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Edited version of private ruling
Authorisation Number: 1011820161801
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Ruling
Subject: Boat expenses
Question 1
Are you entitled to a deduction for the upgrades to the boat under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer: No.
Question 2
Are you entitled to a capital works deduction for the upgrades to the boat?
Answer: No.
Question 3
Are you entitled to a depreciation deduction for the upgrades to the boat?
Answer: No.
This ruling applies for the following periods:
Year ended 30 June 2005
Year ended 30 June 2006
Year ended 30 June 2007
The scheme commences on:
1 July 2004
Relevant facts and circumstances
You are an Australian resident.
You are the beneficial owner of a boat.
You transferred the legal ownership of the boat to a foreign company approximately ten years ago.
The foreign company later transferred the legal ownership of the boat to a different foreign company.
You plan on setting up a sports fishing charter boat business overseas.
A company has been incorporated overseas for the purposes of operating the charter boat business.
To date, the boat has remained in Australia.
During the 2004-05 to 2006-07 financial years you spent money upgrading the boat.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 40-25(1).
Income Tax Assessment Act 1997 Section 40-40.
Income Tax Assessment Act 1997 Section 43-20.
Reasons for decision
Summary
The work undertaken to upgrade your boat is capital in nature and consequently is not deductible under section 8-1 of the ITAA 1997. A capital works deduction is not available as the upgrades are not capital works that qualify for the deduction. A depreciation deduction is not allowable as the asset is not legally owned by you.
Detailed Reasoning
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
The upgrades undertaken on the boat are capital in nature and are therefore not deductible under section 8-1 of the ITAA 1997. Capital expenses may qualify for a capital works or depreciation deduction.
Capital Works
Under division 43 of the ITAA 1997 you can deduct certain kinds of construction expenditure. The deductions would generally be spread over a period of 25 or 40 years. These are referred to as capital works deductions.
The term capital works is an umbrella term covering a wide range of structures and extensions, alterations and improvements to such structures.
There are three different areas of capital works:
(1) buildings;
(2) structural improvements (e.g. sealed roads, driveways, car parks, airport runways, bridges, pipelines and lined road tunnels); and
(3) environment protection earthworks.
In your case, the upgrade to the boat is not a capital work undertaken on a building, structural improvement or an environment protection earthwork.
Depreciation
Under division 40 of the ITAA 1997 you are allowed to claim certain deductions for expenditure incurred in gaining and producing assessable income. Section 40-25(1) of the ITAA 1997 states that you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.
A 'depreciating asset' is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Under section 40-40 of the ITAA 1997, the general rule is that the 'owner' (or the legal owner if there is both a legal and an equitable owner) of the asset 'holds' it. It is the legal owner who can depreciate the asset.
In your case, you are not the legal owner of the boat. Therefore, you cannot depreciate the boat or the upgrades.
Additional note
Even if the upgrades qualified for a deduction under one of the provisions discussed above, a deduction would be excluded in the relevant income year by the operation of section 26-47 of the ITAA 1997. This provision excludes losses in relation to a boat unless it is used in the carrying on of a business. In your case, a business had not yet commenced in the income years in which the upgrades were incurred. Even if a business had commenced, it was to be operated by a company, not yourself. As you did not carry on a business using the boat in the relevant income years, section 26-47 of the ITAA 1997 would apply to prevent you claiming any losses in relation to the boat.
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