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Ruling

Subject: Boat hire business and depreciation.

Questions and Answers:

Are carrying on a business of boat hire?

Answer: Yes

If you elect to be a Small Business Entity, can you allocate your boat into a general small business pool?

Answer: Yes.

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You purchased a boat as a 'going concern' with the intention of carrying on a boat chartering business. You did not borrow to purchase the boat.

You entered into a charter boat management agreement with a charter operator that charges a service fee, a monthly amount for berthing and fees for each turnaround, cleaning, general maintenance, client booking, client training and assistance, etc.

Your plan is to operate the charter business for a period, then dispose of the boat. You are prepared to contribute further capital if required to make the business a success. You have your own boat and have no intention of using the houseboat for private use.

You forecast a profit over the period you hold the boat.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 26-47

Income Tax Assessment Act 1997 Section 328-110

Reasons for decision

Carrying on a business of boat hire

Section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997) limits expenses from boat hire arrangements from being deductible unless this activity amounts to the carrying on of a business.

Taxation Ruling TR 2003/4 is about boat hire arrangements. Paragraph 55 of TR 2003/4 states whether letting of a boat on charter amounts to the carrying on of a business, rather than the passive receipt of income, will depend on the level of services provided in addition to the hire of the boat. These services may be provided directly by the boat owner or through the charter operator as the manager of the boat owner's activity.

Paragraph 56 of TR 2003/4 states services which may be provided to the hirer, which could establish that a business is being carried on by the boat owner, include 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; permits for entrance to various areas; flights and other transport; and hotel and dinner reservations.

Paragraph 84 of TR 2003/4 states further factors which may indicate that the boat hire activity is a business include: the boat is available for charter to the general public; the boat owner owns or leases the appropriate licences and permits required to carry on the charter activity; the charter operator (whether the boat owner operates the activity directly or through another party) has the appropriate experience; the owner and / or operator have appropriate indemnity cover; and the use of the boat is not primarily directed at private use.

Importantly, paragraph 17 of TR 2003/4 states, for the purposes of determining whether a business is being carried on, it must be determined the boat owner entered into the boat hire activity with an intention to make a significant commercial or financial gain from it. All of the income expected to be received from, and all of the costs associated with, the boat hire activity are taken into account to determine what profit, if any, is expected. The expenses necessarily include the decline in value of the boat over the intended term of the activity and any interest incurred.

Where an objective analysis of the boat hire activity demonstrates that the boat owner carries it on with a bona fide expectation of making a commercially realistic profit, this indicator will be satisfied. However, where an objective analysis of the boat charter activity indicates that the overall costs will exceed the income derived over the anticipated life of that activity, it is not credible to conclude that it is undertaken with the requisite intention of profit.

In your case, you are carrying on a business of boat hire because your boat is hired through an appropriate charter operator arrangement and because your boat hire activity has the potential for profit.

Small business entity

Section 328-110 of the ITAA 1997 states you are a small business entity for an income year (the current year) if you carry on a business in the current year and one or both of the following applies:

§ you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million;

§ your aggregated turnover for the current year is likely to be less than $2 million.

If you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset.

There are two kinds of pools: (a) a general small business pool to which depreciating assets having effective lives of less than 25 years are allocated; and (b) a long life small business pool to which depreciating assets having effective lives of 25 years or more are allocated.

The annual depreciation deduction for a pool is calculated under section 328-190 of the ITAA 1997. A general small business pool's opening balance is multiplied by the depreciation rate of 30% and a long life small business pool's opening balance is multiplied by the depreciation rate of 5%.

Further deductions of half the normal rate (15% or 2.5%) are allowed for the taxable purpose proportions of assets added to the pool during the year (regardless of when in the year the assets were acquired) and for additional depreciable expenditure (second element of cost) incurred during the year on existing pooled assets.

In your case, you are a small business entity because your aggregated turnover for any income year is expected to be less than $2 million. It follows you may choose (however not compulsory) to use depreciation for small business entities under Subdivision 328-D of the ITAA 1997.