Finding the Gain: Why outdated tax rules are failing Australian breeders

Cover image courtesy of The Image Is Everything

On Monday we explored how Hawke-era tax reforms reshaped Australian breeding and how America’s 100% depreciation rule is injecting a dose of excitement ahead of Keeneland next week. Together, those examples show what is possible when tax policy aligns with industry needs.

The current reality of taxation in Australia is more complex and less investor-friendly. This second article turns to the barriers: outdated rules, hidden traps, and the business versus hobby test that continues to frustrate participants. From depreciation to capital gains tax, we ask what could - and should - change.

And as we’ll explore over the next few days, change won’t come without lobbying.

A business focus

The lesson in yesterday's article was clear: when governments set the right policy, investment follows. But in Australia, the system tilts the other way. Breeders are presumed to be hobbyists, not businesses, and the tax framework is riddled with rules that discourage reinvestment.

That’s why tax specialists Paul Carrazzo and Adam Tims believe stronger lobbying is essential. They argue that more breeders need to be recognised as genuine businesses if the industry is to thrive.

Unlike America’s “two in seven” rule - which assumes ownership is a business unless proven otherwise - Australia starts from the opposite position. Here, the burden is on breeders to prove their commerciality, a process that can be complex and onerous, particularly for high-income earners whose primary income lies outside their breeding operations.

One of the biggest sticking points is the non-commercial loss rules, introduced more than 20 years ago. These apply only to individuals or partnerships, not trusts or companies, and only if the breeding activity qualifies as a business in the first place.

“Currently if your adjusted taxable income is $250,000 or more, you have to go through onerous rules to be able to immediately claim a loss on your breeding activity,” said Paul Carrazzo of Baumgartners.

“I think this $250,000 figure should be raised, since the rules were struck back in the early 2000s and haven’t been CPI adjusted. We think it should be easier to meet the non-commercial loss rules for high income earners.”

And it’s not just about high income earners who are investing in breeding horses. Many medium sized breeders are also family-owned farms who survive through selling horses they’d bred.

“Stable Financial has advocated for horse breeding businesses for over 25 years, highlighting to the ATO that a bona fide commercial endeavour exists. The last time we had guidance from the ATO was back in 2008, so we are due for another review,” said Adam Tims of Stable Financial.

The most recent ATO Guidance of the business vs hobby rules for the horse racing industry is known as the Tax Ruling TR 2008/2.

“Sometimes people say ‘No one makes money in this industry’ and ‘It’s a luxury’ and that pushes the ATO to thinking it is just a hobby. The ATO have a lot of information at their fingertips and they are listening to this," said Tims.

“If I’m the tax office, I’m thinking ‘Oh really, racing and breeding sounds like a hobby’. But my point is to advocate that it’s not just for the wealthy and employs a hell of a lot of people and for a lot of families, breeding horses is their sole revenue source.

“We need to educate people and the ATO that breeding can be a strong business. We also need to continue to educate the ATO as to the vast global industry that exists and that participants operate in different sectors of this unique industry.

“Importantly, due to the nature of the industry, a genuine lag period exists and horse businesses are often not profitable for a period of time.”

Depreciation rules that don’t reflect reality

Depreciation is another area where the Australian tax system is out of step with industry practice.

“Australian breeders get write-downs on broodmares and stallions, but to change to the American system would require a re-write of the tax system because we mainly look at it from a farming point of view, and America doesn’t,” said Tims.

Here, the way a horse is treated for tax purposes depends on who owns it, not what the horse is doing. If a breeder owns a racehorse, it is still part of their farming business. Trainers and syndicators fall under a racing business category, and hobby owners again face different rules.

“Horses can be bought and sold multiple times in their lifetime. With broodmares, they do get write-down provisions and currently it is based on her being useful to the age of 12 or older. There’s a valid argument that that is too long, you could bring it back to age six or eight.

“It would be an easy change,” Tims believes.

“Stallions are currently depreciated over four years, and that’s probably right. New Zealand have slightly more favourable rules, with broodmares being written down at eight years, but they also have different rules around racehorses.”

Breeders have also input their thoughts, suggesting the U.S. system, where horses are classified as ‘plant’ for tax purposes and eligible for 100% write-off as soon as they enter service - whether that’s training, racing, or breeding - would assist with the incentive to reinvest in fillies.

“There is a strong nexus for breeding operations between the purchasing of yearling fillies and broodmares on their books,” said Jason Abrahams, who owns financial planning buiness Critique in addition to owning and breeding thoroughbreds. “It is just not the case that breeders buy fillies and mares off the track, or exposed broodmares. Often the best access point for opportunities presents themselves when the filly is a yearling.”

“My suggestion would be to be able to start depreciation on a filly that a business has bought at the yearling sales from the date of purchase, as opposed to not being able to start claiming depreciation until the filly has retired and gone to stud.

“This would help with a breeding business’s cashflow and also recognise that you actually have to outlay capital much sooner than the tax office acknowledges.”

So what will help breeders stay in the game?

With foal crops down 40% over the past two decades, the bigger question is simple: what incentives will keep breeders producing the horses we need to sustain field sizes?

“It’s important to look at how costs have made horse ownership prohibitive so I feel that productivity gains should be our focus,” said Tims.

Attracting overseas buyers is one opportunity - but here, Australia risks being left behind.

“For non-residents and internationals investing into Australia, who are mainly from New Zealand, it’s almost embarrassing how difficult the onboarding process is. We have to warn clients that it will take several months and you do get there in the end. It can be onerous and it’s a reason for investors to say no to Australia.”

“Several of our large farms don’t even pay tax in Australia (because they are internationally owned). But ultimately, I don’t like when investment decisions are tax driven. We need to focus on creating an environment where people can run a viable business over time.”

And international comparisons show how carefully policy must be balanced.

“If we wish for the American tax system, do we miss out on other tax benefits that exist for primary producers in Australia? Our GST at 10% is much lower than consumption and sales taxes in other jurisdictions, let’s try to keep it at that level.”

By contrast: UK VAT is 20%, France 20%, Ireland 23%. New Zealand GST is 15%, Japan’s 10%, and Hong Kong doesn’t impose one at all.

Jen Shah of Dean Dorton adds that America’s sales tax is even more complicated, changing state by state, from over 10% to as low as 2%. “Kentucky sits at 6%, but sales tax doesn’t apply to most services like board or training.”

As Tims summed it up: “We are playing the long game and is it going to help where we need help? We need help with the grassroots portions of the industry, not at the top end where not many people can access a write down rule like that.”

The sting of capital gains tax

Another barrier is capital gains tax (CGT).

Most Australian racehorse owners and breeders are small-scale hobbyists - a share in a syndicate here, or one or two broodmares. Yet even they can be caught by CGT if they sell at a profit.

The only exemption applies when the horse (or share) was purchased for under $10,000. Once the price, including GST, goes above that threshold, the exemption vanishes.

“For hobby breeders, it would be good if the ATO could raise the exemption threshold from when a horse is exempt from capital gains tax. This only relates to hobbyists, but if you are a hobby breeder, you are subject to Capital Gains Tax on sales,” said Baumgartners accountant Paul Carrazzo.

“CPI has gone up significantly since that $10,000 cost figure was struck over 20 years ago and it should be raised to a more relevant figure. They change the depreciation limit for cars every year, super caps etc, but they don’t change the $10,000 rule.”

The mismatch is stark. In 2025, the average yearling price was $146,000. Split into 10% shares, that already puts most small owners above the CGT exemption. Sell that horse to Hong Kong after a trial win, and every shareholder is hit.

“I know trainers and syndicators who are aware of this rule and try to keep shares under $10,000 so owners don’t have to pay CGT when a horse is sold on. It’s a simple one to fix as it’s only the threshold number that needs changing. A change in this area, known as ‘Personal-use assets’, would be welcomed by many industry participants,” said Tims.

The unfairness is obvious.

As Tims put it: “When you find the gold, you get taxed on it, but you don’t get a rebate for all the digging you did. It’s not fair. It doesn’t incentivise people to invest in things like breeding foals. We want the tax incentives to keep people in the game.”

“If we want tax reform to assist the longer term health of racing, we need to consider what is important to the majority of participants that operate at the retail or hobby level. Is it going to be one of the main reasons that will stop people reinvesting? No, but it is unfair and it’s obvious to get it changed in line with the current environment,” said Tims.

“It would make people feel like the industry is batting for them, because it shows we care about reducing CGT for hobby owners and breeders.”

The tax complications don’t end with depreciation or CGT. After Part 1 of the tax review in 'Finding the Gain' was published, one reader emailed to highlight another frustration: the way prize money is taxed when redistributed through trainers.

“When prize money - which is non-taxable - is routed through a trainer, it ends up attracting GST via the trainer’s monthly account,” emailed owner Nicholas Arena.

“The only winner is the government. Owners are hit with an extra 10%, and the trainer gains nothing. It would help if the industry pushed the ATO to declare prize money passed on by trainers as GST-exempt.

“Just how much money is leaking out of the system?”

What can the industry do?

By assisting hobby breeders with a change to the CGT exemption level, and by encouraging more breeders to qualify as businesses, we can ensure that our industry continues to thrive and continues to employ people, particularly in rural Australia.

Ultimately there is a core dilemma facing people who want to continue to invest in Australia: it’s hard to prove that horse racing and breeding is a legitimate business, and it should be easier to do so.

OB3 has been a sensational advantage for American breeders and racing owners because their taxation system makes it simple to be in the business of owning horses.

With Australia’s love of our country and our farmers, there is an opportunity for the racing and breeding authorities to band together to push for changes that make it easier for investors to access the benefits of being a business.

Collectively, all sections operating in Thoroughbred racing and breeding should be lobbying our federal and state governments for this fundamental change - we are a serious business that contributes to the Australian economy with a large employment base, through imports and exports, and most importantly in rural areas. More of our participants should qualify to be a business and have the taxation benefits that come with that.

The reforms are clear, but the real challenge to make change happen is political.

Over the next few days we turn to the question that matters most: how can the industry lobby effectively for change - and who will actually step up to lead the charge?

If you would like to contribute to this series, send your thoughts or ideas to vicky@ttrausnz.com.au.