be a tax business with generally but $2m aggregated turnover p.a.
If within the event of insurance received for the destruction of assets, note:
The pool balance is reduced by the extent of insurance received. Thus a profit or loss on the things destroyed needn't be made when the insurance is received; and
If the sum of the insurance received of assets disposed of during the income year exceeds the pool closing balance for the year, the surplus is subject to taxation.
Example
Janet the breeder lost valuable sheds within the 2009 VIC bushfires.
4. Assets subject to "Roll-Over Relief" thanks to destruction
As noted above during a CGT context, "Roll-over relief" occurs where profits on disposal of assets, e.g. where insurance proceeds exceed the written-down value of asset, are often deferred. In reference to a business asset, this is often where the profit is offset against the value of the replacement asset, rather than being declared as income immediately.
In short, yes, a breeder is in a position to get roll-over relief for an asset which was involuntarily destroyed by fire, flood etc. provided the subsequent conditions are satisfied:
The asset wasn't a pooled asset under the "Small Business Entity" (SBE) regime or as a part of a low-value pool for non-SBE taxpayers; and
The taxpayer acquires a replacement asset within the specified times
Example
Big Breeder Pty Ltd, who doesn't qualify as a "Small Business Entity", had a float destroyed within the Victorian floods of 2011.
Insurance proceeds received in FY 2011 was $20,000, the written-down value of the float at time of destruction was $5,000, thus a profit on disposal of $15,000 was realised.
A replacement float was acquired for $30,000, within only 3 months of the event, well within the 12 month required time-frame , which commences on 30 June 2011.
Instead of Big Breeder having to declare the $15,000 as a profit in FY 2011, what it does instead is to scale back the value base of the new depreciable asset to $15,000 ($30,000 cost less $15,000 profit on the destroyed asset).
5. Assets which will be written-off immediately
In many instances, business plant and equipment isn't insured and no proceeds are received.
Where this happens , the tax "written-down" value of the asset are often immediately written-off, this being an instantaneous deduction within the tax year this happens .
However, it should be noted that only a "non-SBE" can cash in of this concession as they're not be eligible to use "pooling" for his or her business assets.
Example
Big Breeder Pty Ltd chooses to not insure any of its "on-farm" motor bikes.
All of those bikes were "written-off" as unrecoverable after the VIC floods.
The tax written-down value of its bikes at the date of destruction was $25,000. As no insurance was received, an instantaneous $25,000 deduction are often claimed for these assets therein tax year.
6. "Loss of income" insurance is assessable to the breeder
Where insurance payments are received to exchange lost income, the proceeds are assessable to the breeder (e.g. business interruption insurance which generally provides income until business profits reach what they were before the hearth . flood etc.).
7. handling the destruction of trading stock
a) Can a horse be written-off if no proceeds received?
A breeder is entitled to say a deduction for the value of trading stock destroyed.
The deduction is obtained via the movement within the opening and shutting stock provision.
b) Tax profits from "forced" disposal of stock
Under the tax act, where a primary production business is forced to eliminate or destroy livestock, the breeder could also be entitled to concessional treatment in reference to any resulting tax profit, as follows:
spread the tax profits over 5 income year; or
defer the tax profit and offset it against the value of replacement stock over the next 5 income years.
This relief relates to the sheriff's sale of livestock, and differs to the relief re spreading insurance recoveries over 5 years, which relates to the death of livestock.
However, this election won't be available where the business is sold following the natural disaster.
Example - spreading the tax profit
Breedco's yearlings need to be destroyed due to the recent Hendra virus.
The insurance proceeds of the forced disposal are $250,000 and therefore the tax profit is $150,000. Breedco elects to spread the tax profit over five years. Breedco's assessable income within the disposal year includes an amount of $130,000 in respect of the disposal. This amount is received by reducing the proceeds of $250,000 by the tax profit of $150,000 and adding an amount of $30,000 (i.e. 20% of the tax profit of $150,000). for every of the four income years following the disposal year, Breedco must include an amount of $30,000 in its assessable income.
c) Closing stock value method are often altered
The golden rule of stock accounting is that opening stock should equal closing stock and zip has changed during this regard.
However, this doesn't stop a breeder from changing the year end accounting stock valuation method.
For instance, if market selling value has been utilized in the past, this will be altered to use either the special "write-off" or "cost" closing stock valuation methods. This strategy would help immensely in reducing taxable income during a particular tax year, something that might be most welcome if you have been a victim of a natural disaster.
Example
Stockco was severely suffering from a replacement outbreak of EI virus that swept through Orion Valley, resulting in many of its prized yearlings being withdrawn from the 2012 Easter sales. However, good money was made on foals sold at the sooner Magic Millions QLD sales. Tax profit for the year is $350,000.
Without the cash-flow from the Easter sales, Stockco requires options to scale back its tax profit for FY 2012. Martin the accountant finds that a lot of of the mares are valued @ market price as at 30 June 2011. By valuing these mares @ cost as at 30 June 2012, the closing stock value of the mares is reduced by $150,000 and tax profit is additionally reduced by this amount to $200,000 ($350,000 less $150,000).
8. Issues re withdrawing funds from a Farm Management Deposit (FMD)
The FMD provisions are contained within the tax act and broadly enable an eligible taxpayer to defer the tax on taxable primary production (breeding) income from the income year during which a FMD deposit is formed (i.e. a deduction is out there for such a deposit) until the FMD deposit is repaid (i.e. this amount is included in taxable income within the year of withdrawal).
However, a FMD deposit (or part thereof) loses its status as a FMD where it's withdrawn within 12 months of the deposit date. In these circumstances, a partial withdrawal of an FMD means only the residual deposit amount qualifies as an FMD, provided the remaining amount is $1,000 or more and as long as it stays within the account for a minimum of 12 months
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