Edited version of private advice

Authorisation Number: 1012647420026

Ruling

Subject: Deductibility of expenses incurred in running and holding a boat

Question

Can you claim any of the holding or running expenses you incur for a boat that you use for private purposes, where you receive a payment from a related entity for allowing it to advertise on the exterior of your boat and on the sail?

Answer

No

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• your private ruling application

• a copy of the fact sheet, Non-business boating activities: overview

You own a boat that is used in organised events for club racing during the week and on weekends. It is also used in organised club cruising events and non-organised cruising. The organised club events would be estimated to be 75% of the usage of the boat.

You receive an annual payment from an associated entity (company) to allow advertising to be put on the exterior of the boat and on the sail. You are a director of this company.

The advertising on the boat is visible when it is berthed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 26-47

Reasons for decision

Summary

Where the boat is used for private purposes, the running costs and holding expenses will have been incurred for reasons other than to advertise products and to derive assessable income, therefore, no deduction will be available. The advertising is incidental to the normal use of the boat rather than the boat being used for the dominant purpose of advertising.

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. Accordingly, the boat expenses are deductible if they are incurred in the course of deriving assessable income.

The object of section 26-47 of the ITAA 1997 is to improve the integrity of the taxation system by preventing deductions from boating activities that are not carried on as a business, being offset against other assessable income. The rule 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 (under section 8-1), exceeds your assessable income from using or holding boats for that year. It is deciphering between the situations, where a boat may be leased out to a third party who then uses it in their business (the owner derives passive income), as opposed to where the boat owner conducts a business with the boat and they provide all the necessary associated services. It uses the terms non-business (passive income) and business. It does not apply to situations where boats are used for private purposes only, as the expenses are not deductible under section 8-1 of the ITAA 1997.

The key issue is that, the amounts have to be deductible under section 8-1 of the ITAA 1997 in the first place, before we consider the application of section 26-47 of the ITAA 1997. Example 2.2 in the explanatory memorandum to this section, exemplifies this. The example is :

Phil, a plumber, paints the name of his plumbing business on the side of his private boat. He can deduct the cost of painting the advertisement because it is not an amount 'relating to using or holding the boat' and so is not affected by the measure. He cannot deduct his other boating expenses, such as those for depreciation or interest costs on the boat, because they are private expenses not incurred in gaining income and so not deductible in the first place.

The cost of painting the sign on the boat is incurred in advertising his business and would therefore be deductible under section 8-1 of the IIAA 1997.

In the case, Berret v FC of T (1999) 41 ATR 1262;99 ATC 2127, the car expense claimed was disallowed on the basis of a lack of nexus to earning assessable income. Similarly, a claim for boat expenses must be related to the use of the boat trips made. In your case the boat trips are for private purposes and will occur whether or not there is advertising on the boat.

It is considered that the mere carriage of signage, of itself does not change the above application of interpreted law regarding use. In Taxation Determination TD 92/162 Income Tax: is the cost of a corporate box with associated advertising signs allowable as a deduction, the mere fact that a corporate box carried advertising material was not sufficient to make the whole cost of the box deductible as an advertising expense. The corporate box constituted the provision of entertainment and was therefore denied deductibility under subsection 51AE(4) of the Income Tax Assessment Act 1936 (ITAA 1936). Similarly, the carriage of signage on the boat cannot, of itself, overcome the dominant private aspect of the sailing use, regardless of the advertising intent.

The relevance of subjective purpose, motive or intention, and its effect on deductions under subsection 51(1) of the ITAA 1936, is considered in Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings. This ruling considers the Full High Court decision of Fletcher & Ors v FC of T 91 ATC 4950; (1991) 22 ATR 613. Although it considers deductibility under ITAA 1936, subsection 51(1) equivalent to section 8-1 of the ITAA 1997.

Paragraph 2 of TR 95/33, states that the essential character of an expense is a question of fact which is to be determined by reference to all the circumstances involved. Paragraphs 4 to 6 and paragraphs 106 to 110 further states:

4. However, if the outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing.

5. If, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, it can be concluded that the expenditure is genuinely, and not colourably, used in an assessable income producing activity, a deduction is allowable for the loss or outgoing.

6. If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective (e.g., to derive exempt income or the obtaining of a tax deduction), then the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher at 91 ATC 4957-8; 22 ATR 621-3.

'essential to the efficient conduct of a *business'

106. Paragraph 26-47(3)(d) provides that one of the exceptions to the quarantining rule in subsection 26-47(2) is where the taxpayer is:

using [the] boat for a purpose that is essential to the efficient conduct of a *business that [they] carry on.

The taxpayer must be able to satisfy the requirement that the boat be more than an 'aid' or 'advantage' to the conduct of the business.

107. In Re Sinclair ATR at 1005; ATC at 2096 the taxpayer used his boat to demonstrate navigational aids. After examining the evidence provided, KL Beddoe (Senior Member) concluded that the boat was an aid and provided advantages but it was not considered 'essential to the efficient conduct of the business'.

108. In Case 6/2001 AATA 965; 2001 ATC 142 at 148; (2001) 48 ATR 1176 at 1185 the taxpayer owned a catamaran. The taxpayer's husband carried on an accounting business and leased part of the boat as an office. The taxpayer provided secretarial services from the boat. In disallowing deductions claimed for expenses associated with the maintenance of a boat, and interest and loan expenses, Mr KL Beddoe (Senior Member) said 'convenience and economy may suggest efficiency but they do not suggest essentiality.'

109. In Case R63 84 ATC 457; (1984) 27 CTBR (NS) Case 117 934 the taxpayer was a company carrying on the *business of an advertising agency. The taxpayer claimed deductions for costs associated with a motor cruiser. The taxpayer claimed it used the boat for entertaining clients and potential clients. The deductions were disallowed by the Commissioner. When agreeing that the claims were not allowable Mr PM Roach (Member) indicated that the requirement in question meant that the conduct of the taxpayer's *business required for its efficient conduct using a boat of the type in question. The use of the boat was not essential to the efficient conduct of the *business if the *business could be conducted efficiently without the use of such a boat.

110. The requirement will not be satisfied if use of the boat is merely convenient, an aid or economical. The boat must be essential to the efficient conduct of the *business.

You intend to put your company's advertising signage on a boat owned by you, a director of the company. The boat is currently used 100% for private use and its use will not change once the advertising signage is put on the boat.

When considering if any deductions are allowable in relation to the running and holding costs of the boat, the use of the boat must be examined to ascertain the true and dominant purposes of the use. The use of the boat would still be considered to be private or domestic in nature, irrespective of any ancillary consideration or purpose, such as having signage on it. The sailing of the boat is not considered to be undertaken in the course of generating the income that your company is going to pay to you for allowing the signage to be put on the boat.

Consequently, such sailing is not part of business use and the advertising is incidental to the normal use of the boat rather than the boat being used for the dominant purpose of advertising, therefore, no deductions will be allowable in relation to the running and holding expenses of the boat.