Edited version of private ruling

Authorisation Number: 1011682564680

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Ruling

Subject: Charter boat business

Questions

1. Are you in the business of charter boat hire?

Answer: Yes.

2. Do the exclusions in section 26-47 of the ITAA 1997 apply to your activity?

Answer: No.

3. Are you entitled to a deduction for your expenditure relating to the boat hire activity?

Answer: Yes.

This ruling applies for the following periods:

Income year ending 30 June 2011

Income year ending 30 June 2012

Income year ending 30 June 2013

Income year ending 30 June 2014

Income year ending 30 June 2015

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

In 2009 you entered into a contract to acquire a yacht.

Your business will offer a variety of cruising and accommodation packages.

You will have a full-time experienced captain and a minimum of two crew members depending on the package and number of guests. Usually there will be a chef and a host/deck hand.

The crew will provide clients with experiences based on cruising, fishing, diving and other related sea activities.

The yacht will be available for charter anywhere in Australia. It has the classification to operate Australia wide.

You have conducted discussions with charter companies, charter booking agents, captains and boat owners in the region and have completed an analysis of the websites of charter companies and current operating boats.

Your market strategy is to use a smaller, less expensive yacht, permanently based in the region, to provide a more affordable charter service than current luxury yachts operating in this region. The business will provide this service by using a motor yacht that is new to the Australian market, designed and built by an overseas company, specifically for Australian conditions.

Your actions related to this activity to date include:

· Development of a business plan including comprehensive market research of both the local motor yacht charter industry and the market for cruising motor yachts in general.

· Securing of key staff.

· Supervising the development of the yacht to ensure construction, layout and options appropriate for charter operation.

· Development of a website and register of domain name.

· Attended various boat shows to promote charter operation.

· Various other tasks including obtaining necessary permits, memberships and licences to enable charter operation.

Your business activities will also extend to yacht sales. You have entered in an agreement with the overseas company that built the yacht.

Under this relationship, you will earn a 5% commission on any yachts sold and your yacht will be used as a demonstration vessel to assist with sales.

You attend the boat shows as a representative of the overseas company. The overseas company pay to relocate the boat to the boat shows, paying captain and crew wages, petrol and boat show costs.

Approximately 20 days per year will be spent travelling to and from boat shows.

Intended private use is less than three weeks per year and will only occur when the boat is not in use.

The yacht was purchased outright with existing funds.

You do not expect the yacht to depreciate in value.

You have developed a cash flow forecast indicating that you can expect to make significant profits.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Section 26-47.

Reasons for decision

Summary

Your activity has sufficient commercial purpose and character to be considered to be carrying on a business. Because you are considered to be carrying on a business you are not precluded from deducting a loss or outgoing for a boating activity.

Detailed reasoning

Section 26-47 of the ITAA 1997 operates to prevent deductions from boating activities that are not carried on as a business being offset against other assessable income. The excess deductions are not allowed where the activity is only a passive receipt of income from property.

If you provide a boat under a lease then generally you are not carrying on a boat hiring business.

The factors to be considered in determining if you are carrying on a business under this boat hire arrangement are:

· Significant commercial purpose or character

· Prospect of profit

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

· Organised, systematic, businesslike manner

· Repetition and regularity

· Size and scale of activity

In these activities the prospect of profit is highly significant when assessing if the activity has the character of a business. Where it is clear from the objective evidence that a taxpayer cannot show the existence of a genuine belief that the activity can be profitable, they will not have the requisite intention of profit.

'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. If the total assets of the business at the two dates are compared, the increase which they show at the later date compared to the earlier date represents the profits of the business during the period in question.

You have developed a cash flow forecast indicating that you can expect to make significant profits over a five year period. In this model you have not taken into account the actual tax deductions for depreciation and the possible investment allowance for determining this accounting profit.

When applying your situation to each of the other factors it is considered that your activity meets these requirements and the overall impression would be that you are carrying on a business.

Because you are considered to be carrying on a business sub-section 26-47(3) of the ITAA 1997 will apply so that sub-section 26-47(2) of the ITAA 1997 does not stop you from deducting a loss or outgoing for a boating activity. However expenses must be apportioned to account for the private use component.

Also sub-section 40-25(1) of the ITAA 1997 will apply to allow you to deduct an amount for the decline in value for an income year. However, sub-section 40-25(2) of the ITAA 1997 requires you to reduce your deduction for the part of the decline in value attributable to the private use of the boat.

Non commercial loss provisions

You are considered to be in the business of boat hire and as such the exclusions discussed in section 26-47 of the ITAA 1997 do not prevent you from deducting business losses.

However, division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

· the exception in subsection 35-10(4) of the ITAA 1997 applies,

· you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

It is noted that you asked for the private ruling to apply for the 2011 income year and onwards. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2011 to 2015 income years.