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15 Jul 2013
Appeal Status
Not appealed

Existing breeding business required before deductions allowable

2013 case note - High Court found breeding business must exist before deduction allowable - commencement of business, intention, bloodstock breeding.

D and Others v Commissioner of Inland Revenue


The plaintiffs were unsuccessful in their challenge to the Commissioner's disallowance of deductions claimed for the cost of the colt by the plaintiffs as members of the syndicate. The High Court found a breeding business must be in existence before a deduction is allowable pursuant to section EC 39 of the Income Tax Act. An intention to have a breeding business at some time in the future did not meet the requirements of the section.

Impact of decision

The judgment establishes that an existing breeding business is required before a taxpayer can claim deductions of bloodstock for breeding under section EC 39(1) of the Income Tax Act 2007.

The judgment clarifies that carrying on a breeding business requires more than a hope or desire to use bloodstock for breeding in the future. In the absence of a commitment to a plan and a structure to establish a business, a speculative venture with a contingent intention to establish a breeding business will not be sufficient.


The Te Akau Stallion Syndicate No 1 ("the syndicate") was formed in 2008 and its objectives were recorded in a syndicate agreement. It purchased a thoroughbred colt at the 2008 Karaka sale for $550,000.

The stud was to be trained and raced to earn money for the syndicate members and to increase its worth as a stud stallion. It did not trial in 2008 but trialled three times in 2009, making no income in either year. The temperament of the colt deteriorated, and in 2009 it was gelded.

In the tax years 2008 and 2009, each member of the syndicate claimed a deduction for their respective share of the syndicate loss, which was made up of expenditure incurred in relation to the colt and a 75% diminishing value write-down of the purchase price.

The Adjudication Unit allowed deductions for expenses incurred in relation to the colt. However, deductions for the cost of the colt were denied on the basis the syndicate was not in the business of breeding bloodstock pursuant to section EC 39(1).

Five syndicate members ("the plaintiffs") challenged the Commissioner's finding in relation to the deduction for the cost of the colt. They contended the syndicate bought the colt for use as a stud stallion, with the intention of using it in their breeding business and so were entitled to deductions under section EC 39(1)(c).


Was an existing breeding business a prerequisite for section EC 39(1)?

To ascertain the meaning of section EC 39(1)(c), Judge Brewer canvassed the legislative history of the provision in accordance with section 5 of the Interpretation Act 1999.

His Honour first considered the predecessor to section EC 39, section 86H of the Income Tax Act 1976. Section 86H allowed deductions for bloodstock "used for breeding in the course of the conduct of any business of the taxpayer". He agreed with the Commissioner's submission that the application of section 86H required the taxpayer to first use the bloodstock for breeding "in the conduct of any business of the taxpayer". A taxpayer could not claim the value of bloodstock under section 89H if they were currently in the business of racing the bloodstock, with only an intention the bloodstock would be used for breeding in the future.

Judge Brewer then went on to consider the amendments to section 89H implemented by the Income Tax Amendment Act 1990 (No 3), the substantial re-enactment of the section in section EM 1 of the Income Tax Act 1994, and current form in the Income Tax Acts 2004 and 2007. His Honour noted there were no apparent changes in meaning between the 1994 and 2004 sections, and the 2004 and 2007 sections as supported by section YA 3 of the Income Tax Act 2004 and section ZA 3 of the Income Tax Act 2007, which confirmed the intention that the provisions would not change in effect between the earlier and later Acts.

His Honour agreed with the Commissioner's claim that the 1990 amendments to section 86H had extended the circumstances in which a taxpayer was entitled to make deductions for change in valuation of the bloodstock, but had not removed the requirement for a taxpayer to carry on a bloodstock breeding business. This was because the section expressly allowed deductions to be made in the business of breeding bloodstock in the 1994 Act and in the taxpayer's breeding business in the 2004 and current Acts. If the sections were intended to extend eligibility beyond breeding businesses, these words would be redundant.

Lastly, Judge Brewer looked at section EC 39(1)(a) and (b) to interpret subparagraph (c). All three subparagraphs allowed taxpayers to take the value of bloodstock into account in various circumstances, but in every instance this had to be "in their breeding business". This supported the conclusion that section EC 39(1)(c) allowed a taxpayer to write down the cost of bloodstock only when they had an existing breeding business.

The taxpayers alternatively argued that the scheme of the provisions focused on the identity of the taxpayer using the bloodstock, and so "their" in section EC 39(1) should be interpreted to draw a distinction between intended use of the bloodstock in the taxpayer's own business or in another taxpayer's breeding business. They claimed that because they had the intention of using the bloodstock in their breeding business, the requirements were met. His Honour dismissed this interpretation because it was incompatible with the legislative history of EC 39 and would significantly widen the application of EC 39.

Was the syndicate carrying on a breeding business?

While the finding for the Commissioner on the first issue was fatal to the plaintiff's case, Judge Brewer considered it would be of assistance to consider the second issue, particularly in light of the probability of an appeal by the unsuccessful party.

The taxpayers claimed that everything that was done to acquire the colt and train it was not exceptional in terms of breeding business models and consistent with it being part of a breeding business. They accepted the speculative nature of the venture, but argued this should not frustrate the intention of the taxpayers. They argued the legislative history showed a discernible move from a "use test" to an "intention to use test", and the "intention to use test" was for assessing when bloodstock became part of a breeding business, rather than when a breeding business commenced.

The Commissioner submitted that the activities carried on by the syndicate did not show an intention to engage in a business of breeding. While the colt was acquired as a potential stud stallion, this outcome was dependent on events. The activities that did occur were instead consistent with the raising and development of a racehorse. The future prospect of breeding the colt was a contingency plan, not an intention. The point at which the business would become a breeding business was when the stallion was standing at stud or at least marketed as a stud for breeding purposes. Because the colt was never advertised, marketed for present or future services or bred, no breeding business ever began.

His Honour accepted it was the intention of the syndicate to stand the colt at stud if it was feasible, but found it was an ideal outcome for the syndicate rather than a fixed intention. The acquisition and racing of the colt was preparatory to a breeding business, not the establishment of a breeding business. Buying bloodstock with an intention to stand it at stud in the future does not establish a breeding business. A speculative venture could be a breeding business, but it would require a commitment to a plan and structure to establish the business, rather than an objective that the bloodstock be developed so that a breeding business could come into fruition in the future.

Income Tax Act 2004, Income Tax Act 2007, Tax Administration Act 1994