For such a contentious topic—particularly for participants in the thoroughbred industry—the wait for updated ATO guidance on whether an activity is a “business” or a “hobby” has certainly been a long one.
The wait is over - updated guidance is now available, albeit in draft form. Last month, the ATO published TR 2026/D2, Income tax: carrying on a business by an individual.
This ruling, I must emphasise, doesn’t just deal with the breeding and/or racing industry, but any type of activity. The underlying business indicators are also not exclusive to individuals. Commercial character, profit-making purpose, repetition, organisation and scale are also relevant to other entities, e.g. Companies, trusts, partnerships etc. Their application can produce different outcomes depending on the entity and the statutory provision involved.
This new draft ruling sets out the indicators the Commissioner considers relevant to determine whether an activity undertaken, as an individual, is a business as opposed to an investment or a hobby. This is an important distinction as the taxation treatment of activities will vary depending on this classification. An income tax “business” can claim tax losses and be GST registered, a “hobby” can’t claim tax losses and, generally, can’t obtain GST registration.
The indicators in this draft ruling are consistent with the indicators set out in Taxation Ruling TR 97/11 which are relevant to determining whether a taxpayer carries on a business of primary production for tax purposes. This draft ruling does not replace the more specific advice provided in TR 97/11 and other rulings on this topic and should be read in conjunction with them.
What is significant about this ruling is that it gives more explicit warnings about persistent, commercially unexplained losses, but both require an overall assessment—not a rule that a particular loss amount or number of loss years means “no business”.
On any objective assessment, it is the ATO giving a warning that recurring losses, without any objective likelihood of profits in the future, will be given more weighting by the ATO in the future in determining if an activity is a business or hobby.
- RULING OVERVIEW
This new TR 2026/D2 ruling is best characterised as a consolidation of established business indicators, with a sharper explanation of how persistent losses can undermine business status—not a new rule requiring profitability.
Published on 16 October 2026, the draft remains open for consultation until 27 November 2026. Its proposed date of effect would extend to periods before and after publication of the final ruling.
Importantly, paragraph 3 expressly preserves the existing specialist guidance in the existing 1997 primary production ruling noted above:
“This Ruling does not replace the more specific advice provided in TR 97/11 and other rulings on this topic and should be read in conjunction with them.” ¹
For primary producers, such as horse breeders, TR 97/11 therefore remains central. For horse businesses the industry-specific considerations in TR 2008/2, a ruling relating only to the racing industry, remain relevant rather than being displaced by a general individual-business framework.
2.THE SEVEN BUSINESS INDICATORS IN THIS RULING
Paragraph 14 identifies seven indicators for an activity to be considered a “business”:
- significant commercial purpose or character;
- intention to carry on a business;
- purpose and prospect of profit;
- activities not being a hobby or recreation;
- businesslike and systematic organisation;
- size and scale; and
- repetition and regularity.
The reduction from TR 97/11’s eight indicators is mainly a change in how the indicators are arranged and explained, rather than a change to the underlying tests. The draft combines businesslike organisation with comparison to the methods of ordinary participants in the relevant industry. Industry comparison has not disappeared.
Business or hobby considerations are a question of fact, and this ruling reflects that these indicators must be considered in combination and as a whole.
No indicator is decisive, and their relative importance varies with the circumstances. Accordingly, regular sales, extensive records or substantial expenditure cannot independently establish a business. Equally, small scale does not independently exclude one.
The ruling framework also accommodates changing and unconventional activities. A hobby can become a business when the operator begins conducting it commercially. Examples in the ruling reflects this. The “content-creator” case study illustrates that transition through monetisation, commercial agreements, investment, advisers and staff—not merely the receipt of an initial payment.
- LOSSES – CURRENT STATE OF PLAY
Breeders must pay special attention to what the draft ruling includes on losses. From personal experience, this is factor is the overwhelmingly the main basis that the ATO uses to attack the business status of a breeder.
A horse breeder can take longer to generate profits because the costs begin well before the horses produce sale income, and developing commercially valuable breeding stock can require several breeding seasons. Under current ATO guidance, those industry characteristics help explain why early losses do not necessarily indicate an uncommercial activity.
3.1 Losses: the draft’s most important practical message
Paragraph 30 calls the prospect of profit “highly significant”. Paragraph 31 then states:
“if the activities are carried out in a way where there is little or no real prospect of making a profit, it is unlikely that you can be said to have a profit-making purpose.”
Read alone, that language could suggest that an unsuccessful activity cannot be a business. Paragraphs 32–34 prevent that interpretation.
3.2 Start-up and growth losses remain compatible with business status
Paragraph 32 expressly accepts activities that are not expected to become profitable immediately:
“Activities that are objectively unlikely or not expected to make a profit in the short term can still have a profit-making purpose.”
It also recognises deliberate losses incurred while building scale and a customer base. This matters because commercial businesses may rationally accept current losses to develop future earnings. The question is whether the conduct genuinely supports that commercial explanation.
3.3 Poor prospects are adverse, but not automatically fatal
Paragraph 33 accepts that an operator can intend to make a profit despite low objective prospects. However, other business indicators must be sufficiently strong to outweigh the adverse profitability evidence. Paragraph 34 similarly preserves the possibility of business status where a genuine belief in eventual profitability is objectively unlikely to be realised.
The draft’s warning is directed at the combined circumstances of inherent unprofitability and conduct objectively inconsistent with profit-making:
“where an activity is inherently unprofitable and is carried on in a way that objectively shows no intention to make a profit”
- IS THE ATO SAYING SOMETHING DIFFERENT FROM THE PREVIOUS PRIMARY PRODUCTION RULING TR 97/11?
The language in this draft ruling is more explicit, but the essential position is substantially continuous.
TR 97/11 already treats profit prospects as “a very important indicator”. It expressly recognises that a primary-production business may make a small profit or a loss in a particular year; paragraph 49 in that ruling accepts expected short-term losses.
More significantly, paragraph 50 already addresses activities that objective evidence suggests may never become profitable:
“Taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable.”
4.1 The consistent-loss case study: what drives the adverse “hobby” result?
There is a “consistent loss” case study in this new draft ruling that breeders should take special note of. The case study is to do with “Blaire” who conducts a leatherworking activity.
Blaire attends markets regularly, develops repeat customers and hopes eventually to profit. Nevertheless, prices remain below full costs, and she is unwilling to make the changes necessary for profitability because they would diminish her enjoyment of the activity.
The ATO concludes that the activity lacks sufficient commercial character and is, thus, a “hobby”. Its decisive combination is recurring losses, no realistic profit prospect, recreational motivation and resistance to commercial change—not recurring losses alone.
If you wish for me to clarify or expand upon anything mentioned in this article, please do not hesitate to contact me.
PAUL CARRAZZO CA, CPA
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
