Trainer's percentage is exempt income

Summary

The trainer's percentage will be exempt income in the hands of an owner/trainer.

Facts

The disputant is a company which operates a racehorse-training stable. During the relevant period, its major shareholder ("M") owned or had an interest in a number of successful racehorses in his personal capacity. M and his son are employed by the disputant company as horse trainers and both hold training licences, as under the Rules of Racing a company is unable to hold a training licence.

Horses which were owned or partly owned by M lived in the disputant's stables and were trained by M and his son with horses owned by third parties.

Under the Rules of Racing, the trainer of a winning horse is entitled to 10% on the stake or prize money ("the trainer's percentage") and the owner receives the remaining 90%. The 10% trainer's percentage is paid directly to trainers with the 90% balance paid to the owners. Under section CB9(c) and (ca) of the Income Tax Act 1994, stake money is exempt income.

The disputant did not charge M any part of the standard daily charge for training horses which he owned or had a part ownership in. The trainer's percentage for all horses, including those that M only had a part ownership interest in, was paid into the disputant's bank account. At the end of the financial year, journal entries were made to reimburse the company for the expenses paid by the disputant for the maintenance of M's horses and to reconcile all of the trainer's percentage to M's personal account.

The Commissioner considered that the trainer's percentage was derived by the disputant and was accessible income to the disputant under section CD3 of the Income Tax Act 1994. The Commissioner's position was that the payment of the trainer's percentage is mandatory under the Rules of Racing and is not "stakes, being prize money". The Commissioner argued that the trainer's percentage has the hallmarks of income in the hands of trainers [Reid].

Decision

Judge Barber held that the trainer's percentage is exempt income under section CB9(c) and (ca) of the Income Tax Act 1994 where the trainer is also an owner.

Judge Barber made findings of fact that the employment terms between the disputant and M and the disputant and M's son enabled them to train M's horses on company time or on their own time without needing to pay the disputant for that service. The Judge said that it followed from that that M's horses were not being trained by the disputant but received the "necessary ancillary services" as horses in the stables at M's expense.