Peerless Marine Pty Ltd and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (QT2005/79-90; 96-97; 324-327)
Judgment date: 8 September 2006
Date published: 3 November 2006

Summary of decision:

Overview of facts:
1. On or about 23 July 1998, Peerless Marine Pty Ltd ("Peerless") was incorporated. | 2. Peerless registered for Goods and Service Tax ("GST") with a start date of 1 July 2000. | 3. Mr Stephenson, director and shareholder of Peerless, was a successful businessman who had been interested in and involved with boats for almost 50 years. For the last 15 years he has had a particular interest in powered catamarans. | 4. Mr Austin and Mr Spriggens were experienced boat builders who also had established a reputation in the luxury boat market. | 5. Mr Austin and Mr Spriggens through AS Marine Pty Ltd were involved with the construction of White Spirit for Peerless. | 6. An experienced and reputable marine designer was commissioned for the design of White Spirit . | 7. Peerless was formed for the purpose of building luxury catamarans for sale. Between 1998 and 2002 it constructed a powered catamaran, White Spirit , intending it to be used as a demonstrator vessel to assist in securing future orders for similar vessels. | 8. The construction of the 53 foot power vessel was completed in 2001. It was constructed over a period in excess of three years at a total cost in the order of $2.5 million. | 9. Peerless developed a business plan in May 1998 and updated /reviewed the business plan in June 2000, March 2001, April 2002 and September 2002. | 10. Peerless was an exhibitor (without a vessel) at the Sanctuary Cove International Boat Show in 1999 and 2000. | 11. In May 2002, White Spirit was exhibited at the Sanctuary Cove International Boat Show. | 12. Peerless advised that White Spirit was used exclusively to promote and demonstrate the Applicant's capacity to build this type of product, and for the sale of White Spirit . There was no evidence of use of the boat for the private enjoyment of any person associated with the Applicant. | 13. Logbook hours for the vessel White Spirit were recorded in the Applicant's business diary. No separate logbook was maintained. | 14. As costs increased and the time for construction blew out Peerless determined to sell the vessel if possible. But until sold White Spirit was to be available as a demonstrator. Ultimately the notion of building other boats was abandoned and the efforts of Peerless were devoted to the sale of White Spirit . The vessel had been for sale from when it had been launched. Marine brokers were engaged for this purpose. | 15. Since the 2004 Sanctuary Cove International Boat Show, " White Spirit " was placed on the market for sale at a selling price of $2,500,000.00. | 16. White Spirit was sold in May 2006 for $1.25 million | Issues decided by the court or tribunal | Deputy President Mr Hack found: | 1. The losses or outgoings claimed by the Applicant in its income tax returns were allowable deductions under the ITAA . They were necessarily incurred by it in carrying on a business of boat builder, and were not of a private or domestic nature. They were not denied deductibility under section 26-50. | 2. In particular, the use of the boat at all time was essential to the efficient conduct of carrying on the business, thereby satisfying paragraph 26-50(5)(d) of the ITAA97 . | 3. Consequently, the expenses were not 'non-deductible expenses' for the purposes of subsection 69-5(3) of the GST Act. GST input tax credits were therefore allowable to the Applicant. | 4. On the question of whether the Applicant was carrying on a business, the Deputy President found that the Applicant was carrying on a business from the outset [para 87]. | 5. The Deputy President paid close attention to what motivated Mr Stephenson in setting up and then operating Peerless Marine. The Deputy President concluded that Mr Stephenson went into the venture with an expectation that there was a profit to be made from constructing large powered catamarans. His interest in those vessels and the enquiries he made led him to conclude that there was, and it was this gap in the market place that Mr Stephenson believed he was capable of filing, and profiting from. [para 76] | 6. The Deputy President did not accept that the losses and outgoings were of a private or domestic nature. Mr Stephenson did not cause Peerless to build White Spirit to satisfy his private wishes and demands, but rather he did so in his capacity as the driving force behind the applicant and not any capacity designed to satisfy his private desires. [para 95] | 7. The nature of the business being carried out started "with the intention of constructing White Spirit as a demonstrator as a boat builder, that is keeping [ White Spirit ] for that purpose once constructed....As costs increased and the time for construction blew out Peerless Marine determined to sell the vessel if possible. But until sold White Spirit was to be available as a demonstrator. Ultimately the notion of building other boats was abandoned and the efforts of Peerless marine were devoted to the sale of White Spirit in order to recoup some of the investment." [para 100] | 8. The Deputy President found on the facts of the case that there was sufficient connection between the incurring of the losses and outgoings and the gaining or producing of assessable income. | 9. On the question of whether the use of the boat was for a purpose essential to the efficient conduct of the business, the Deputy President found the use of White Spirit 'both during and after her construction, as a means of demonstrating to potential purchasers what it was capable of undertaking for those purchasers. That purpose was ... a purpose essential to the efficient conduct of its business." [para 125] | 10. As the boat expenses were not disallowed for the purposes of the ITAA, they were not 'non-deductible expenses' for the purposes of the GST Act. Input tax credits were therefore allowable.

Issues decided:
Deputy President Mr Hack found: 1. The losses or outgoings claimed by the Applicant in its income tax returns were allowable deductions under the ITAA . They were necessarily incurred by it in carrying on a business of boat builder, and were not of a private or domestic nature. They were not denied deductibility under section 26-50. 2. In particular, the use of the boat at all time was essential to the efficient conduct of carrying on the business, thereby satisfying paragraph 26-50(5)(d) of the ITAA97 . 3. Consequently, the expenses were not 'non-deductible expenses' for the purposes of subsection 69-5(3) of the GST Act. GST input tax credits were therefore allowable to the Applicant. 4. On the question of whether the Applicant was carrying on a business, the Deputy President found that the Applicant was carrying on a business from the outset [para 87]. 5. The Deputy President paid close attention to what motivated Mr Stephenson in setting up and then operating Peerless Marine. The Deputy President concluded that Mr Stephenson went into the venture with an expectation that there was a profit to be made from constructing large powered catamarans. His interest in those vessels and the enquiries he made led him to conclude that there was, and it was this gap in the market place that Mr Stephenson believed he was capable of filing, and profiting from. [para 76] 6. The Deputy President did not accept that the losses and outgoings were of a private or domestic nature. Mr Stephenson did not cause Peerless to build White Spirit to satisfy his private wishes and demands, but rather he did so in his capacity as the driving force behind the applicant and not any capacity designed to satisfy his private desires. [para 95] 7. The nature of the business being carried out started "with the intention of constructing White Spirit as a demonstrator as a boat builder, that is keeping [ White Spirit ] for that purpose once constructed....As costs increased and the time for construction blew out Peerless Marine determined to sell the vessel if possible. But until sold White Spirit was to be available as a demonstrator. Ultimately the notion of building other boats was abandoned and the efforts of Peerless marine were devoted to the sale of White Spirit in order to recoup some of the investment." [para 100] 8. The Deputy President found on the facts of the case that there was sufficient connection between the incurring of the losses and outgoings and the gaining or producing of assessable income. 9. On the question of whether the use of the boat was for a purpose essential to the efficient conduct of the business, the Deputy President found the use of White Spirit 'both during and after her construction, as a means of demonstrating to potential purchasers what it was capable of undertaking for those purchasers. That purpose was ... a purpose essential to the efficient conduct of its business." [para 125] 10. As the boat expenses were not disallowed for the purposes of the ITAA, they were not 'non-deductible expenses' for the purposes of the GST Act. Input tax credits were therefore allowable.

ATO view of decision:
The Tribunal's conclusions were open to it on the evidence. This is a decision that was made on its facts, and would be applied in any case with similar facts. The Deputy President said in relation to the substantive issue of whether Peerless was carrying on a business of boat building, "There was no real dispute about the legal principles involved. It was accepted on both sides that the question was one of fact." | The decision is not expected to have widespread implications for other cases, as the questions to be considered in each case are: • whether a business is carried on; • when it can be said that the business commenced; and • whether the use of the boat in question is essential to the efficient conduct of the business. | • whether a business is carried on; • when it can be said that the business commenced; and • whether the use of the boat in question is essential to the efficient conduct of the business. | The answers to these questions are always dependent on the facts of each case. | The decision is consistent with Taxation Ruling TR 2003/4.

Administrative treatment:
Implications on current Public Rulings & Determinations | No implication as the decision is based on the facts of the case.

Legislative references: Income Tax Assessment Act 1997 8-1 26-50 A New Tax System (Goods and Services) Act 1999 7-1 9-20 11-5 11-15 11-20 69-5 195-1 Taxation Administration Act 1953 22 284-90
Case references: Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 (1979) 79 ATC 4261 (1979) 9 ATR 873 Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 (1970) 70 ATC 4061 (1970) 1 ATR 726 Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397 (1972) 72 ATC 4094 (1972) 3 ATR 165 John v Federal Commissioner of Taxation (1989) 166 CLR 417 (1989) 89 ATC 4101 (1989) 20 ATR 1 Federal Commissioner of Taxation v Glennan (1999) 90 FCR 538 (1999) 99 ATC 4467 (1999) 41 ATR 413 Pedley v Federal Commissioner of Taxation 2006 ATC 2064 (2006) 62 ATR 1014 Case M67 (1980) 80 ATC 479 Ell v Federal Commissioner of Taxation 2006 ATC 4098 (2006) 61 ATR 661 Case 50 5 CBTR (NS) 329 Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 (1980) 80 ATC 4542 (1980) 11 ATR 276 Steele v Deputy Commissioner of Taxation [1999] HCA 7 (1999) 99 ATC 4242 (1999) 41 ATR 139 Case R63 84 ATC 457
Subject references: Income Tax carrying on a business of boat manufacturing is loss or outgoing deductible is loss or outgoing of a private or domestic nature, boat constructed as a demonstrator use of boat essential to the efficient conduct of business Goods and Services Tax input tax credits carrying on a enterprise non-deductible expense