As I noted in a previous update a few years ago, the Government announced that from 1 July 2011 new standards apply to “collectables” or “personal use assets” that are acquired by a Self-Managed Superannuation Fund (SMSF).
Collectables includes items such as:
- coins or medallions;
- postage stamps or first day covers;
- rare folios, manuscripts or books;
- recreational boats;
- memberships of sporting or social clubs, or
- assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for “personal use or enjoyment”.
Unfortunately, the latter category includes racehorses in training owned by a SMSF, given that the ATO has long classified them as “personal use assets”, but more about that later.
These new standards apply to both assets acquired prior to 1 July 2011 and also new assets acquired after that date. In other words, regardless of when the racehorse was acquired it should not be held within your SMSF where it is a personal use asset and does not meet the new standards (refer below).
What are the new standards for holding these assets?
The tightened rules state that:
- The item must not be leased to, or part of a lease arrangement with a related party (a related party includes a member of the fund);
- If the item is transferred to a related party, it must be independently valued;
- The item must not be stored in the private residence of a related party;
- The item must not be used by a related party;
- The decision on the storage of the item must be recorded and kept for at least 10 years after the decision has been made; and
- The item must be insured in the fund’s name.
It’s obvious from the above, that the very fact that an item such as a Racehorse in training must not be “used” or “leased” to a related party now makes them ineligible to be a SMSF asset and should be immediately removed to either a related party or outsider for an arm’s length value.
However, Racehorses owned in the fund on or before 30 June 2011, were subject to a special “transitional” concession as they had to be removed from the fund by 1 July 2016 – which is now only a few months away.
Why are racehorses “personal use assets”?
From the time the Capital Gains Tax (CGT) rules came into being in September 1985, the contentious issue within the racing industry was whether a hobby racehorse was a normal capital asset or a “personal use asset”, as different rules apply to the latter in terms of exemptions etc.
Upon the urging of the industry, the ATO considered the issue and released a special tax ruling in 1991, where it stated:
“A horse that is acquired by a taxpayer who races horses as a hobby, i.e. who is not carrying on a business of racing horses, is a personal use asset for the purposes of Part 111A (i.e. the CGT rules).”
Is it all doom and gloom for racehorses in training held in a SMSF?
If the SMSF trustee can argue to the ATO that the Racehorse is not a “personal use asset”, i.e. not kept for personal use or enjoyment, the fund may still be able to keep the horse within the SMSF. For instance, the racehorse may have become an elite horse and will kept in the fund for future breeding purposes where, if a mare, significant monies can be expected via foals bred or, if a stallion, via service fees derived or large sale proceeds on full or partial sell down to a stud.
If the above argument are relied upon, given that this is such a contentious issue, I would strongly recommended that the SMSF trustee seek a private ruling from the ATO from an adviser with specialist knowledge in this area.
Also note that if the racehorse is disposed of by the SMSF and its interest cost the SMSF $10,000 or less (including GST), that no CGT will be paid on the sale of the horse, regardless of what it’s market value is at that time. This is a special CGT concession that relates to “personal use assets”.
Please contact Paul Carrazzo on 03 9982 1000 if you wish for me to clarify or expand on any of the matters raised in this article.
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.
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
Suite 102, 21 Bedford Street,
North Melbourne, VIC, 3051
TEL: (03) 9982 1000
FAX: (03) 9329 8355
MOB: 0417 549 347
Web Site: www.carrazzo.com.au