Edited version of private ruling

Authorisation Number: 1011729568808

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Ruling

Subject: Work related expenses - travel and depreciation - boat

Question 1

Are you entitled to a deduction for the running costs of your boat incurred when carrying out your duties?

Answer:

Yes.

Question 2

Are you entitled to a deduction for the decline in value of your boat to the extent that it is used for income producing purposes?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are an employee.

As part of your job you are required to travel between islands.

There is no public ferry to travel between the islands.

You purchased a boat, for the purpose of travelling, to enable you to carry out your duties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 40-25 and

Income Tax Assessment Act 1997 Section 40-65.

Reasons for decision

Summary

It is considered that the running costs and the decline in value of your boat, to the extent that it is used for income producing purposes, are both allowable deductions.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

There must be sufficient connection between the outgoing and the activities directed at gaining or producing assessable income. The decision in Ronpibon Tin v. FCT (1949) 78 CLR 47; (1949) 8 ATD 431, confirms that for an outgoing to be deductible under section 8-1 of the ITAA 1997, a taxpayer has to establish that there is a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income.

Allowable deductions

A deduction is allowable for the cost of travel incurred when travelling within the course of employment. In your case, you require the use of your boat to perform some of your duties. You use your boat to travel between islands to undertake work.

The use of your boat is incidental and relevant to the performance of your duties, and as such in producing your assessable income. There is a clear connection between your expenses in maintaining your boat and the derivation of your assessable income.

However, if you receive any payments from your employer for the costs incurred, and the amount is not required to be included on your assessable income, a deduction is not allowed for the reimbursed expenses (Taxation Ruling TR 92/15).

Therefore, as long as the expense has not been reimbursed, you may claim a deduction for the costs that you have incurred to run and maintain your boat; including registration, insurance, fuel and other incidentals relating to the boat. It should be noted that when you use the boat for private purposes, only the portion of the expenses that are work related can be claimed as an allowable deduction, this includes the repayment of interest. In addition to this you cannot claim a deduction for the purchase price of a depreciating asset.

Depreciation of boat

As you require the use of the boat to perform some of your duties, it satisfies the requirement that the asset be used for the purpose of producing assessable income. Therefore, you are entitled to claim a deduction for the decline in value of your boat to the extent that it is used for taxable purposes.

Section 40-65 of the ITAA 1997 states that you must choose either the diminishing value or prime cost method to work out the decline in value of a depreciating asset. Both of these methods are based on the effective life of an asset and once you choose one of the methods for depreciating an asset you cannot change it.

Taxation Ruling TR 2010/2 states that you may choose to use the Commissioner's determination of the effective life of a depreciating asset; Table A of TR 2010/2 indicates that a boat over 10 metres in length has an effective life of twenty years. However, the commissioner also allows you to make your own estimate for effective life of your boat; section 40-95 of ITAA provides guidance on how to do this.

If you do not use the asset solely for a taxable purpose, then section 40-25 of the ITAA 1997 states that you must decrease your deduction to reflect the non-taxable use of that asset. Paragraph 40-25(7)(a) of the ITAA 1997 states that taxable purpose includes using the asset to produce assessable income. This means that if you use your boat for private purposes as well as to produce assessable income, your deduction must be apportioned to exclude the private use.

Under the self-assessment system, it is up to you to establish what percentage is used for taxable purposes rather than private use. Please note that you must be able to demonstrate how you have calculated your percentage for work related purposes if you are ever asked to do so.