Horse racing club entitled to GST input deduction on stakes paid to GST-registered riders and trainers

Summary

This case involved the issue of entitlement to input tax deductions under the Goods and Services Tax Act 1985 (“the GST Act”) for stakes payments paid to GST registered trainers and jockeys in the horse racing industry.

Canterbury Jockey Club Inc (“CJC”) had claimed GST input deductions on stakes payments paid to GST registered trainers and riders in horse races CJC conducted. CJC argued trainers and riders provide services to it on race days for consideration in the form of stakes payments, and therefore it was entitled to GST input deductions for stakes payments made to trainers and riders who win.

The Commissioner of Inland Revenue (“the Commissioner”) argued that trainers and riders did not supply services to CJC and the stakes payments made by CJC were not consideration for any services. Trainers and riders instead supply services only to the horse owners.

Impact

The case establishes the GST position, with respect of stakes paid to GST-registered riders and trainers, for similarly situated clubs in the horse racing industry.

Facts

CJC is an incorporated society, and a “racing club” under s 5 of the Racing Act 2013. It is registered for GST with a taxable activity of horse racing. Racing clubs such as CJC are responsible for organising, managing and promoting race meetings where horses compete in races for prize money which is known as stakes or stakes money. The New Zealand Racing Board (NZRB) oversees the racing industry and conducts betting on racing for the harness, greyhound and thoroughbred horse racing codes. Betting may only occur at race meeting conducted by registered racing clubs. Profits from betting by NZRB are distributed to the three racing codes.

New Zealand Thoroughbred Racing (“NZTR”) is the governing body overseeing the thoroughbred racing code. It distributes NZTR’s share of NZRB’s profits among its registered racing clubs, including CJC.

NZTR establishes, enforces and amends the Rules of Racing 2013 (“the Rules”) which govern the various relationships and interactions between, among others, registered clubs, horse owners, trainers and riders. The Racing Act gives NZTR the sole authority to make and administer the Rules and to provide for “prize money and other stakes”. NZTR regulates what stakes are paid for, to whom, and in how many pools. From 1 June 2013, the Rules came into effect by which NZTR (on behalf of clubs) must pay to the owners, trainers and riders their share of their stake money. NZTR also collects, on behalf of clubs, entry fees payable when a horse is nominated and accepted for a race and distributes the stake money.

Stakes payments are paid to reward the connections of a horse that finishes in a stakebearing place. They also serve to attract owners and trainers to enter their horses into the club’s races, thereby increasing the quality of horses and number of people engaging with race meetings.

Horse trainers usually receive a monthly fee from horse owners and are in the business of providing services of training horses. Riders are normally engaged by the trainer, but the owner may also be involved. The rider is paid a set fee to ride at races, regardless of the outcome of the race.

Clubs are not a party to either of these arrangements and most trainers and riders are GST registered. Trainers are described as “the agent for the owner” and it is rare for owners to nominate their horse for a race, instead it is the horse’s trainer who normally does this.

The Rules prescribe that NZTR, on behalf of the clubs, shall pay stakes to trainers and riders directly. NZTR is required to deduct any amount of tax that it is legally obliged to deduct from the stakes and issue, on behalf of the club, any tax invoice required. Those that receive stake payments and who are GST registered, must pay GST on the stakes payments.

The clubs collect the GST on the stakes payments for payment to the IRD. Clubs file their own GST returns and make any required GST payments to IRD directly.

CJC filed its GST return for the period ending 30 September 2013 excluding a claim for input tax credits of $102,428.82 for stakes payments made to GST registered trainers and riders. CJC did so with the intention of proposing an adjustment, which it did on 18 December 2013, increasing CJC’s total purchases and expenses (including GST) by $102,428.82 and in turn increasing the GST refund owed to CJC by $13,360.28 for the period.

The Commissioner rejected the proposed adjustment on 13 February 2014 and issued a Notice of Response (“NOR”) the next day. CJC then challenged the NOR by way of this test case, as a representative club for the racing industry.

Decision

Do trainers and riders supply services to CJC?

Regarding the meaning of “supply”, the Court found there must be a transfer of something to someone else as well as a nexus or connection between the payment and the supply of services, with reciprocity in the legal relationship between both parties. The Court accepted that there was a legal arrangement between CJC and rider/trainer participants that was governed by the Rules which imposed enforceable and reciprocal obligations, and such obligations can give rise to a supply for GST purposes. The Court made no finding as to whether the Rules created a contractual relationship between CJC and trainers/riders as in any case, a contractual relationship was not critical to determining the issues here.

Regarding the services provided by riders and trainers on race day, the Court accepted that trainers and riders do not contract with CJC to provide services and that they provide training and riding services to the owners, for which they are paid. However, a contract is not necessary for there to be a ‘supply of services’ (as held in the Court of Appeal decision in Turakina Maori Girls College Board of Trustees v Commissioner of Inland Revenue (1993) 15 NZTC 10,032 (CA)). The Court found that trainers and riders do provide services to CJC on race day by entering the race, participating in accordance with the Rules, and providing a stake winning performance. The Court came to that conclusion due to three factors:

1. CJC works in the promotion of its horse races. Its profit is largely from betting, which itself is advanced by having a more competitive pool of racehorses;
2. The Rules since 2013 require NZTR to pay stake money, plus GST, on behalf of CJC to trainers and riders, and to render tax invoices for CJC to pay GST. The Court held it would be “problematic” for the Commissioner to deny input tax deductions when a club (through NZTR) must ensure the GST component is paid for the trainers’ and riders’ services on race day (at [83]); and
3. Without the input tax deductions being claimed by CJC, the GST payment on stake money is not neutral (GST was intended to be broad-based and neutral).

Regarding the Commissioner’s argument that the riders and trainers provided a benefit, for which CJC paid stakes money, rather than services, the Court found that participation by trainers and riders on race day is a supply of services from which CJC derives a benefit. That benefit does not affect the fact that there is a supply for services.

Are stakes payments to trainers and riders consideration for the services provided?

In considering whether there was a sufficiently strong connection or nexus between the payment of stakes and the supply of goods to constitute consideration, the Court found the payment must induce the trainers/riders to provide their services on race day and that the payment of stakes did, in fact, induce the trainers/riders to perform. Thus, the payments were consideration for their services. Consideration was given here regardless of whether the parties were in a contractual relationship or not.

The Commissioner submitted that the stakes payments were actually “prizes” given as a reward to a winner, rather than “fees” contingent on success. The Court rejected that argument and found that stakes payments are consideration for the services of trainers and riders and are treated as such under both the Rules and in practice, because in the hands of GST registered participants, the stakes payments are GST liable.

Overall the Court found that CJC was entitled to GST input tax deductions for stakes payments made to GST registered trainers and riders in horse races conducted by CJC.