Edited version of private ruling

Authorisation Number: 1011801529203

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Ruling

Subject: Am I in business

Question

Do your activities amount to the carrying on of a business as a charter boat operator?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a charter boat as a going concern under an agreement with the previous owners. The purchase price was partly financed through a loan through a finance company.

The previous owners chartered the boat to customers through a charter management agreement with a charter operator (CO). You also use this operator to manage the charter service under an agreement.

CO have provided you with job profit and loss statements for that cover the income derived and expenses incurred by the former owners in conducting the charter service. The figures provided make no allowance for interest or other costs such as depreciation that are not directly concerned with the hire of the boat.

Under the charter management agreement you are entitled to all hiring fees in relation to the charter of the boat and you agree to pay CO a management fee for the provision of services including but not limited to administration services, support infrastructure for charterers, radio and rescue facilities, garbage disposal and fuelling facilities. CO is also entitled to charge an administration fee in addition to the management fee for the provision of additional services such as the carrying out of timely repairs and maintenance to the boat, maintaining the boat in seaworthy condition, pre-charter training and assistance, including briefing charterers on the limitations of the boat's permit regarding safe ports and geographical limitations.

You have also provided your own projections of income and expenditure for the ten years commencing on the date of purchase. These indicate that the venture will return a profit in year 6, when the bulk of the loan obtained to purchase the boat has been paid off.

The vessel is registered and insured as a charter vessel.

Reasons for decision

A boat hire activity must amount to the carrying on of a business in order to claim an amount that exceeds the assessable income from the use of the boat. The excess deductions are not allowed where the activity is only a passive receipt of income from property.

If you only provide a boat under a lease then generally you are not carrying on a boat hiring business and so you would not be entitled to the excess deductions for your boat. If a boat owner receives money from hiring out their boat directly, or under a management agreement with a charter operator, it is still a requirement for this activity to amount to the carrying on of a business in order to claim the excess deductions that would otherwise be prevented by section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997).

Indicators of a management agreement can include:

· The boat owner shares in the risks and rewards of the business activity.

· The contract for the provision of the boat to the hirer highlights that the charter operator is acting as the agent of the boat owner in the boat hire arrangement.

· Boat owner derives the income and incurs expenses relating to the charter of the boat to third parties.

· Boat owner maintains a sufficient level of control over the boat.

You have entered into a management agreement that meets the above indicators.

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

The prospect of profit is 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 financial 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 entered into the management agreement with CO and have provided projected income estimates for years 1 - 10 of your ownership of the boat. These estimates are based on job profit and loss accounts compiled by CO from actual hire records but incorporate interest and depreciation charges that are not included in the job profit and loss figures. Your estimates indicate that you can expect a profit over the ten year period. The venture will become profitable after year 5 when the bulk of the loan account has been repaid.

The boat is only available for private use for a fixed number of days in any year at times when it is not required for hire purposes. Any unused private use days cannot be carried forward to a future year or otherwise accumulated.

When applying your facts 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.