Edited version of private advice

Authorisation Number: 1052000327106

Date of advice: 29 June 2022

Ruling

Subject: Am I in the business of boat charter operator?

Question

Is the boat charter operation you intend to conduct considered to be carrying on a business for the purposes of section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Taxpayer ABC (you) obtained an ABN and registered for Goods and Services Tax (GST).

You paid a small deposit to acquire a vessel, named Vessel DEF (DEF) for under $XXX from XYZ Pty Ltd (XYZ)

To purchase DEF, you intend to borrow half and the remaining balance will be sourced by private capital.

You intend to purchase DEF as a going concern and have an unsigned draft management agreement (the draft agreement) to employ XYZ as the charter manager.

Due to the age of DEF, you intend to operate for some years, at which time the vessel will reach the end of commercial life and be sold.

The proposed location for this operation is based in a state of Australia.

The vessel will be moored locally.

You have conducted research into the industry, charter operators and obtained advice from industry and financial experts. Your accountant has projected that the venture is likely to be profitable over the specified period.

You intend to offer the charter services to your clients.

The draft agreement version M.N dated in 20XX states, in the recitals that XYZ will act as your agent in managing the charter operations of the vessel.

You have selected XYZ as Charter Manager, to maximise profit, size, and scale.

The draft agreement provides the following:

•         Clauses 4 and 5 provide the provision of services provided by XYZ under the draft agreement including:

o   4.1.1 and 4.1.6 - manage promotion, advertising, and marketing of the vessel to maximise charter fees and administration costs;

o   4.1.2 - charter the vessel to suitable persons at commercial rates to members of the general public;

o   4.1.3 - provide services to hirers and potential hirers ancillary to the charter of the vessel including but not limited to, inquiry and booking services, support infrastructure for the hirers while the vessel is on charter, turnaround services, ensuring that a two way radio is in operation between the company and the yacht and garbage disposal and fuelling facilities.

o   4.1.4 - provide office facilities for the chartering of the vessel.

o   4.1.5 - arrange and/or co-ordinate breakdown services or search and rescue as required.

o   4.1.6 - attend to the initial payment of all third party costs and expenses.

o   4.1.7 - generally maintain, control and supervise all necessary acts in an efficient and proper manner.

o   4.1.8 - facilitate all charter bookings by Charterers

o   5.1.1 - carry out repairs and maintenance to the vessel

o   5.1.2 - arrange or supply suitable mooring, docking and storage and berth facilities in the Whitsundays.

o   5.1.3 - supply the transfer between location A and location B depending on departure and arrival of Charterers.

o   5.1.4 - arrange and supply temporary relocation of vessel in the event of emergency.

o   5.1.5 - repairs and maintenance ensuring equipment is replaced as necessary.

o   5.2 - pre-charter training and assisting, briefing Charterers in relation to limitations of vessel, geographical limitations and arranging for suitable qualified skippers and crew.

•         Clause 6 and 8 provides for Revenue, Fees and Expenses, including:

o   6.1.8 - allows the charter operator to incur up to a specified dollar expense without consultation to the owner.

o   6.1.9 - the owner agrees to pay to the charter operator a management fee

o   6.3 - in the event that hiring fees are insufficient to cover costs and expenses, the owner agrees to pay the difference within a reasonable number of days.

o   6.8.1 - costs relating to turnaround services

o   6.8.2 - credit card fees arising for booking and collecting money for hire of the vessel

•         Clause 7 provides that XYZ will provide you with monthly reports which categorises expenses between holding the vessel and actual use of the vessel. The monthly report will detail the number of days the vessel was used for charter and the number of days the vessel was used for personal use.

You have allowed a reasonable number of days per year of personal use.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-47

Reasons for decision

Summary

Section 26-47 of the ITAA 1997 provides rules for deductions for non-business boating activities by limiting the deductibility of expenses incurred from boat hire activities. Paragraph 26-47(3)(b) of the ITAA 1997 provides an exemption when the activities of the boat are in the ordinary course of that business. In applying the business indicators provided in Taxation Ruling TR 2003/4: Income tax: boat hire arrangements and Taxation Ruling TR 97/11: Income tax: am I carrying on a business of primary production? to your intended boat hire activity, you are considered to be carrying on a business for the purpose of section 26-47 of the ITAA 1997.

Detailed reasoning

Section 26-47 of the ITAA 1997 provides rules for deductions for non-business boating activities. This provision limits the deductibility of expenses incurred from boat hire activities unless such activity amounts to the carrying on of a business.

In most cases, costs of boat charter activities can only be used to reduce assessable income received from boat charter activities. They cannot be deducted from assessable income from other sources.

The exception to this is when you satisfy the requirements of paragraph 26-47(3)(b) of the ITAA 1997, which requires a boat owner to use or hold the boat for hire in the ordinary course of a business they carry on. That is, the boat owner's activities in respect of the boat must amount to the carrying on of a business and letting the boat on hire must be in the ordinary course of that business. In addition, this business must be carried on by the boat owner. If the boat owner is merely in receipt of income for letting the boat to a charter operator, who uses that boat in their business of letting it on hire, this will not satisfy the requirements of paragraph 26-47(3)(b) for the boat owner.

Taxation Ruling TR 2003/4 Income tax: boat hire arrangements discuss the Commissioner's view on boat hire arrangements and the application of section 26-47 of the ITAA 1997 to such arrangements. Further guidance for determining if you are carrying on a business can be found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business for primary production?

Using a boat mainly for chartering it on hire in the ordinary course of a business that you are carrying on

Paragraph 9 of TR 2003/4 provides that a managing agent may be employed to assist in boat charter activities. However, this activity must be more than passive receipt of income from the boat.

Where a boat owner enters a contract with a charter operator, two issues must be considered:

•         Is the boat being used in the owner's business, or does the agreement represent the lease of the boat to the charter operator's business; and

•         In chartering the boat to customers, either by you directly, or through the charter operator, does the activity amount to more than the passive receipt of income from boat rental?

The extent of your participation in and control over the operation of the charter activity, as well as the extent to which you share in the risks and rewards of it, assists in determining the character of the arrangement. This is indicated by the terms of your draft agreement with XYZ.

You intend to purchase a vessel and have drawn up a draft agreement with XYZ. Under the draft agreement, XYZ will act as your agent with exclusive management of the boat for the term of the agreement. The agreement confirms the following:

•         XYZ acts as your agent and manages your boat on your behalf

•         You are entitled to all income from the charter of your boat

•         You pay management and service fees to XYZ for the services they provide under the agreement

•         You reimburse XYZ for costs incurred on your behalf and

•         You are responsible for payment of mooring costs, repairs, and insurance.

The terms of the draft agreement between yourself and XYZ demonstrate the characteristics of a management agreement as opposed to that of a rental or lease agreement.

Carrying on a business or passive income

Although having satisfied the requirement of a management arrangement, it must still be determined whether your boating activity amounts to the carrying on of a business or is merely the passive receipt of income from the charter of your vessel to XYZ.

Paragraphs 55 and 56 of TR 2003/4 state the level of additional services provided with the boat charter will determine whether the activity amounts to the carrying on of a business. These services may be provided directly by you, or by XYZ on your behalf.

TR 2003/4 provides examples of complementary services, as:

•         Customer inquiry and booking services

•         Issuing of accounts and processing of deposits and payments

•         Reception area for charter guests

•         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, entrance permits, flights and other transport, and hotel and dinner reservations.

Your agreement with XYZ includes a number of additional services to be provided in charter services. These services will be provided through XYZ as your agent and include:

•         Provide services to hirers and potential hirers ancillary to the charter of the boat including but not limited to:

o   inquiry and booking services

o   pre-charter training and assistance

o   support infrastructure for the hirers while the boat is on charter and waste disposal and fuelling facilities

o   on behalf of the owner, the charter operator will also arrange for suitable qualified skippers and crew as required.

•         Carry out the appropriate promotion, advertising, and marketing of the boat to maximise charter fees

•         Attach signage to the boat for promotional purposes

These additional services provided by XYZ, on your behalf, to hirers indicate you are carrying on a business and are not merely receiving passive income from hiring your boat.

Additional indicators of carrying on a business

Taxation Ruling TR 97/11 provides a number of general principles which indicate whether a business is being carried on. Although this Taxation Ruling is directed at determining whether a business of primary production is being carried on, these principles apply to determining whether other forms of activity amount to the carrying on of a business.

TR 97/11 lists the relevant indicators as:

•         Whether the activity has a significant commercial purpose or character;

•         Whether there is more than just a mere intention to engage in business;

•         Whether there is a purpose of profit as well as a prospect of profit from the activity;

•         Whether there is repetition and regularity of the activity;

•         Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•         Whether the activity is planned, organised, and carried out in a business-like manner such that it is directed at making a profit;

•         The size, scale, and permanency of the activity; and

•         Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether you are carrying on a business of charter boating must be determined in accordance with the principles provided in TR 97/11.

Significant commercial purpose or character

This indicator requires a taxpayer be able to demonstrate the activity is carried on for commercial reasons and in a commercially viable manner. Your charter boat activity should be capable of producing a significant overall profit over the term of the activity and not implemented for private of tax benefits. The size and scale of your activity, its repetition and regularity and your intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

In your case, you:

•         Are in the process of acquiring the boat sourced through a mixture of private funds and a loan.

•         Have conducted research into the boat charter industry to determine the most significant site for boat chartering. You advise your research demonstrated there is a competitive advantage as being part of a charter fleet.

•         Intend to purchase the boat as a going concern and therefore will continue to engage the services of a local charter operator under an agreement;

•         Sought advice from numerous sources within the boat charter industry and financial experts; and

•         Have provided a specific projection which you advise indicates the operation will become profitable overall.

The steps you have taken demonstrate a commercial basis for entering into the boat hire arrangement, rather than for a private or tax minimising purpose. You have advised that your financial projection expects a profit to be made over the period. Your charter boat activity demonstrates significant commercial purpose and character.

Intention to engage in business

Carrying on a business requires actual action and is not the mere idea or desire to engage in business. The extent of actions you have taken will determine whether you are carrying on a business.

In your case, you have demonstrated an intention to engage in business and have taken multiple steps to commence in the business of charter boating, including:

•         Obtained an ABN and registered for GST,

•         Engaged with XYZ and prepared a draft agreement with XYZ as your charter operator; and

•         Conducted research and obtaining advice from industry and financial experts.

Prospect of profit

In order to demonstrate your boat hire activity amounts to the carrying on of a business, you must demonstrate an intention of making a significant commercial profit.

Demonstrating the prospect of profit comprises of three elements:

•         A genuine belief that profit is attainable;

•         The intention to produce profits from the boat charter activities; and

•         That the activities are capable of producing a profit.

It is not necessary for the activities to make a profit in every year of income. You may be carrying on a business even though you are making a small profit or loss in any given year.

In your case:

•         You have not confirmed the commencement date or term of your arrangement with XYZ however, you have indicated that you expect the lifespan of the boat

•         You have projected you would generate a profit and over the years.

You have demonstrated there is reasonable expectation you are undertaking this activity with the prospect of making a significant commercial or financial gain from it. Based on the projections you have provided; you have satisfied this requirement.

Activities of the kind carried on in a similar manner

A boat hire activity is more likely to be a business where it is conducted using business methods and procedures ordinarily used in boat hire activities carried on as a business.

TR 2003/4 and TR 97/11 provide factors which may indicate a boat hire activity is a business, including:

•         The volume of the sales;

•         The types of customers - wholesalers, retailers, the public at large, or friends and relatives;

•         The manner in which marketing takes place;

•         The sort of expenses you incur;

•         Capital investment;

•         Whether you own any licences or permits required;

•         Whether you and/or the operator have appropriate experience and indemnity cover; and

•         The use of the boat is not primarily private use.

In your case:

•         Your customers are the public as opposed to mainly friends and family;

•         You will market your boat for charter through your agent XYZ. This is common practice in the charter industry;

•         Your private use of the boat is a reasonable amount of time.

These factors indicate you are carrying on a business.

Organised, systematic, and business-like manner

Your boat hire activity is more likely to amount to carrying on a business where the activity is carried out in a systematic and organised manner. An individual may still be carrying on a business despite having poor organisational skills.

Factors which indicate your boating activity is conducted in a business-like manner are:

•         The keeping of appropriate business records;

•         Operations being carried out on a consistent basis and not haphazardly;

•         Advertisement for customers is carried out in a consistent and systemic manner;

•         Profitable activities are pursued, and unprofitable activities are discontinued; and

•         Personal boat use does not take priority over use for charter purposes.

In your case:

•         You will receive monthly reporting from XYZ,

•         You have conducted research into the industry, including research of the area of operation, charter operators and financial implications of the activity. You have projected profitability over a period and will review the profitability of your operation on an ongoing basis in consultation with XYZ;

•         Although you have not finalised the agreement with XYZ, you are completing due diligence before finalising the purchase of the boat and finalising the agreement.

•         Advertisement for boat hire will be carried out by XYZ in a consistent manner in accordance with their regular industry advertisement.

•         Personal use of the boat is intended to be minimal.

These factors indicate you are carrying on a business in an organised and systemic manner.

Repetition, regularity, size, and scale

Boat hire activities are more likely to amount to carrying on a business where they are regular and ongoing.

Additionally, the larger the scale of the activity, the more business-like it is likely to be. However, it is possible for you to carry on a business with small scale activities.

Your boat will be available for hire for the full year, other than private days and unavailability due to repairs. You intend for your boat to be chartered regularly. You have one boat available for hire and are carrying out your business on a small scale.

Application to your circumstances

The boat charter scheme you are implementing demonstrates an intention and prospect that the boat's use will be more than passive receipt of income from leasing the boat for rental income. You intend to engage XYZ to act as your agent. You intend to enter into a charter fleet, to maximise profit, size, and scale. You have taken steps to commence a business and share a similarity of other businesses in the same industry.

Applying the business indicators provided in TR 2003/4 and TR 97/11 to your intended boat hire activity, you are considered to be carrying on a business for the purpose of section 26-47 of the ITAA 1997.

Further issues for you to consider

This private ruling is binding on the facts provided. The main reason this activity as described is qualifying as a business is in regard to its overall profitability. You should review the actual details provided at the end of the first year of operation, should the boat charter income and expenses vary significantly from the financial information that you provided with this private ruling application, this private ruling decision will have no application. If this is the situation you could apply for a new private ruling based on the different facts if you are unsure of how the ATO view would apply to your circumstances.