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David Ellis, Karaka’s biggest buyer, blames IRD for bleeding bloodstock sales

David Ellis, the biggest spender at New Zealand's premiere Karaka horse sales this year, says the tax department is stifling new investment in the bloodstock industry with its interpretation of depreciation rules.

The value of yearling sales at Karaka in South Auckland have fallen in each of the past six years, reaching $69.7 million last month, down from $111.2 million in 2008. That's below the average $83.9 million in the past seven sales. The number of catalogued horses has fallen 12 percent in that time and actual lots bought are down 18 percent.

Ellis, principle of Waikato-based Te Akau Racing stables, spent $6.8 million on 43 horses at Karaka last month, almost $3 million more than the second-largest buyer.

He was behind an investor syndicate that last year lost a High Court case against the Inland Revenue Department over depreciation on a colt that disappointed as a potential breeder and ended up being gelded. Ellis told BusinessDesk that IRD needs to take some of the blame for the decline in sales because of a lack of clarity over tax on horses bought for breeding

"It is so uncertain on what you can and can't do, and this is a big statement from Karaka's biggest buyer," Ellis said.

"We are desperate as an industry for government to clarify tax issues, for example Michael Cullen increased depreciation on blood stock to encourage investment," he said. "But the legislation is so unclear no one knows what to do."

Investment syndicates, such as in the Ellis case, typically purchase a horse with the intention of breeding but to establish pedigree and reputation they first put it on the racing circuit. Last year's High Court ruling held that because the syndicate had no previous breeding record IRD could disallow any deductions until foals had been sired.

"Whether that's fair or not, no one is able to write off the costs unless they have a pre-existing breeding business," Andrew Babbage, a tax partner at Deloitte, told BusinessDesk. Those deductions weren't available to one-off syndicates, which would potentially bring in new investors.

"If you're an existing breeder and you purchase a horse the purchase is preparatory to a breeding business, and the continuing of the established breeding," Babbage said.

This year's top price paid was $800,000 for a Cambridge Stud colt with blood lines from Fastnet Rock and Katie Lee, less than half the top price last year of $1.97 million for a Curraghmore Stud colt from Fastnet Rock and Celebria. The record price paid at Karaka was $3.6 million in 2000 for Don Eduardo, sired by Zabeel via Diamond Lover.

The clearance rate this year rose to 78 percent and the median price paid was $45,000.

Ellis, whose Te Akau Racing also has stables in Singapore, said the global economic downturn had also contributed to the tightening in sales, as had a high kiwi dollar against the Australian dollar.

"Naturally the Australians did not spend with the same freedom as in the past, but even given that, sales were still successful - with some alarm bells centred on fresh investment in the industry," he said.

"New Zealand industry still had good results, for example at VRC Oaks (at Melbourne's Flemington Racecourse) Kirramosa won that race," he said. "We've won international races in Hong Kong, Singapore, Australia. The industry still performs well but could perform a lot better if we clarified the tax issues."


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Comments and questions

That is the problem with the IRD and their attitude. They prefer there to be uncertainty around the rules because they get to put a dollar each way on the bet. The problem is this is wasting one of those dollars that should be collected for the benefit of New Zealand.
IRD needs to clarify their position clearly so that the interpretation is black and white and businesses are not having to navigate through the fog.
The other reality is a lack of clarity stands to mask incompetence.

That is only one aspect of the decline in Horse Racing David I'm sorry, the major one is returns to the owner versus costs to the owner, most horses that race win 1 race, that race is all up worth around $7-8,000 the winning owner might receive $2700 if he's lucky, it will cost that owner anything from $8000 to $40,000 to win that race over and above the purchase price of the animal, Horse Racing is only for the wealthy in Society, where flushing money down the Sewer is not a problem.
The biggest problem is the bottom of the barrel, the gap is far too great with costs and returns, and the very few at the top unfairly reap the riches.
The whole industry needs a complete re write sooner rather than later.

Well DC you only have yourself to blame for this ruling, trying to deduct cost on the basis of being a stallion prospect, on every male yearling bought, knowing at the outset that 80% offered and bought are not stallion chances and will have to be gelded by or before 3yo to be any chance on the race track - where you just love to see your colours win at the expense of others.

You cant have it both ways buddy

and the sort of abuse you have allegedly led (and being taken to task by ird on) in recent years is shades of the 80's where the excesses of Law firm driven hydraulicked partnership's (copy catting their own clients) destroyed the write down policies needed by genuine industry players to allow reinvestment in viable replacement stock.