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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011821740877

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Ruling

Subject: Charter Boat Operation

Question

Are you considered to be carrying on a boat hire business?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You purchased a boat and used it in a charter operation in area A from part way through the 2007-08 financial year to part way through the 2008-09 financial year.

Due to the downturn in the market you reviewed the operation and determined through your own research that there was a greater opportunity for profit in area B.

Your research revealed that there was a significant corporate clientele in this region and there were insufficient operators to meet this demand.

Since part way through the 2008-09 financial year you have been establishing the operation in area B with regular charters recommencing in the current financial year (2010-11).

The financial modelling of the operation has been based on a relatively low number of charters during 2010-11 as the enterprise becomes established with increasing activity until reaching a fairly stable level by 2014. It is your assumption that, as is common in the industry, a vessel can take a while to obtain a profile in a new area but once this is achieved regular bookings and word-of-mouth ensure a consistent and regular schedule of charters.

You have a charter agreement in place for the area B operation. The agreement is with The XYZ Charters Trust which has the role of charter operator.

The XYZ Charters Trust will conduct the day-to-day running of the activity however you, in your capacity as the owner, will have significant hands on involvement in the operation.

You own the vessel and you are also director of the corporate trustee of The XYZ Charters Trust.

You are an experienced recreational sailor and you own other vessels which are used privately so the charter vessel would see minimal private use. Financial modelling provides for X days a year private use.

You commenced regular charters during the 2010-11 financial year.

You have developed a 10 year projection of anticipated income and expenses from the activity, and expect to make a significant profitable return on your investment over the 10 year life of the charter operation.

Reasons for decision

Summary

You are considered to be carrying on a business with regards to your boat hire activity. The conditions in Taxation Ruling TR 2003/4 indicating that a business is being carried on have been met.

Detailed reasoning

A boat hire activity must amount to the carrying on of a business to claim an amount that exceeds the assessable income from the use of the boat. The excess deductions are not allowed where the activity is only a passive receipt of income from property.

If you only provide a boat under a lease then generally you are not carrying on a boat hiring business and so you would not be entitled to the excess deductions for your boat. If a boat owner receives money from hiring out their boat directly, or under a management agreement with a charter operator, it is still a requirement for this activity to amount to the carrying on of a business in order to claim the excess deductions under section 26-47 of the ITAA 1997.

Indicators of a management agreement can include:

You have entered into a management agreement that meets the above indicators.

The factors to be considered in determining if you are carrying on a business under this boat hire arrangement are:

In these activities the prospect of profit is highly significant when assessing if the activity has the character of a business. Where it is clear from the objective evidence that a taxpayer cannot show the existence of a genuine belief that the activity can be profitable, they will not have the requisite intention of profit.

'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. If the total assets of the business at the two dates are compared, the increase which they show at the later date compared to the earlier date represents the profits of the business during the period in question.

You have entered into a management arrangement and you intend on running the charter operating for 10 years. You have developed a 10 year income projection which indicates that you can expect a significant profit.

When applying your facts to each of the other factors, it is considered that your activity meets these requirements and the overall impression would be that you are carrying on a business.

Because you are considered to be carrying on a business, sub-section 26-47(3) of the ITAA 1997 will apply so that subsection 26-47(2) of the ITAA 1997 does not stop you from deducting a loss or outgoing for a boating activity.

The expenses associated with conducting the activity will be deductible under section 8-1 of the ITAA 1997 provided they are not of a capital or private nature.

Additional Information

Please note, whether a taxpayer is carrying on a business is a question of fact dependent on individual and temporal circumstances. It is accepted that your boat charter activity constitutes a business for the 2010-11 to 2012-13 financial years. However, this does not mean that it will be accepted that the activity will constitute a business in the 2013-14 and later financial years.

Whether a boat charter activity is considered to be a business is highly dependent on its prospect of profit. We have relied on your income and expense projections in concluding that your boat charter activity will constitute the carrying on of a business for the 2010-11 to 2012-13 financial years. However, after this time if it can be seen that your projections were optimistic when compared to your actual income and expenses for that period, it may be determined that there is no longer a realistic prospect of profit and that the activity no longer constitutes a business.

For the reasons mentioned above, we have only ruled for the 2010-11 to 2012-13 financial years. You may apply for another private ruling after this time as to whether the Commissioner accepts that your boat charter activity still constitutes the carrying on of a business.

You should also note that as you are an individual carrying on a business, the non-commercial loss provisions may apply to you. Further information about the non-commercial loss provisions can be found on our website: ato.gov.au  

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