Edited version of private advice

Authorisation Number: 1052060488037

Date of advice: 10 March 2023

Ruling

Subject: Boat deductions

Question

Are you entitled to a deduction for the purchase and running costs of a boat?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a sole trader, carrying on a business as a NDIS support worker.

Your business includes taking your clients to appointments, community events and social and recreational activities on a regular basis.

The clients showed an interest in a particular recreational activity.

To try and reduce the cost of the activity for yourself and your clients you purchased a depreciating asset.

You have not had any private use of the depreciating asset to date however you estimate that you will use it 60-70% of the time for the purpose of the activity.

You will incur running costs when you use the depreciating asset.

The clients do not pay you any amounts for the activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Reasons for decision

You can deduct from your assessable income any loss or outgoing to the extent that:

•         it is incurred in gaining or producing your assessable income, or

•         it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except where the loss or outgoing is capital or private in nature or a provision prevents you from deducting it (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

You can deduct an amount equal to the decline in value for an income year of a depreciating asset you hold to the extent that you use the asset for a taxable purpose (Division 40 of the ITAA 1997). A taxable purpose includes the purpose of producing assessable income (subsection 40-25 of the ITAA 1997).

The running costs for the depreciating asset fall for consideration under section 8-1 of the ITAA 1997 whereas the purchase costs fall for consideration under Division 40 of the ITAA 1997.

A number of significant court decisions have determined that, for an expense to be considered to have been incurred for the purpose of producing assessable income:

•         it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense

•         there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income, and

•         it is necessary to determine whether there is the requisite connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income.

The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

Although the essential character test is one which is objectively applied, the courts have indicated that a taxpayer's subjective intentions may be relevant. In Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613, the Full Federal Court reviewed various authorities and concluded that, in determining the essential character of expenditure, purpose is not necessarily the criterion or test of deductibility but that, in cases of voluntary expenditure, the purpose for which the expenditure was incurred may be relevant.

Application to your circumstances

In your case, the operations or activities by which you most directly gain or produce your assessable income is that of providing support to your clients, including support to enable them to participate in recreational activities. You derive your income from providing those support services and not from providing the recreational activity itself. In addition, you do not charge your clients any amounts in relation to the use of the depreciating asset, and as such, there is no nexus between the expenses you incur for the depreciating asset and any assessable income.

Where an expense produces no income, it is sometimes necessary to consider the purpose for which an expense has been incurred. In your case, the main reason you have incurred the expenses for the depreciating asset is to reduce the cost of the recreational activity for yourself and your clients, and not for the purpose of gaining or producing assessable income.

As such you are not entitled to a deduction for the decline in value of the depreciating asset under Division 40 of the ITAA 1997 or for the running costs under section 8-1 of the ITAA 1997.