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Edited version of your written advice
Authorisation Number: 1012721119657
Ruling
Subject: Company use of boat for business and private purpose
Questions and Answers:
1. Based on the facts provided, would a boat you acquire be a business asset for which you can claim relevant deductions that are not limited or not quarantined under section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
2. If you are to have the boat customised to accommodate special needs clients, can you claim depreciation for the cost of the entire boat, including the modifications?
Yes.
3. If you use the boat, free of charge, on special charity days that relate to your market segment, can you claim the relevant costs as business marketing expenses?
Yes
4. Will there be a limit your deductions and depreciation if the boat is used for private use?
No. However, you may be liable to pay fringe benefits tax (FBT) in relation to the provision your
boat for use by your director and/or employees.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You are a company that carries on a business for which you occasionally hire boats to serve your clients and are considering purchasing your own boat. You estimate the use of the boat will add a small profit to your business. You also estimate around 10% to 20% of the boats usage will be by your director.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 26-47
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 328
Fringe Benefits Tax Assessment Act 1986 Division 9A
Reasons for decision
Section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997) is about non-business boating activities. The object of this section is to prevent deductions from boating activities that are not carried on as a business being offset against other assessable income.
Subsection 26-47(3) therein provides four exceptions to the non-business boating rules, where a boating activity is accepted as being for business use, namely:
(a) holding a boat as your trading stock;
(b) using a boat (or holding it) mainly for letting it on hire in the ordinary course of a business that you carry on;
(c) using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on;
(d) using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.
In addition, subsection 26-47(4) therein provides an exception to the non-business boating rules, to so much of an amount you incur in providing a fringe benefit.
In relation to general deductions, section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital nature, private or domestic nature or relate to the earning of exempt income.
In relation to depreciation, Division 40 and Subdivision 328-D of the ITAA 1997 allow deductions to be claimed over time in respect of many expenses of a capital nature. Here, you can deduct an amount equal to the decline in value of a depreciating asset that you hold. That decline in value is generally measured by reference to the effective life of the asset.
In your case, your intended use of the boat falls under paragraph 26-47(3) (c) of the ITAA 1997 because it will be mainly used for transporting the public (ie, your clients) in the ordinary course of a business that you carry on. It follows there will be no limit to or quarantining of your deductions. Therefore, you can claim the relevant deductions for decline in value (depreciation) in relation to your original purchase plus for any modifications you may later make to your boat. As for charity use of the boat, this appears to serve a marketing/promotional purpose for your business and therefore the relevant costs will be deductible under section 8-1 of the ITAA 1997.
As for the use of your boat by your director, it will most likely constitute the provision of a fringe benefit, for which you would be required to pay FBT (the current rate is 46.5%) on the market value of the provision (ie, a similar boat hiring fee) provided to your director.