Edited version of private advice

Authorisation Number: 1051993723366

Date of advice: 22 June 2022

Ruling

Subject: Am I in business - boat charter

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You obtained an ABN and registered for GST for the purpose of this venture.

You acquired a vessel.

This vessel was already operating as a charter vessel through a Charter Operator when it was acquired.

The vessel was acquired as a going concern.

You have signed a purchase agreement for the vessel.

You signed an agreement with the same Charter Operator as the vessel was previously chartered with (the Agreement).

The Agreement is for an initial two-year period with annual options available. You intend to utilise these options to extend the Agreement a minimum of three times to five years overall. You then intend to reassess the activity before exercising further options if it is still commercially viable.

The Agreement includes the following:

•         The Charter Operator will act as your agent in managing the charter operations of the vessel.

•         The services which the Charter Operator will provide as your agent:

o   Management, promotion and marketing of the vessel.

o   The Charter Operator will use its best endeavours to charter the vessel at commercial rates as determined by them to suitable persons.

o   Provide services to charterers and potential charterers including inquiry and booking, briefings by qualified staff, support infrastructure while the vessel is in charter, radio contact.

o   Provide office facilities.

o   Arrange/co-ordinate breakdown or search and rescue operations.

o   Attend to initial payment of all third-party costs.

•         The Charter Operator may provide additional services to charterers on your behalf such as pre-charter training and assistance.

•         You agree to:

o   Produce and maintain the correct certification for the vessel, the certificate of survey.

o   Ensure the vessel is furnished and maintained in the condition considered necessary by the Charter Operator.

o   Allow the Charter Operator to incur up to $XXX expense on the vessel if necessary without consultation.

o   Pay the Charter Operator the difference between the costs and expenses incurred and the income received, in the event that the hiring fees are insufficient to cover the costs and expenses.

o   Reimburse the Charter Operator for any expenses incurred in relation to the vessel and any services provided.

o   Reimburse the Charter Operator for all other reasonable costs incurred on your behalf.

•         You are entitled to all hiring fees earned in relation to the charter of the vessel.

•         You will pay the Charter Operator a management fee in remuneration for the provision of services.

•         The Charter Operator will provide you with a monthly report including the hiring fees earned and the expenses incurred.

•         You will be allowed access to the vessel for up to 28 days per calendar year for your private use. The private use cannot be during peak seasons.

•         You will be responsible for insuring the vessel and paying the insurance premiums.

The Charter Operator will promote the vessel primarily through their website. Further promotion is to be conducted through boat shows, signage and promotional material such as brochures.

Prior to acquiring the vessel you:

•         conducted research into the venture,

•         discussed operations with a number of charter operators to understand commercial viability and how the charter industry works,

•         obtained a financial history of the vessel's operations under the previous owner in order to evaluate the likely future performance, and

•         sought financial advice and obtained a 10-year financial projection.

The financial projection indicates that the charter activity will be profitable in the first full financial year after acquisition, and will continue to be profitable for the full 10 years.

You will maintain your own records to monitor the performance of the vessel as well as to form the basis for the information required to meet taxation obligations. The records you will maintain will be based on monthly reports from the Charter Operator.

You will be involved in the day-to-day operations of the vessel as required, including decision making around the performance of the vessel while in charter, maintenance requirements and promotional activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-47

Reasons for decision

Summary

Yes, your boat charter activity is considered to be carrying on a business, because the terms of your agreement with the Charter Operator represent a management agreement as opposed to a lease agreement, and the chartering of the vessel amounts to more than the passive receipt of income. Also, the impression gained from an analysis of the general indicators of business activity, is that you are carrying on a business.

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 requires 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 owner's 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 Commissioner's view of the operation of section 26-47 of the ITAA 1997, and specifically deals with when a taxpayer's activity amounts to the carrying on of a business in relation to a boat for the purposes of subsection 26-47(3). 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?

Letting to the public through a Charter Operator

Paragraphs 8 and 9 of TR 2003/4explain that a boat charter activity must amount to carrying on a business. It must be more than just the passive receipt of income from property.

To determine whether a boat owner is carrying on a business where the boat owner enters an arrangement with a charter operator, two issues must be considered:

1. The character of the arrangement: Whether the boat is being used in the owner's business and its operation managed by the charter operator, or whether the agreement represents the lease of the boat to the charter operator's business; and

2. Whether the chartering of the boat to customers through the charter operator amounts to more than the passive receipt of income from leasing property.

The character of the arrangement with the Charter Operator

To determine the character of the arrangement between yourself and the Charter Operator, the terms and conditions of the Agreement and events surrounding the execution of the Agreement must be considered.

The extent of your participation in and effective 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.

You have purchased the vessel and have entered into a formal agreement with the Charter Operator where they will manage the day-to-day operation of the vessel. The terms of the agreement confirm the following:

•         The Charter Operator acts as your agent.

•         The services that the Charter Operator will provide relate to the day-to-day operation of the charter of your vessel.

•         You are entitled to all income earned from the charter of your vessel.

•         You are required to pay a management fee to the Charter Operator.

•         You are required to reimburse the Charter Operator for expenses incurred in relation to the vessel and the Agreement.

•         The Charter Operator is required to consult you before incurring expenditure of more than $XXX.

•         You are responsible for producing the correct certification for the vessel, maintaining the survey condition of the vessel, ensuring the vessel is furnished and maintained as necessary, and covering any loss where hiring fees do not exceed costs and expenses.

•         You are responsible for insuring the vessel appropriately.

•         The Charter Operator is required to provide you with monthly reports of income and expenses. You will use these reports to keep your own business records and comply with your taxation obligations.

The terms of the Agreement between yourself and the Charter Operator indicate that the Charter Operator is acting as your agent, you derive the income and incur the expenses relating the charter of the vessel, and you maintain sufficient control of the operation of the vessel. The Agreement demonstrates the characteristics of a management agreement as opposed to that of a rental or lease agreement.

Carrying on a business vs passive income

Although you have satisfied the requirement for having a management arrangement as opposed to a lease 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 through the Charter Operator.

Paragraphs 55 and 56 of TR 2003/4state 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 the Charter Operator on your behalf.

TR 2003/4provides 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 the Charter Operator includes a number of additional services to be provided by the Charter Operator. These services include:

•         Inquiry and booking services;

•         Briefings by qualified staff;

•         Support infrastructure while the vessel is in charter, radio contact, and the coordination of breakdown or search and rescue services;

•         Office facilities for the chartering of the vessel;

•         The Charter Operator may also provide other services listed in the Agreement such as pre-charter training and assistance.

These additional services provided by the Charter Operator to hirers on your behalf, indicate you may be carrying on a business, however your activity must also be evaluated against the general indicators of a business. These general indicators are considered below.

Additional indicators of carrying on a business

Taxation Ruling TR 97/11 provides a number of general indicators for 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. TR 2003/4 provides guidance on how these indicators apply to boat hire activities in paragraphs 15 to 22.

The relevant indicators will be considered below.

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators. It requires a taxpayer be able to demonstrate the activity is carried on for commercial reasons and in a commercially viable manner, and with an intention of producing significant commercial gain. Your charter boat activity should not be implemented for private or tax benefits.

In your case, you:

•         Have conducted research into the boat charter industry and determined that the vessel chosen satisfies a high demand niche in the area you wish to charter it;

•         Have acquired the vessel;

•         Have engaged the services of a charter operator under an Agreement for day-to-day operation;

•         Obtained a ten-year financial projection which indicates that the activity will be profitable.

The steps you have taken demonstrate your commercial basis for entering into the boat hire arrangement. 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.

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 or financial gain from it.

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 obtained a ten-year financial projection. Your agreement with the Charter Operator is for a period of two years, with the option to extend yearly after that. You intend to exercise the option to extend at least 3 times, to 5 years, before re-evaluating.

The financial projection indicates that you will generate a profit of $XX,XXX in the first full financial year after acquisition, $XX,XXX in the followng financial year, and increasing each financial year after that. The projection takes into account all expected income and expenses, including the charter management fees, decline in value and interest. It also assumes the maximum of 28 days of private use.

The monthly reports from the first two months the vessel was in charter confirm that the activity is capable of producing a profit.

You have demonstrated that you are undertaking this activity with the prospect of making a significant commercial or financial gain from it.

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 likely that it will amount to carrying on a business. However, this indicator is not determinative.

Your vessel will be available for hire on a regular basis, and you expect that charters would be concentrated between April to the following January each year, with the rest being off peak season with less charters due to cyclones. Your personal use of the vessel will not interfere with generating revenue on this regular basis, because it will be during the off-peak time. You have one vessel available for hire and are carrying out your business on a small scale.

Activities of the kind carried on in a similar manner to those or ordinary trade

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 2003/4and TR 97/11 provide factors which may indicate a boat hire activity is carried on in a similar manner to other boat hire businesses, 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:

•         Your vessel will be available for charter on an arm's length basis and your customers are the general public.

•         You will market your vessel for charter through the Charter Operator. This is common practice in the charter industry.

•         The vessel will be promoted primarily through the Charter Operator's website. Other promotional activities may include boat shows, signage and promotional material such as brochures.

•         You have made the required capital investment in purchasing the vessel

•         You and/or the Charter Operator will have appropriate insurance, licences and permits.

•         Your private use of the boat is limited to a maximum of 28 days per year, during off-peak season.

These factors indicate that your activities are carried on in a similar manner to other boat charter businesses.

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. Activities to this effect may be carried out by the boat owner, or by a manager on the owner's behalf.

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 the Charter Operator, complete your own financial records and will keep records to assist in complying with your taxation obligations.

•         You have conducted extensive research into the industry. You have projected profitability over a ten-year period.

•         You have signed an agreement with the Charter Operator.

•         Under the Agreement, the Charter Operator will carry out advertisement, marketing and promotion for the hire of the vessel, and charter the vessel at commercial rates. The vessel will be consistently advertised through the Charter Operator's website.

•         Personal use of the boat is limited to a maximum of 28 days in off-peak season.

These factors indicate that your activity is conducted in a business-like manner.

Conclusion

Applying the business indicators provided in TR 97/11 and TR 2003/4to your boat hire activity, you are considered to be carrying on a business. The boat charter activity you have commenced demonstrates a commercial purpose and an intention and prospect of significant commercial profit. Furthermore, your Agreement with the Charter Operator represents a management agreement as opposed to a lease agreement, which shows that you are carrying on a business while the Charter Operator acts as your agent managing the day-to-day operations.

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.

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