Transcription of The Stock Network Interview with Paul Carrazzo Partner at Baumgartners
Lel Smits: Paul Carrazzo is a partner at Baumgartner’s, a full-service tax accounting audit and business advisory practice, recognized as an AFR top 100 firm. Paul is widely regarded as Australia’s leading tax advisor to the thoroughbred racing and breeding industry, while also supporting a broad range of clients including multinational enterprises. Ahead of appearing at Stocks on Location, I’m joined by Paul to discuss the key tax structuring and compliance challenges facing investors, racing industry participants and high growth private businesses today.
Paul, welcome to the Stock Network.
Paul Carrazzo: Your pleasure, Lel.
Lel Smits: Now, you’re considered the leading advisor in the Australasian racing and breeding sector, an industry with very unique tax treatments and also very frequent regulatory updates.
Can you outline what are the most common tax or structuring mistakes you see owners, breeders and very much investors make? And also, how can participants better protect themselves as the ATO is increasing its scrutiny everywhere?
Paul Carrazzo: You’re right on the last bit. In spades, well, there’s been a lot more curiosity and audit activity by the ATO and the thoroughbred industry, especially in the last 12 months. And obviously, you know, a few have come across our desk as well.
Now, in terms of the mistakes I see, I’ll give you an answer from a hobby perspective and from like a horse business perspective, someone who’s like got an income tax horse business. From a hobby’s perspective, the main mistake people make is that they don’t structure themselves to take advantage of the capital gains tax concession. This capital gains tax concession states that if you acquire a horse, which we call a personal use asset for $10,000 or less, and it’s just your interest in the horse, not the whole horse.
But if you acquire an interest in a horse for $10,000 or less, which includes shares by the way, you actually don’t pay capital gains tax when you sell that horse. And a lot of people like, for instance, you may go along to a sale with your partner and you might buy a horse for $22,000. No, actually, no, no, no, no.
We’ll put a better example or more appropriate. Let’s say you buy a horse for $18,000 plus GST. What you should do ideally to avoid capital gains tax when you sell that horse, you should split the horse 50-50 between you and your partner.
So you both have a cost base of say $9,900. And that means regardless of how much you sell that horse for, you will not pay capital gains tax when you sell that horse. And that is very appropriate for a lot of people who sell horses up to Hong Kong, for instance, and other big consumers of Australian horses around the world.
So that’s one thing I would say for that. That’s what I would share in relation to hobbies. In relation to business people, well, how many hours have you got? I tell you the problems I see when people trying to structure as a horse business, they just don’t work through the proper factors or have a real understanding of how the ATO interpret those factors as well.
And I guess with my experience, I’ve got a bit of a head start on that. But if you’re trying to run a business, you should, for instance, have proper stock records. You should like job cost your horses so you can keep a running total or review of whether your horses are you.
You’ve got to have a business plan, for instance, if you’re going to try and structure yourself into a horse business, because the ATO, one of the first things I’ll ask for when they look, if they ever get curious about the business status of your affairs, I often ask for a business plan. And we suggest either the client locks one up under our auspices or we do it completely ourselves for the client. So so these are the sorts of areas that you find problems with with people starting out in business.
And, you know, and sometimes and here’s another classic one. Well, the ATO hates what we call standalone horse racing where you’ve only got racehorses in the business to try and argue that your business with only racehorses that will very rarely be accepted by the ATO because they’ve got this mentality. They see it as a game of chance.
So to try and structure yourself properly, you should have a heavy bias towards, say, breeding breeding stock in your business, mares that are mated to stallions, foals that you sell, maybe a bit of what we call pin hooking. They’re the sort of things that there’s some of the problems I see when people come to me and say, listen, the ATO are breathing down my neck. Can you please troubleshoot and help me with the ATO? And these are the sort of things I find that I’ve really got to defend for them.
Lel Smits: Yeah. Yes. And when it comes to building resilient financial structures, really for more private and high growth businesses, Baumgartners works with businesses ranging from startups to multinational private groups. So not just horses, not just horses, not at all. And in your very diverse experience, where do you think these businesses most often underestimate financial risk? And also, what frameworks do you think they should prioritise to build long term resilience?
Paul Carrazzo: With the financial risk aspect, when you, for instance, if you’re dealing with a multinational firm, they often underestimate the transfer pricing rules, how much you can actually sell your product up to a parent, say, in Hong Kong or any other developed country where that business may have subsidiaries, et cetera, or parents. So that’s one thing I often find.
The other thing is they don’t, they get too aggressive with their claiming of expenses. They often, for instance, interest payable between, say, an Australian subsidiary and an overseas parent, often they don’t understand that the level of interest that you charge between the two entities can come under ATO review if it’s not seen as arm’s length well. And that’s the sort of thing that you’ve got to keep clients aware of as to the problems involved.
And also, if you’ve got a client who’s distributing, say, to an international trust overseas or to non-residents overseas, you’ve got to be aware of the rules and the anti-avoidance provisions that are contained therein. And they’re the sort of things that we come across regularly and try and advise our clients on.
Lel Smits: Well, Paul, I really appreciate your expert insights today and look forward to hearing more at StocksOnLocation.
Paul Carrazzo: I can’t wait. We’re all around on the 25th.
Ends