Edited version of private advice

Authorisation Number: 1051565878138

Date of advice: 19 August 2019

Ruling

Subject: Deductibility of boat depreciation and running costs

Question

Is the purchase of a boat and its ongoing running costs tax deductible for the business?

Answer

No

This ruling applies for the following period:

Financial Year ending 30 June 2020

The scheme commences on:

N/A

Relevant facts and circumstances

The Trustee for a Trust (the Taxpayer) operates a franchise business. The activities of the business include supplying and installing outdoor signs, indoor signs, vehicle signs (wraps) and boat signs (wraps). The Taxpayer would like to purchase a boat and claim its depreciation and ongoing running costs as it will be used for demonstration purposes to advertise the business' capabilities to customers.

The boat will be wrapped in the Taxpayer's branding to promote the business, used for trade shows and be displayed out the front of the store to promote the offer. The boat will also be used on the water for entertaining clients and to promote the quality of the wrap. The client contends that this is a necessary expense to incur in order to win more business in this niche market of boat signs (wraps).

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act 1997

Section 8-5 of the Income Tax Assessment Act 1997

Section 12-5 of the Income Tax Assessment Act 1997

Paragraph 26-47(3)(d) of the Income Tax Assessment Act 1997

Section 40-25 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The depreciation of a boat and its ongoing running costs are not tax deductible for your business. Owning a boat is not essential to the efficient conduct of your business, as there is not enough nexus between your core business activities and the ownership of a boat. Rather, we consider the proposed purchase of a boat a lifestyle asset.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contains a positive (subsection 8-1(1)) and a negative (subsection 8-1(2)) limb in relation to general deductions.

The positive limb provides for a deduction for losses or outgoings to the extent to which they are necessarily incurred in carrying on a business.

A number of court cases have determined that, in order to qualify for a deduction under subsection 8-1(1), one must demonstrate a sufficient nexus between the outlay and the derivation of assessable income (Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; 4 ATD 187; (1937); 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147).

Your business derives its assessable income from such activities as production and installation of outdoor signs, indoor signs, vehicle and boat wraps. You are not going to use the boat in those activities.

Although we acknowledge that you intend to use the boat to demonstrate one type of your product and entertain potential and current customers, the expenses associated with those activities are not necessarily incurred in running your business. Therefore, the running costs associated with the use of the boat do not satisfy the test in the positive limb under subsection 8-1(1).

Paragraph 8-1(2)(b) in the negative limb specifically denies a deduction where the outgoings are of a private or domestic nature.

It is a question of fact whether a loss or outgoing is of a private or domestic nature. We consider that the primary purpose of you owning a boat is for private boating activities. Therefore, the running expenses in relation to this boat will be of private and domestic nature and will be specifically excluded by paragraph 8-1(2)(b) of ITAA 1997.

According to subsection 8-5(1) of ITAA 1997, a deduction is available outside this Division if it is allowed under any other provision of this Act.

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose.

Taxable purpose is defined in paragraph 40-25(7)(a) of the ITAA 1997 to mean the purpose of producing assessable income.

In your case, the boat you propose to purchase is not going to be used in carrying out your primary business activities, i.e. is not going to qualify as an income-generating asset. Therefore, depreciation of the boat is not deductible under section 40-25 of the ITAA 1997.

Section 12-5 of ITAA 1997 provides a list of specific deductions, including the provisions dealing with deduction in relation to boats under section 26-47.

Section 26-47 is about non-business boating activities. The object of this section 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 quarantining rule in subsection 26-47(2) 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 as exceeds your assessable income from 'using or holding boats' for that year.

Subsection 26-47(3) states that the rule in subsection (2) does not apply to amounts that are attributable to one or more of the following boating activities:

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.

To satisfy one of the exceptions in subsection 26-47(3), it is necessary that the boating activity amounts to the carrying on of a business.

In addition, subsection 26-47(4) provides that the quarantining rule in subsection 26-47(2) does not apply to amounts that are incurred in providing a fringe benefit.

Following from the information you have provided, you have no intention to hold the boat as trading stock, to use or hold it for hire or transport purposes in the ordinary course of your business, or to provide a fringe benefit. Therefore, we only need to consider the exceptions under paragraph 26-47(3)(d). To satisfy this, you must demonstrate that the use of your boat as a means to demonstrate the quality of your product is essential to the efficient conduct of a business that you carry on.

Taxation Ruling TR 2003/4 Income tax: boat hire arrangements (TR 2003/4) explains in detail the Commissioner's view on the operation of section 26-47 of ITAA 1997. While TR 2003/4's main focus is on boat-hire arrangements, it gives a comprehensive explanation of the exemption available under paragraph 26-47(3)(d).

Paragraph 106 of TR 2003/4 states that the taxpayer must be able to satisfy the requirement that the boat is more than an aid or advantage to the conduct of the business.

In Re Sinclair and FC of T [2000] AATA 1168; 2001 ATC 2092; (2000) 47 ATR 1001 (Sinclair), the taxpayer used his boat to demonstrate navigational aids. After examining the evidence provided, Mr 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 of selling computer programs.

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

In Case R63 84 ATC 457; (1984) 27 CTBR (NS) Case 117 934 (Case R63), the taxpayer carried on a business of an advertising agency and claimed a deduction for costs of a motor cruiser which was used for entertaining clients and potential buyers. Mr P M Roach (Member) upheld the Commissioner's decision to disallow the deduction and indicated that 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.

The decisions in the above mentioned cases suggest that the benchmark of what is considered to be 'essential to the efficient conduct of a business' is high. The requirement will not be satisfied if the use of the boat is merely convenient, an aid or economical.

The circumstances of your case are somewhat similar to Sinclair and Case R63 on the basis that your business of supplying and installing signs and wraps would still be carried out efficiently without owning a boat. We do not agree with the contention that purchasing and using a boat would be essential to the efficient conduct of your business, as there is not enough nexus between your core business activities and the ownership of a boat. Rather, we consider the proposed purchase of a boat a "lifestyle asset" that might merely provide an aid or advantage to the conduct of your business. On this basis, the exception in paragraph 26-47(3)(d) does not apply to your circumstances.

Conclusion: the depreciation of the boat and its ongoing running expenses are not tax deductible for your business.