Edited version of your written advice

Authorisation Number: 1012691267591

Ruling

Subject: Boat hire arrangement self-operator

Questions and Answers:

1. For the years ending 30 June 2014, 2015 and 2016, do/will the activities of your partnership constitute a business and, if so, are the partners entitled to claim relevant income tax deductions for the running costs, including depreciation?

No.

2. Do the activities constitute an enterprise for GST purposes?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are engaged in full-time employment. From the year ended 30 June 200X, you commenced a boat charter business as part of the charter fleet, from which you have made approximately $Y in losses to date. The boat cost you approximately $X.

Due to poor returns and a downturn in the tourism industry, you removed your boat from the charter fleet and decided to undertake your own charter activities from a less expensive berth.

The remaining debt on your boat is approximately $Z, with interest only payable at around $A per month. You estimate, after holding the boat for 10 years, its termination value will be approximately $B.

For the year ended 30 June 20XX, you hired your boat to family, friends and work client, with you acting as the skipper. However, your hiring was primarily restricted to your holiday/leave periods.

For the relevant years, you estimate making a loss of $C and $D and profit of $E and $F respectively, based on estimated annual revenue of $F, $E, $Z and $Z respectively.

Your business plans includes your hiring of your boat in ports in Australia and also overseas after you retire from your employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 26-47

Reasons for decision

Income Tax

Section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997) limits expenses incurred in respect of a boat used for hire from being deductible unless using a boat (or holding it) mainly for letting it on hire in the ordinary course of a business that you carry on.

Taxation Ruling TR 2003/4 is about boat hire arrangements. It applies to a taxpayer who owns a boat and directly provides the boat for hire, lease or charter (paragraph 5). Paragraph 9 explains when determining whether a boat owner is carrying on a business in respect of a boat hire activity, the issue that needs to be considered is whether letting the boat amounts to more than the passive receipt of income from property. Importantly, paragraphs 13 and 30 explain:

Whether letting a boat on charter involves only the passive receipt of income or amounts to the carrying on of a business will depend on the level of services provided in addition to the hire of the boat (see further paragraphs 50 to 57 below). These services may be provided directly by the boat owner…. Where the activity involves only the provision of the boat to the hirer, without sufficient services provided, it will not amount to more than the passive receipt of income. Where sufficient services are provided as part of the hire arrangement, the activity may amount to the carrying on of a business, depending on how the activity is evaluated against the general indicators of a business.

It is not sufficient that the boat is used or held for letting it on hire in the ordinary course of a business for only a minor part of the year. It must be used or held 'mainly' for this purpose. If the boat is not used or held 'mainly' for this purpose, deductions in respect of the boat are subject to the quarantining rule in subsection 26-47(2).

Paragraphs 50 to 57 of TR 2003/4 (mentioned above) include the following principles:

In McDonald the taxpayer purchased several income producing properties as joint tenants with his wife, which were subsequently let through letting agents. Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property…Their investment involved little, if any, active participation from either party. This was inevitable because the respondent was apparently in full-time employment, and Mrs McDonald was fully committed at home….there was here a mere investment in property…

In Case G10 75 ATC 33; (1974) 19 CTBR (NS) Case 103, the taxpayer was letting out several holiday flats for short term rental. The taxpayer was actively engaged personally from day to day in multifarious activities directed to the profitable operation of his income producing holiday flats. This included the provision of furniture, blankets, crockery, cutlery, pots and pans, laundering blankets and linen when supplied, showing visiting enquirers over the premises, taking bookings and transacting payments, cleaning, garbage removal and maintenance of the facilities…. Here the elements of repetition and continuity of acts and transactions are for present purposes sufficient evidence of the existence of a business. The taxpayer was actively engaged personally from day to day in multifarious activities directed to the profitable operation of his income producing holiday flats…His income was the reward for his combined use of his capital and his labour...'

Whether letting of a boat on charter amounts to the carrying on of a business, rather than the passive receipt of income, will depend on the level of services provided in addition to the hire of the boat. These services may be provided directly by the boat owner…. Where services are provided as part of the hire arrangement, the extent of those services will be a relevant matter in considering whether the activity amounts to the carrying on of a business rather than the passive receipt of income.

Services which may be provided to the hirer, which could establish that a business is being carried on by the boat owner, include:

• customer inquiry and booking services;

• issuing of accounts and processing of deposits and payments;

• reception area for charter guests;

• pre-charter briefing including training and assistance in the correct operation of the boat and safety equipment;

• access to jetties with electric power, hot and cold water, waste disposal facilities and fuelling facilities;

• support infrastructure for the hirer while the boat is on charter, including a radio and rescue service; and

• additional services connected with the boat charter, including booking services for:

• activities and facilities in the area;

• permits for entrance to various areas;

• flights and other transport; and

• hotel and dinner reservations.

Where the activity involves only the provision of the boat to the hirer, it is unlikely that the activity will amount to more than a lease and the passive receipt of income.

Paragraphs 158 to 162 of TR 2003/4 provide the following example of an independent operator whose activity amounts to carrying on a business:

Chloe and Roma purchased a boat for $300,000 with which they intend to operate a skippered tour activity. They purchased the boat via a finance agreement over a 5 year term with a final balloon payment of $120,000. At the end of this term, Chloe and Roma intend to re-finance the remainder of the debt on the boat with a loan to be paid off in full over 4 years.

Their business plan demonstrates an intention to establish a skippered sightseeing charter business. The boat activity is advertised weekly in a number of national tourist magazines, newspapers, on a tourist website and various radio stations as guided tours including picnic lunches at scenic locations and sunset tours with a light supper.

Chloe and Roma have a business independent of the boats which provides them with an average yearly income in excess of $60,000 each. Their freelance work enables them to be available at all times to operate tours. As their charter activity develops they intend to spend less time on the freelance work and more time on the boat charter activity.

Chloe and Roma have done considerable research into the industry in the area in which they intend to operate. Their research has indicated that they can expect their boat to have a market value of approximately $210,000 at the end of 10 years and they have calculated their annual depreciation as $9,000 on this basis.

Chloe and Roma expect that the boat will be used for charter on an average of 4 days in each week and they plan to use it privately on average for 1 day a week. The boat will be available for charter throughout the year.

In addition, as mentioned above, paragraphs 13 of TR 2003/4 explains that where sufficient services are provided as part of the hire arrangement, the activity may amount to the carrying on of a business, depending on how the activity is evaluated against the general indicators of a business, which are:

A business is generally carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and, with an intention of producing a significant commercial gain.

Prospect of profit…All of the income expected to be received from, and all of the costs associated with, the boat hire activity are taken into account to determine what profit, if any, is expected. The expenses necessarily include the decline in value of the boat over the intended term of the activity and any interest incurred…. where an objective analysis of the boat charter activity indicates that the overall costs will exceed the income derived over the anticipated life of that activity, it is not credible to conclude that it is undertaken with the requisite intention of profit.

Activities of the kind carried on in a similar manner to those of ordinary trade…Features indicating that the activity is similar in this sense, include:...the boat is available for charter on an arms-length basis;... the charter operators…have…appropriate licences; appropriate permits (e.g. for marine parks, boat surveys, etc); appropriate experience; appropriate insurances; the owner and / or operator have appropriate indemnity cover; and the use of the boat is not primarily directed at private use.

Organised, systematic, business-like manner…This usually involves matters such as advertising for customers in a consistent and systematic manner, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

Repetition and regularity… However this will not of itself lead to the conclusion that the activity amounts to a business.

In your case, for the relevant years, we consider your boat hire activity does/will not amount to a business for the following reasons:

• Your partners are engaged in full time employment whilst also being the skipper of your boat when hired, which results in your boat being available for hire for only a minor part of the year. Paragraph 30 of TR 2003/4 states it is not sufficient that the boat is used or held for letting it on hire in the ordinary course of a business for only a minor part of the year.

• An objective analysis of your boat charter activity indicates it does not have the prospect of profit. Your activity has already accrued $G in losses (including depreciation) and your activity will not make any profit at least up to 31 December 2016. Even if you sold your boat for $B, your overall activity would not make a profit.

• Whilst not explicitly determinative, an impression gained is your business plan includes a private flavour, namely, your partners sailing around Australia and/or overseas for private purposes. It also seems unlikely a boat temporarily berthed in places (such as Cairns, Darwin, Broome and Geraldton) could compete with permanent local operators for charter business.

Goods and Service Tax

Subsection 23-10(1) of the A New Tax System (Goods and Services Tax) Act (GST Act) provides that an entity is entitled to be registered for GST if it is carrying on an enterprise.

Subsection 9-20(1) of the GST Act provides that enterprise includes (of relevance):

• an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act)

• an activity or series of activities done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act)

• an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 9-20(2)(c) of the GST Act excludes from the definition of enterprise an activity or series of activities done by an individual or partnership made up of individuals without a reasonable expectation of profit of gain.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for GST purposes.

In the form of a business

Paragraphs 170 and 170A of MT 2006/1 provide guidance on the meaning of activity or series of activities done in the form of a business. They state:

170. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

170A. In FCT v. Swansea Services Pty Ltd at paragraph 99, McKerracher J. observed that the words 'in the form of' do not support a suggestion that form alone may prevail over substance. However, he said that they do 'have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby.'

Paragraph 170B of MT 2006/1 provides that the term activity in the form of a business includes a business, but the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own.

Adventure or concern in the nature of trade

Paragraphs 234, 237, 241 and 242 of MT 2006/1 discuss the concept of adventure or concern in the nature of trade. They state:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

241. The meaning of the phrase, 'in the form of an adventure or concern in the nature of trade' has at its foundation the concept of 'an adventure or concern in the nature of trade' which is discussed above.

242. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

You are individuals and the boat charter activity you are carrying on is not reasonably intended to be profit making. Therefore, in accordance with paragraph 170A of MT 2006/1, your boat charter activity is not an activity or series of activities done in the form of a business.

In accordance with paragraph 237 of MT 2006/1, as your boat charter activity is not entered into for profit making, it is not an adventure or concern in the nature of trade.

You are not hiring out the boat on a regular or continuous basis. Therefore, you are not carrying on an enterprise under paragraph 9-20(1)(c) of the GST Act.

Furthermore, the exclusion from the definition of enterprise in paragraph 9-20(1)(c) of the GST Act applies because you are individuals and there is no reasonable expectation of making a profit or gain.

Therefore, you are not carrying on an enterprise. As you are not carrying on an enterprise, you are not entitled to be registered for GST.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).