Edited version of your written advice

Authorisation Number: 1013034034644

Date of advice: 15 June 2016

Ruling

Subject: Am I in business - boat charter

Question 1

Is the taxpayer's boat hire/charter arrangement considered carrying on a business for income tax purposes?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017.

Year ended 30 June 2018.

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

You commissioned the construction of a boat to be delivered sometime in 20XX.

You entered into an agreement to charter the boat.

The boat will be available for charter for around half of the year.

You will obtain a loan and expect to repay it over a couple of years.

You will claim depreciation at 12% using the diminishing value method in your income tax return.

You have a business plan for the activity which includes market analyses of the region in which the activity is to operate, the clients and competitors in the area, and promotional strategies.

The management agreement provides that you are entitled to all income from the operation and you will pay a management fee to the charter operator for their service.

Under the agreement, the charter operator provides:

• manage, promote, advertise and market the boat for hire,

• provide inquiry and booking services,

• ensure radio communication is in operation between the charter operator and the charterers,

• provide garbage disposal and fuelling facilities,

• provide breakdown or search and rescue operations as required, and

• provide a monthly report itemising the hiring fees and expenses and in relation to the charter of the boat.

Additional services that may be provided for an additional fee include:

• arrange suitable moorings or berth facilities,

• maintaining the boat in a seaworthy condition,

• carrying out of repairs and maintenance to the boat,

• pre-charter training and assistance to people hiring the boat, and

• briefing charterers in relation to the limitations of the boats permit regarding safe ports and geographical limitations.

As part of the agreement you agree to:

• provide current certificates of registration/survey,

• provide all insurance in relation to the boat,

• maintain the boat in survey condition at all times, and

• reimburse the charter operator for any expenses incurred in relation to the boat (eg. turn around costs, mooring and berthing facilities, repairs and maintenance).

You will review booking income and maintenance costs on a monthly basis, analyse actual performance against income projections in line with your business plan.

You will conduct inspections of the boat and have meetings with the charter operator to discuss marketing, pricing and maintenance issues.

You will maintain a separate bank account and the books will be attended to by you and a bookkeeper in an organised manner.

You will register for GST and submit quarterly BAS.

You are unsure whether you will sell the boat after at the end of the charter agreement period or retain it for private use.

You have provided income and expenses projection based on a similar boat.

You will incur a loss over the first few years, and then return a small profit in the following year.

Your cumulative position at the end of a few years is an overall loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 26-47

Income Tax Assessment Act 1997 Section 26-47(2)

Income Tax Assessment Act 1997 Section 26-47(3)

Reasons for decision

Section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997) provides rules for deductions from non-business boating activities. In most cases, costs of boat charter activities can only be used to reduce assessable income received from boat charter activities. They cannot reduce assessable income from other sources.

The exception to this is when you use or hold a boat mainly for chartering it on hire in the ordinary course of a business you carry on.

Taxation Ruling TR 2003/4 discusses the Commissioner's view on boat hire arrangements and the application of the above provision. Further guidance for determining if you are carrying on a business can be found in Taxation Ruling TR 97/11.

Using a boat mainly for chartering it on hire in the ordinary course of a business that you are carrying on

TR 2003/4 states you may carry on a business of boat charter and employ the services of a managing agent to aid this task. Where the boat owner enters into a contract with a charter operator, two issues need to be considered:

• is the boat being used in the owner's business, or does the agreement represent the lease of the boat to the charter operator's business, and

• in chartering the boat to customers, either by you directly, or through the charter operator, does the activity amount to more than the passive receipt of income from boat rental?

The extent to which you participate in, and the effective control you have over, the operation of the charter activity, as well as the extent to which you share in the risks and rewards of it, will assist in determining the character of the arrangement.

The terms and conditions in the agreement or contract with the charter operator will present the facts that determine the answer.

Use of the boat for private purposes also influences an assessment of carrying on of a boat charter business. A comparison of the time used for private or business purposes can often provide an accurate indication of the primary purpose; however, other factors can be relevant. For example, a boat made available for hire for more than half of the year, but taken for private use for all or most of the peak commercial hiring periods may indicate a dominant private purpose.

In your case you have purchased a boat and entered into a formal contract. The following facts indicate that the contract is a management agreement:

• charter operator acts as your agent and their activities regarding your boat will be undertaken on your behalf,

• you are entitled to all hiring fees earned in relation to the charter of your boat and will pay a management fee,

• you are required to pay management fees in return for the services provided under the agreement,

• you are required to reimburse any costs incurred on your behalf of the boat charter activities,

• are required to consult with you prior to any expenditure for repairs, maintenance or equipment replacement over a certain value,

• you are responsible for the payment of mooring costs, repairs and insurance, and

• the arrangement grants exclusive management of the boat for around half of the year for the term of the agreement.

In light of the above facts the arrangement has the characteristics of a management agreement as opposed to the characteristics of a rental or lease arrangement.

Carrying on a business or passive income

Where the arrangement between you and the charter operator does amount to a management agreement, the question still arises as to whether this activity amounts to the carrying on of a business, or instead involves only the passive receipt of income from chartering the boat to the boat hirer.

Paragraphs 55 and 56 of TR 2003/4 explains that whether the charter of a boat is carrying on a business will depend on the level of additional services provided to complement the charter of the boat. These services may be provided directly by you, or through the charter operator on your behalf. If this is the case, the extent of those services will be relevant in considering whether the activity amounts to carrying on a business or passive receipt of income.

TR 2003/4 provides examples of complementary services as:

• 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, and

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

As part of your activity, additional services are provided to the hirers of your boat. These services are provided through the charter operator, as your agent, or yourself and include:

• customer inquiry and booking services,

• pre-charter training and assistance in the correct operation of the boat and safety equipment,

• support infrastructure for the hirers while the boat is on charter,

• waste disposal and fuelling facilities,

• cleaning of the vessel prior to charter, and

• arrangement of a qualified skipper and crew if required.

Additional indicators of carrying on a business

Throughout TR 2003/4 several indicators of carrying on a business are discussed, which are also found in TR 97/11 with regards to primary production. The principles discussed in TR 97/11 apply equally to determining whether other forms of activity amount to carrying on a business.

TR 97/11 lists the relevant indicators as:

• whether the activity has a significant commercial purpose or character,

• whether you have more than just an intention to engage in business,

• whether you have a purpose of profit as well as a prospect of profit from the activity,

• whether there is repetition and regularity of the activity,

• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business,

• whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit,

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or a sporting activity.

It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on.

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

Intention to engage in business

Carrying on a business requires activities, not simply the idea, or desire to engage in a business. The extent of activity determines whether a business is being carried on.

In your case, you have shown you have more than a mere intention by purchasing the boat and entering into a management agreement to charter the boat.

Prospect of profit

We consider this to be a very important indicator. It is important that you are able to show how the activity can make a profit. This indicator reflects three elements:

• a genuine belief that profit is attainable,

• the intention to produce profits from the boat charter activities, and

• that the activities are capable of producing a profit.

It is not necessary for the activities to make a profit in every year of income to classify the activities as a business, and as such, you may be carrying on a business even though you are making a small profit or a loss in any given year of income.

However, where the objective evidence at the time of entering the boat charter activities shows a significant profit (over the life of operations) is unlikely, this would strongly indicate that entering into the activities was not motivated by profit, and this indicator would not be satisfied (TR 2003/4 paragraph 75).

In your case, the charter operator has provided you with an income and expenses projection for one year based on a similar boat over a six month period.

You have provided a tax forecast which indicates your boat charter activity will incur a loss each year from 'Year 1 to year 3' inclusive and a small profit in Year 4. However, your cumulative position at the end of year 4 is an overall loss of more than $32,000.

While it is not necessary that a profit be made every year, the expectation of making a commercially realistic profit should be achieved.

To establish whether a bona fide intention to make a profit, it is necessary to take into account all of the expected income and expenses. This will include any interest incurred and any decline in value of the boat while used in the activity (TR2003/4 paragraphs 17 and 78).

Based on the projections provided, the activity would not return a significant profit for a number of years.

For the purpose of this ruling, as you have not determined the use of the boat at the end of the agreement, any balancing adjustment has not been taken into consideration in determining if the activity has a prospect of profit.

Activities of the kind carried on in a similar manner

The boat charter activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. 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 ( whether the boat owner operates the activity directly or through another party) have:

n appropriate licences;

n appropriate permits (for example for marine parks and boat surveys)

n appropriate experience

n appropriate insurances;

• the use of the boat is not primarily directed at private use.

In your case, the use of this boat is for a dual purpose and there is significant private use.

Organised, systematic and business-like manner

Boat charter activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised 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.

In your case, you appear to be conducting your affairs in a business-like manner.

Repetition, regularity, size and scale

Boat hire activities are more likely to amount to carrying on a business where they are regular and ongoing. Additionally, the larger the scale the more business-like. However, it is possible for you to carry on a business on a small scale.

In your case, your boat will be exclusively available for hire for around half of the year with the remaining period used privately.

Your management agreement allows for a further 28 days private recreational use.

In the spectrum of whether this activity is smaller or larger, it is definitely considered at the smaller end due to the large amount of time the boat is unavailable for charter.

Conclusion

When applying your facts to each of the other indicators it is considered that, as a whole, your boat hire activity will not meet the requirements and the overall impression would be that you are not carrying on a business.

TR 2003/4 states that in order to demonstrate that a boat charter activity amounts to the carrying on of a business, a taxpayer needs to show that it is carried on with the intention of making a significant commercial profit and not merely bought primarily for private use.

Whilst your management agreement is for around half of the year, your agreement allows for further additional day's private use, this will reduce the actual availability of the boat and this is considered significant private use.

The income and expense projections that you have supplied demonstrate that over four years of operation, you expect to make a loss of more than $32,000 from the boat hire activity. Consequently, considering the level of profit you expect to make, the activity does not have significant commercial purpose or a prospect of profit.

As such, the boat charter activities will not constitute a business for the purposes of section 26-47 of the ITAA 1997. This means the income received will be assessable income but deductions in excess of the boating income are quarantined and carried forward to be deducted against assessable income from boating activities in later years.

Limit to future years rulings

You had requested the Commissioner to provide you with a private ruling for future years. Due to the possibility of change to the law, the possibility of changes in your circumstances, and the risk that a subsequently issued public ruling might override a private ruling the Commissioner has issued, the Commissioner has provided a private ruling until the 30 June 2018. You may request a further ruling after this time if this issue remains a concern to you.

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