Edited version of private ruling

Authorisation Number: 1011681911254

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Ruling

Subject: Business expenses - Boats

Issue 1

Is the company able to claim a deduction for a recreational vessel (boat) and its related expenses which it wishes to use for permanent advertising and as an inducement to buy its goods and to provide a location and environment for 'personal skills' training for income tax purposes?

Question 1

Does subsection 26-47(2) of the Income Tax Assessment Act 1997 (ITAA 1997) operate to limit deductions otherwise allowable for boating activities under section 8-1 and Division 40 of the ITAA 1997?

Yes.

Question 2

Does subsection 26-47(2) operate to limit a deduction otherwise allowable under section 8-1 of the ITAA 1997 in respect of the following expenses;

· Cost of placing signage on the boat's hull and sails that advertise the company's name and website details.

· Cost of advertising the boat trip in printed material such as magazines.

· Cost of advertising the boat electronically on your website and in the information pack emailed to prospective clients.

No.

This ruling applies for the following period

1 July 2010 to 30 June 2013

The scheme commenced on

The date a recreational vessel (boat) is purchased.

Relevant facts

The company is trustee of a trust that sells business opportunities. The business opportunity includes:

· the rights to use a name

· training in the product and running a business,

· assistance in business set-up

· ongoing help and advice.

The trust employs the sole director and shareholder of the taxpayer to organise training and provide assistance and backup to its customers.

The company wishes to purchase a safe recreational vessel, on which customers can choose to go on a team building boat trip at the conclusion of training.

The boat will provide a location and environment for 'personal skills' training and would therefore be used for training purposes.

The company will use the boat for advertising in the following ways.

Physically the boat will sport the company's name and website details on the hull and sails.

The company website promotes the team building boat trip to go fishing, sailing or for relaxation as part of its package offer to prospective clients.

The proffered boat trip is already included in current advertising in magazines and in the information pack emailed to prospective customers.

The public officer of the company believes that the lure of a boat trip acts as an emotional incentive for customers to sign up to a business opportunity.

The public officer has also stated that offering a boat trip makes a very impressive impact upon prospective customers because it implies the company is large and secure. A boat such as a catamaran is attractive and safe for inexperienced sailors amongst the company's potential customers and/or their partners.

The public officer provided an estimate of the additional income the use of a boat will generate for the business.

The public officer stated that:

The company has no intent to hire out the boat on a charter basis as the regulations and insurance were too prohibitive.

The company does not consider the option of charter hire as a viable option in X because of the lack of available operators and the unlikelihood of an operator permitting the company to physically advertise on the hire boat.

The boat would be used on occasion for private use.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 8-1

Income Tax Assessment Act 1997 section 26-47

Income Tax Assessment Act 1997 Division 40

Reasons for decision

Issue 1

Question 1

You intend to purchase a boat that you wish to use to use for permanent advertising and as an inducement to buy its goods and to provide a location and environment for 'personal skills' training for income tax purposes. Generally related expenses for using and holding an asset are deductible pursuant to section 8-1 and division 40 of the ITAA 1997. However, in the case of a boat, the treatment of deductions will vary depending on the use to which the boat is put. A deduction may be specifically denied (for example, a. boating entertainment expense under section 32 of the ITAA 1997 or because it is private in nature under paragraph 8-1(2)(b) of the ITAA 1997. A deduction may be allowed in full, for example, where the expenses are incurred providing a fringe benefit to an employee or the amount of the deductions may be limited if the boating activities are not carried on as a business.

Section 26-47 of the ITAA 1997 prevents deductions from boating activities that are not carried on as a business being offset against other assessable income. The section is concerned with deductions otherwise available to you under section 8-1 or Division 40.

To determine whether the operational rule at subsection 26-47(2) of the ITAA 1997 applies to your circumstances, we need to consider whether the exceptions at subsections 26-47(3) and (4) of the ITAA 1997 apply to how you intend to use or hold your boat.

The first exception at subsection 26-47(3) of the ITAA 1997 occurs when boating activity is carried on as a business:

Exception: business use

The rule in subsection (2) does not apply to amounts that are attributable to one or more of the following:

(a) *holding a boat as your *trading stock;

(b) using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you *carry on;

(c) using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on;

(d) using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.

* denotes a term defined in section 995-1 of the ITAA 1997.

This exception describes boats that are used as an integral part of a business, either as trading stock or as assets that are actively used to directly generate income for the business.

You intend to use the boat as an advertising platform, a lure for prospective customers and a training venue. Your boat will not be held as trading stock as you are not in the business of selling boats. Your public officer stated that the boat will not be used for hire or charter purposes as the regulations and insurance were too prohibitive. You intend to use the boat in a manner that is not for the transportation of goods or people for payment. The question remains as to whether your intended use of the boat is essential to the efficient conduct of the business that you carry on.

Whether the use of a boat is essential to the efficient conduct of a business that you carry on was tested in Taxation Board of Review Case R63 (1984) 84 ATC 457 where boating expenses were claimed by an advertising agency that used the boat to entertain prospective clients as a means of obtaining an edge over its competitors. Board member, PM Roach, posed a series of questions to clarify this issue. The first question was to identify the business that was carried on. In your situation this is the business of selling business opportunities. He then asked whether the use of the boat was 'essential' to the efficient conduct of the business. If the business could be conducted efficiently without the use of the boat then he concluded that the use of the boat was not essential to the efficient conduct of the business. The boat and its operation cannot be regarded as essential to the efficient conduct of the business of selling business opportunities.

You have stated that the boat will be used occasionally for private purposes. Expenses related to private use are not deductible under section 8-1 of the ITAA 1997. Note that in certain circumstances this private use may also have fringe benefits tax implications for the company. Where the boat's use does constitute a fringe benefit, section 26-47(4) of the ITAA 1997 excludes amounts which are fringe benefits from subsection 26-47(2) of the ITAA 1997.

Where there are amounts for deductions relating to using or holding your boat in an income year to which the exceptions don't apply, subsection 26-47(2) of the ITAA 1997 explains how those amounts are treated. It says:

This Act applies to you as if so much of the amounts relating to using or *holding boats that you could otherwise deduct for an income year as exceeds your assessable income from using or holding boats for that year:

(a) were not deductible for that income year; and

(b) were an amount (a quarantined amount) relating to using or holding boats that you can deduct for the next income year.

In a given year, the amounts of deductions are limited to the amount of assessable income derived from using or holding the boat in that year. Any surplus amount is not deductible in that year but can be quarantined and offset against assessable income from boating activity in the following year. As already stated under subsection 26-47(1) of the ITAA 1997, the deductions relating to holding and using the boat are prevented from being offset against other assessable income.

Your assessable income is derived from the sale of business opportunities not from the boating activities. Therefore subsection 26-47(2) of the ITAA 1997 operates on amounts related to holding or using the boat to deny a deduction for those amounts and to quarantine them against assessable income from boating activities in later years.

Question 2

The advertising expenses you incur to advertise your business of selling business opportunities are not boat related expenses. Therefore the advertising expenses are not limited by subsection 26-47(2) of the ITAA 1997.

Most advertising expenses are clearly deductible when incurred for purposes of selling trading stock or obtaining publicity for a business name. The cost of applying the business name and website to the sails and hull of the boat and the cost to advertise the boat trip in printed and electronic media will be a deduction to the business under the general provisions at section 8-1 of the ITAA 1997.