Bloodstock – setting up to succeed

Bloodstock – setting up to succeed

December 19, 2013

The New Zealand’s bloodstock sector is more than just an agribusiness niche and is attracting renewed interest from investors, says Geoff Roan, Senior Manager, Bloodstock, for Crowe Horwath.

While sometimes seen as a high risk investment, if structured correctly and professionally managed as a business, the bloodstock sector can be both profitable and fun, says Mr Roan.

The bloodstock sector was valued at $1.6 bn in NZ by New Zealand Racing Board in 2010, which compares favourably with viticulture ($1.5 bn) and aquaculture ($1.7 bn).

Contribution to GDP $1.64 billion $1.5 billion $1.7 billion Direct employment impact FTE $8,877 $5,940 $10,520 Total employment impact FTE $17,000 $16,500 $26,600

“The farmer investment strategy used to be summed up as the ‘three Bs’ - boat, BMW and bach,”

said Mr Roan. “But that didn’t take into account the important fourth ‘B’, the broodmare. And unlike the ‘three ‘Bs’, bloodstock investment can produce an income stream and brings the benefit of significant tax advantages.”

In the 1970s and 1980s, farmers were significant investors in the bloodstock industry and made up a large share of those breeding, owning and racing horses. Farmers now only make up 38% of bloodstock ownership. But ownership from the farm sector is beginning to increase again, according to a recent survey by the New Zealand Thoroughbred Breeders Association. That reflects rising farm

incomes, especially in the dairy sector, and a growing trend for farmers to begin releasing capital by the sale of shares into Trading Among Farmers (TAF), taking on equity partners, and preparing the way for family farm succession.

“But bloodstock only works as an investment if it’s strategically structured in a way to benefit the investor,” said Mr Roan. “A business plan needs to be carefully initiated and systematically followed through.”

As an example of what could go wrong, Mr Roan cited the recent High Court “Drummond & Orr vs.

Commissioner of the IRD”. The case centred on the establishment of a breeding business through the purchase of a well-bred colt from the Karaka Yearling sales. The syndicate’s intention was to race the colt, and eventually stand him at stud. Unfortunately the colt turned out to have temperament problems and it was gelded before breeding was established.

A correctly established bloodstock business can claim an income tax deduction for the write-down of a stallion or broodmare purchase price in the first year, subject to certain criteria.

The government Racing Viticulture Aquaculture Crowe Horwath (NZ) Limited is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and independent legal entity.

increased the write-down rates in 2006. It also earlier relaxed the criteria for write-downs so that actual breeding was not required, with both moves being aimed at attracting investment into the bloodstock industry.

The syndicate had claimed the GST on the purchase of the colt and accelerated specified write-downs had also been claimed by the syndicate members in their individual tax returns.

In this case, the IRD successfully argued that that an existing breeding business was required before the specified write-down of 75% was allowed. The judgement noted that the acquisition of the colt, which was then raced, was considered to be preparatory to a breeding business, but was not the establishment of such a business. However, the IRD was unsuccessful in reversing the GST claim on the initial purchase of the colt.

Had the colt been part of an investment strategy that included young fillies or “the broodmare” then the Judge may have reached a totally different conclusion.

This above case emphasises the need for professional advice when investing in bloodstock.

Investment strategies centred on bloodstock can be legally established when purchasing yearling colts and fillies if the correct procedures are established at inception and managed systematically.

ENDS

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