Drysdale and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2007/0772)
Judgment date: 14 May 2008
Date published: 24 July 2008
Decision outcome: Favourable

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether the Applicant was carrying on an enterprise for the purposes of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Overview of facts:
1. The Applicant expended approximately $425,000 on a boat and associated acquisitions. At or about the time he purchased the boat, the Applicant entered into a "sub-dealers" agreement with the vendor, under which he would receive $5,000 commission for each boat of the same type sold within Victoria during the term of the agreement. | 2. The Applicant claimed that: a. he expected to earn commission of approximately $20,000p.a.; b. he did not receive any commissions as no Dufour 40 yachts were sold in Victoria; c. the Boat was primarily moored at the Docklands Marina; d. the Boat was displayed at two Sandringham Boat Shows; e. he showed the Boat to several potential purchasers, although these people did not provide witness statements; and f. he operated a mussel farm six days a week. | a. he expected to earn commission of approximately $20,000p.a.; b. he did not receive any commissions as no Dufour 40 yachts were sold in Victoria; c. the Boat was primarily moored at the Docklands Marina; d. the Boat was displayed at two Sandringham Boat Shows; e. he showed the Boat to several potential purchasers, although these people did not provide witness statements; and f. he operated a mussel farm six days a week. | 3. The Applicant took no steps to enter into a "direct sales agency agreement" with Dufour after the "sub-dealers" agreement came to an end. | 4. The Boat was valued, as at 25 October 2007, by an expert valuer at $285,000 (plus or minus 5%), meaning the Boat depreciated at about $46,907 per annum. | Issues decided by the court or tribunal | The Tribunal found that the acquisition of the boat and associated acquisitions by the Applicant were not creditable acquisitions, as the acquisitions were not made in carrying on an enterprise. The absence of relevant indicia of a business was not consistent with the Applicant carrying on an enterprise. In this regard, the Tribunal contrasted the facts of this case with the indicia of a business as evidenced in Hostess Marine v Commissioner of Taxation ([2006] FCA 1651) and Peerless Marine v Commissioner of Taxation ([2006] AATA 765) and found that few of the features in those cases existed in the case of the Applicant (see paragraph 26 of the decision). | Further, the Tribunal found that it was necessary for the Applicant to have a reasonable expectation of profit or gain. SM Handley acknowledged that the Applicant may well have purchased the boat with an intention to make a profit, but the circumstances of the matter meant that that expectation was not reasonable. | Thirdly, the Tribunal found that there was a private recreational element to the Applicant's acquisition, which also worked against a finding that the Applicant was carrying on an enterprise. | The Tribunal also found that it was legitimate for the Commissioner to take the depreciation of the vessel into account in considering whether there is a reasonable expectation of a profit.

Issues decided:
The Tribunal found that the acquisition of the boat and associated acquisitions by the Applicant were not creditable acquisitions, as the acquisitions were not made in carrying on an enterprise. The absence of relevant indicia of a business was not consistent with the Applicant carrying on an enterprise. In this regard, the Tribunal contrasted the facts of this case with the indicia of a business as evidenced in Hostess Marine v Commissioner of Taxation ([2006] FCA 1651) and Peerless Marine v Commissioner of Taxation ([2006] AATA 765) and found that few of the features in those cases existed in the case of the Applicant (see paragraph 26 of the decision). Further, the Tribunal found that it was necessary for the Applicant to have a reasonable expectation of profit or gain. SM Handley acknowledged that the Applicant may well have purchased the boat with an intention to make a profit, but the circumstances of the matter meant that that expectation was not reasonable. Thirdly, the Tribunal found that there was a private recreational element to the Applicant's acquisition, which also worked against a finding that the Applicant was carrying on an enterprise. The Tribunal also found that it was legitimate for the Commissioner to take the depreciation of the vessel into account in considering whether there is a reasonable expectation of a profit.

ATO view of decision:
The decision confirms that a taxpayer is required to demonstrate that sufficient indicators of a business exist to establish that activities have been done in the form of a business for the purpose of paragraph 9-20(1)(a) of the GST Act - see generally Miscellaneous Tax Ruling MT 2006/1. | One of the indicators of a business is the prospect of profit. The decision is consistent with the Commissioner's view, as outlined in Taxation Ruling TR 2003/4 (Income tax: boat hire arrangements) at paragraph 17, that a taxpayer should take into account the decline in value of the boat in determining whether that taxpayer has an expectation of making a commercially realistic profit from the undertaking. | The decision also confirms that the depreciating value of an asset should be taken into account when determining whether there is a reasonable expectation of profit or gain for the purposes of paragraph 9-20(2)(c) of the GST Act.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 (Cth) 7-1 9-20 9-20(1)(a) 9-20(2)(b) 9-20(2)(c) 11-5 11-5(a) 11-15 11-5(a) 11-15 11-15(2)(b) 11-20 69-5(1) Income Tax Assessment Act 1997 (Cth) 26-50
Case references: In Re The Spanish Prospecting Company Ltd (1911) 1 Ch 92 Commissioner of Taxation v Slater Holdings Limited [1984] HCA 78 84 ATC 4883 Spassked v Commissioner of Taxation [2003] FCAFC 282 2003 ATC 5099 Ferguson v FCT (1979) 79 ATC 4261 (1979) 26 ALR 307 (1979) 9 ATR 873 Hostess Marine Pty Ltd v Commissioner of Taxation [2006] FCA 1651 79 ATC 4261 Peerless Marine Pty Ltd and Commissioner of Taxation [2006] AATA 765 2006 ATC 2419
Subject references: Carrying on an enterprise Reasonable expectation of profit or gain Private recreational pursuit or hobby