1.3.1 First Question: Do people contribute money or money’s worth as consideration to acquire rights (“interests”) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)?

The answer to this question is “Yes”.

  1. The nature of the enterprise

    A horse racing scheme can reasonably be defined as:

    “the arrangement between 2 or more people (members) to own or lease a racehorse for the purpose of participating in the undertaking of caring for, training and racing it [the horse as a whole] to best advantage for the benefit of the members as a group”.

  2. The nature of the “contributions” by members

    When considering where a horse racing scheme fits within the context of the managed investment scheme regime, it is important to distinguish between:

    1. schemes that involve the pooling of members’ contributions for use as the property of the scheme (typical in partnership and unit trust-based “investment” schemes); and
    2. schemes that do not involve pooling, but rather the use of members’ contributions in a common enterprise that constitutes the scheme (typical in co-ownership contract-based “enterprise” schemes);

      as this has significant implications for differentiating the property of the scheme from property owned directly by individual investors and used in the operation of the scheme.

      The members’ contributions to a typical horse racing scheme are:

    1. if a partnership or trust-based “investment” arrangement – money or money’s worth paid to or on behalf of the scheme; or
    2. if a co-ownership contract-based “enterprise” arrangement:

      1. the right to use their respective interests (in the horse) in the operation of the common enterprise that constitutes the scheme; and
      2. money paid to or on behalf of the scheme.

        The structure of the arrangement can be influenced by numerous factors, including taxation considerations. The most common, and the one preferred by the writer, is “co-ownership” [as distinct from “partnership” or “unit trust”], with a clear distinction in the Co-owners Agreement between the ownership of the horse and the scheme property, considering such arrangements to be more flexible and accommodating of the varying and often changing needs of the individual members.

        “Co-ownership” arrangements are typically contract-based “enterprise” schemes, with the ownership of the horse divided into a specified number of interests owned by up to 20 members in the normal course but up to 50 is permitted under the ASIC Instrument, as “tenants-in-common”, subject to the Co-owners Agreement.

  3. The nature of the “rights (interests) to benefits” produced by the scheme

    The definition of a managed investment scheme recognises that the benefits may be either financial benefits, or benefits consisting of rights or interests in property. It is not essential for a horse racing scheme to constitute a managed investment scheme that the motivation of the individual members to participate in the scheme is to derive a financial benefit. In fact, there is no necessary relationship between the speculative nature of the scheme (and low probability of a financial return) and the ownership arrangement satisfying the definition.

    ASIC states in paragraph 32 of RG91 [2016]:

    “Regulation under the co-regulatory arrangements, subject to appropriate conditions about the content of the agreements, should promote informed and confident investment in the relevant horse racing syndicates, which are small in scale. We have also taken into account that participation in racing often occurs for the pleasure of following horse racing and having a stake in the performance of a racehorse, rather than primarily to produce financial benefits”.

    Each member, by their participation in the scheme, acquires the right to:

    1. participate in the undertaking of caring for, training and racing the horse (as a whole) to best advantage for the benefit of the members as a group; and
    2. receive any distributions of income (net prize money) earned, in the same proportions as their respective interests in the scheme.

      Each member will typically receive a proportion of any income (net prize money) earned as distributions from either:

    1. the scheme’s designated bank account administered by the manager (after the total amount of net prize money is received into that account from the relevant principal racing authority); or
    2. the relevant Principal Racing Authority to such member’s nominated bank account.

      The method of distribution of net prize money is not significant in determining the nature of the benefit or the scheme.