Edited version of your written advice

Authorisation Number: 1051453163140

Date of advice: 14 January 2019

Ruling

Subject: Am I in business – boat charter

Question

Is the boat charter operation you intend to conduct considered to be carrying on a business for the purpose of section 26-47 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are acquiring a boat.

You have paid a deposit. The remaining balance of the boat will be paid upon import. The total cost will be sourced partly from existing funds and approximately XX% of the purchase price will be financed.

You intend to charter the boat in the XX region, commencing mid 2019.

You signed a Charter Boat Management Agreement (the agreement) with a boat charter operator (BCO), engaging the services of BCO as charter operator.

The agreement states BCO will act as your agent in managing the charter operations of the boat.

Under the agreement, BCO’s duties as charter operator are to:

● Provide exclusive management of the boat for the term of the agreement,

● Unless otherwise expressly agreed in writing, facilitate all charter bookings by hirers,

● Use its best endeavours to arrange for the charter of the boat to hirers,

● Make a determination as to whether the potential hirers are suitable to charter the boat,

● From time to time, conduct sailing schools, scheduled sightseeing cruises and regattas,

● Clean the boat and perform turnaround services after each charter,

● Assess the boat to determine if repairs and maintenance are required, up to the value of $1000, after each charter,

● Conduct periodic repairs and maintenance, and

● Supply or arrange for berthing, storage, mooring and docking facilities.

Under the agreement, additional services BCO will provide with boat hire are:

● Inquiry and booking services;

● Pre-charter training and assistance;

● Support infrastructure for the hirers while the boat is on charter;

● Waste disposal and fuelling activities;

● The arrangement of suitability qualified skippers and crew; and

● Cleaning and turnaround services prior to each charter.

The agreement states you are entitled to all income earned from the charter of the boat. You will pay BCO a XX% commission of gross charter fees in remuneration for sourcing and booking charters and a XX% service fee. The fees payable will not exceed XX% of gross charter fees earned in any given month.

The boat will be managed by BCO for a minimum period of five years, with options for extension to seven and ten years respectively.

You intend to sell the boat after the ten year charter period and expect the market value to be a certain percentage of the original value.

Repairs and maintenance will be conducted at your own expense. You will reimburse BCO for all expenses incurred on your behalf in relation to the operation of the boat.

BCO provide hirers with all the required equipment, safety gear, galley crockery and utensils, linen and full safety briefings.

You have conducted research into the expected performance of this activity through discussions with people involved in the charter industry and your finance provider. You have also conducted personal inspections to enhance your understanding of the operational and financial aspects involved.

You sought a review of the financial aspects from an accounting firm who prepared a ten year financial projection based on this information. Depreciation for the boat has been calculated based on an estimated fall in market value.

Based on the ten year projection, the charter boat activity will become profitable in the second year of operation and will continue to make a significant overall cumulative profit.

You will prepare your own financial records.

BCO will provide you with monthly reports which itemise all income and expenditure as well as the details of the days the boat was chartered.

You will conduct inspections on a regular basis, upon giving reasonable notice to BCO.

BCO will manage the promotion, advertisement and marketing and attach signage to the boat. You will also conduct marketing on social media in addition to the marketing services of BCO.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-47

Reasons for decision

Summary

The charter boat activity is considered to be carrying on a business for the purpose of section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 26-47 of the ITAA 1997 provides rules for deductions for non-business boating activities. This provision limits the deductibility of expenses incurred from boat hire activities unless such activity amounts to the carrying on of a business.

In most cases, costs of boat charter activities can only be used to reduce assessable income received from boat charter activities. They cannot be deducted from assessable income from other sources.

The exception to this is when you satisfy the requirements of paragraph 26-47(3)(b), which require a boat owner to use or hold the boat for hire in the ordinary course of a business they carry on. That is, the boat owners activities in respect of the boat must amount to the carrying on of a business and letting the boat on hire must be in the ordinary course of that business. In addition, this business must be carried on by the boat owner. If the boat owner is merely in receipt of income for letting the boat to a charter operator, who uses that boat in their business of letting it on hire, this will not satisfy the requirements of paragraph 26-47(3)(b) for the boat owner.

Taxation Ruling TR 2003/4 Income tax: boat hire arrangements discusses the Commissioners view on boat hire arrangements and the application of section 26-47 of the ITAA 1997 to such arrangements. Further guidance for determining if you are carrying on a business can be found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business for primary production?

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

Paragraph 9 of TR 2003/4 provides a managing agent may be employed to assist in boat charter activities. However, this activity must be more than passive receipt of income from the boat.

Where a boat owner enters a contract with a charter operator, two issues must 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 of your participation in and control over the operation of the charter activity, as well as the extent to which you share in the risks and rewards of it, assists in determining the character of the arrangement. This is indicated by the terms of your agreement with BCO.

You are purchasing a boat and have entered into a formal agreement with BCO. This is a management agreement; under the agreement BCO will act as your agent with exclusive management of the boat for the term of the agreement. The agreement confirms the following:

● BCO acts as your agent and manages your boat on your behalf;

● You are entitled to all income earned from the charter of your boat;

● You pay management and service fees to BCO for the services they provide under the agreement;

● You reimburse BCO for costs incurred on your behalf;

● BCO are required to consult with you prior to any expenditure for repairs, maintenance or equipment replacement costing more than $1000; and

● You are responsible for payment of mooring costs, repairs and insurance.

The terms of the agreement between yourself and BCO demonstrate the characteristics of a management agreement as opposed to that of a rental or lease agreement.

Carrying on a business or passive income

Although having satisfied the requirement of a management arrangement, it must still be determined whether your boating activity amounts to the carrying on of a business, or is merely the passive receipt of income from the charter of your boat to BCO.

Paragraphs 55 and 56 of TR 2003/4 state the level of additional services provided with the boat charter will determine whether the activity amounts to the carrying on of a business. These services may be provided directly by you, or by BCO on your behalf.

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;

● 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, entrance permits, flights and other transport, and hotel and dinner reservations.

Your agreement with BCO includes a number of additional services to be provided in charter services. These services will be provided through BCO as your agent and include:

● Inquiry and booking services;

● Pre-charter training and assistance;

● Support infrastructure for the hirers while the boat is on charter;

● Waste disposal and fuelling activities;

● The arrangement of suitability qualified skippers and crew; and

● Cleaning and turnaround services prior to each charter.

These additional services provided by BCO, on your behalf, to hirers indicate you are carrying on a business and are not merely receiving passive income from hiring your boat.

Additional indicators of carrying on a business

Taxation Ruling TR 97/11 provides a number of general principles which indicate whether a business is being carried on. Although this Taxation Ruling is directed at determining whether a business of primary production is being carried on, these principles apply to determining whether other forms of activity amount to the carrying on of a business.

TR 97/11 lists the relevant indicators as:

● Whether the activity has a significant commercial purpose or character;

● Whether there is more than just a mere intention to engage in business;

● Whether there is 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 out 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.

Whether you are carrying on a business of charter boating must be determined in accordance with the principles provided in TR 97/11.

Significant commercial purpose or character

This indicator requires a taxpayer be able to demonstrate the activity is carried on for commercial reasons and in a commercially viable manner. Your charter boat activity should be capable of producing a significant overall profit over the term of the activity and not implemented for private of tax benefits. The size and scale of your activity, its repetition and regularity and your intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

In your case, you:

● Are in the process of acquiring the boat sourced through a mixture of private funds and a commercial loan with an industry provider;

● Have conducted research into the boat charter industry to determine the most significant site for boat chartering. Your research demonstrated there is a competitive advantage in providing a new vessel in the region due to a significant number of aging vessels;

● Will engage the services of the leading local charter operator under an agreement for day to day operation;

● Sought advice from numerous sources within the boat charter industry and financial experts; and

● Have provided ten year projections which indicate the operation will become profitable in your second year of operation and each year thereafter.

The steps you have taken demonstrate your commercial basis for entering into the boat hire arrangement rather for private or tax minimising purposes. As provided in your financial projection, a significant profit is expected to be made over the ten year period. Your charter boat activity demonstrates significant commercial purpose and character.

Intention to engage in business

Carrying on a business requires actual action and is not the mere idea or desire to engage in business. The extent of actions you have taken will determine whether you are carrying on a business.

In your case, you have demonstrated more than an intention to engage in business and have taken multiple steps to engage in the business of charter boating, including:

● Obtaining an ABN and registering for GST;

● Obtaining a boat;

● Engaging the services of BCO as your charter operator and entering into an agreement with BCO; and

● Conducting research and obtaining advice from industry and financial experts.

Prospect of profit

In order to demonstrate your boat hire activity amounts to the carrying on of a business, you must demonstrate an intention of making a significant commercial profit.

Demonstrating the prospect of profit comprises of three elements:

● A genuine belief that profit is attainable;

● The intention to produce profits from the yacht 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. You may be carrying on a business even though you are making a small profit or loss in any given year.

You have provided a ten year financial projection. Your agreement with BCO is for a period of five years, with the option to extend to seven and ten years respectively. You will sell the boat after ten years.

In your case:

● You have projected you would generate a profit in your second year of operation and every year thereafter;

● Your projected profit takes into account all expected income and expenses. This has included any decline in value of the boat for the duration of the agreement, as well as interest deductions.

You have demonstrated there is reasonable expectation you are undertaking this activity with the prospect of making a significant commercial or financial gain from it. Based on the projections you have provided, you have satisfied this requirement.

Activities of the kind carried on in a similar manner

A boat hire activity is more likely to be a business where it is conducted using business methods and procedures ordinarily used in boat hire activities carried on as a business.

TR 2003/4 and TR 97/11 provide factors which may indicate a boat hire activity is a business, including:

● The volume of the sales;

● The types of customers – wholesalers, retailers, the public at large, or friends and relatives;

● The manner in which marketing takes place;

● The sort of expenses you incur;

● Capital investment;

● Whether you own any licences or permits required;

● Whether you and/or the operator have appropriate experience and indemnity cover; and

● The use of the boat is not primarily private use.

In your case:

● The volume of sales you project is comparable to those of other operators;

● Your customers are the general public as opposed to mainly friends and family;

● You will market your boat for charter through your agent BCO. This is common practice in the charter industry;

● You will have appropriate insurance; and

● Your private use of the boat is limited.

These factors indicate you are carrying on a business.

Organised, systematic and business-like manner

Your boat hire activity is more likely to amount to carrying on a business where the activity is carried out in a systematic and organised manner. An individual may still be carrying on a business despite having poor organisational skills.

Factors which indicate your boating activity is conducted in a business-like manner are:

● The keeping of appropriate business records;

● Operations being carried out on a consistent basis and not haphazardly;

● Advertisement for customers is carried out in a consistent and systemic manner;

● Profitable activities are pursued and unprofitable activities are discontinued; and

● Personal boat use does not take priority over use for charter purposes.

In your case:

● You will receive monthly reporting from BCO, complete your own financial records and will keep records to assist with BAS and tax return preparation;

● You have conducted research into the industry, including research of the area of operation, charter operators and financial implications of the activity. You have projected profitability over a ten year period and will review the profitability of your operation on an ongoing basis in consultation with BCO;

● You have signed an agreement with BCO;

● Advertisement for boat hire will be carried out by BCO in a consistent manner in accordance with their regular industry advertisement. You will also conduct your own advertisement on social media in a systemic manner; and

● Personal use of the boat is intended to be minimal, to maximise profitability of the activity.

These factors indicate you are carrying on a business in an organised and systemic 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 of the activity, the more business-like it is likely to be. However, it is possible for you to carry on a business of small scale activities.

Your boat will be available for hire for the full year, other than private days and unavailability due to repairs. You intend for your boat to be chartered regularly. You have one boat available for hire and are carrying out your business on a small scale.

Conclusion

Applying the business indicators provided in TR 97/11 and TR 2003/4 to your boat hire activity, you are considered to be carrying on a business. The boat charter scheme you are implementing demonstrates an intention and prospect of significant commercial profit and purpose. As you are considered to be carrying on a business, you satisfy the requirements set out in subsection 26-47(3) of the ITAA 1997. Under this statutory exception, you may deduct any losses or outgoings incurred in relation to your boat charter activities, provided they are not of a private or capital nature.

Note

This private ruling is binding on the facts provided. You should review the profitability of your business and your financial position at the end of your first year of operation. Should your income and expenses vary significantly from the financial information you provided with this ruling, this ruling will have no application. In such an event, you may apply for a new ruling based on the new information if you are unsure of how the tax law would apply to your circumstances.

Limit to future years rulings

You had requested the Commissioner provide you with a private ruling for the period until you cease the charter boat activity, being ten years. Due to the possibility of changes in your circumstances, change in the law, and the risk of future public rulings overriding a private ruling the Commissioner has issued, the Commissioner has provided a private ruling of the first two full financial years only. You may request a further ruling after this time if your circumstances have changed and you require further binding advice.

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