Since 2016, the ATO have continued to target taxpayers who have invested in what they term “Lifestyle Assets”. It is no great surprise that they classify “thoroughbred horses” as part of these targeted lifestyle assets.
The latest project relating to thoroughbred horses ran for the years 2016-2020, but obviously the ATO still have great curiosity around the tax compliance of racehorse ownership, driven no doubt by revenue recovered. In the past few days the ATO announced another project targeted at racehorses and other lifestyle assets.
This targeting takes the form of a “data-matching program” where they access data from the insurance industry. In the case of thoroughbred horses, the threshold is an asset value of at least $65,000. The ATO will match this information against their own data to identify people and businesses who may not be reporting all their income relating to these assets.
Information now sought for 2023-24 to 2025-26
In this latest project, the ATO will acquire lifestyle assets data from insurance providers for 2023-24 through to 2025-26 financial years. Insurance policy data will be collected for lifestyle assets, where the asset value is equal to or exceeds the nominated thresholds. Other lifestyle assets may include fine art, aircraft, marine vessels and caravans/motorhomes and the threshold varies based on the asset class.
This is a comprehensive project that must be taken very seriously. The ATO estimates that the total number of policy records obtained will be approximately 650,000 to 800,000 each financial year. They expect 250,000 to 350,000 matched records will relate to individuals. These estimates are based on what we have learnt from previous years’ data.
Why does the ATO look at lifestyle assets
Per the associated Government Gazette notice, the lifestyle assets data-matching program will allow the ATO to identify and address a number of what they view as “taxation risks”, including:
- omitted or incorrect reporting of income – taxpayers accumulating or improving assets with insufficient income reported in their tax returns to show the financial means to pay for them, i.e., establishing which taxpayers have failed to explain their “asset-betterment”;
- omitted or incorrect reporting of income and/or capital gains – taxpayers disposing of assets and not declaring the income and/or capital receipts on those disposals or declaring them incorrectly. Remember, a capital gain on a “hobby” racehorse where your ownership interest cost $10,000 or more is subject to capital gains tax;
- incorrect claiming of GST credits – taxpayers may be purchasing assets for personal use through their business or related entities and claiming GST credits they are not entitled to
- omitted or incorrect reporting of FBT – taxpayers may be purchasing assets through their business entities and applying those assets to the personal enjoyment of an associate or employee giving rise to a fringe benefits tax liability;
- use of assets by self-managed super funds (SMSFs) in breach of the law – SMSFs may be acquiring assets but applying them for the present-day benefit of the fund's members or other related parties. Under tightened “collectables” standards, hobby racehorses are not generally eligible investments of an SMSF, i.e., they breach the “sole-purpose” test.
The objectives of this program
The Government Gazette notes the objectives to be:
- promote voluntary compliance and increase community confidence in the integrity of the tax and super systems
- assist with profiling to provide compliance staff with a holistic view of a taxpayer's wealth
- identify possible compliance issues with income tax, capital gains tax (CGT), fringe benefits tax (FBT), goods and services tax (GST) and super obligations
- determine avenues available to assist in debt management activities
- gain insights from the data to help develop and implement treatment strategies to improve voluntary compliance, which may include educational or compliance activities as appropriate
- identify and educate those individuals and businesses who may be failing to meet their registration or lodgment obligations and assist them to comply
- help ensure that individuals and businesses are fulfilling their tax and super reporting obligations.
Data gathering and retention
The extension of the program will result in the ATO collecting data for all financial years from 2015-16 to 2025-26. The information is obtained annually following the end of each financial, and they will retain each financial year’s data for 5 years from receipt of the final instalment of verified data files from the providers.
ATO warning from past projects
If you don’t think the ATO is fully invested in the racehorse data matching projects, I again share a quote from a previous data matching program release issued by the ATO Small Business Deputy Commissioner. A quote that leaves little to the imagination as to the ATO’s intent on these lifestyle assets projects. Consider:
- “If a taxpayer is reporting a taxable income of $70,000 to us but we know they own a three-million-dollar yacht then this is likely to raise some red flags”
- “Doing things like being untruthful about your income or failing to declare capital gains is effectively stealing from the community – and this is money the community is missing out on to pay for infrastructure and services we all rely on like schools, hospitals, and roads.”
Please contact me if you wish for me to clarify or expand on any of the matters raised in this article.
Prepared by:
PAUL CARRAZZO CA
Partner - Baumgartners
1/35 Cotham Rd, Kew, VIC, 3101
TEL: +61 3 9851 9000
MOB: 0417 549 347
E-mail: p.carrazzo@baumgartners.com.au
