Lee Group Charters Pty Ltd v Commissioner of Taxation; Keri Lee Charters Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 615 of 2015)
Judgment date: 7 April 2016
Date published: 2 June 2016

Summary of decision:
Outlines the ATO's response to this case, which concerned whether excess boating deductions could be offset against other assessable income of the taxpayers.

Overview of facts:
Lee Group Charters Pty Ltd (LGC) acquired a boat, the Keri Lee 1, in 2005 and exchanged it for another, the Keri Lee II, in 2006. In 2009, the Keri Lee II was exchanged as a part of a transaction under which a related entity, Keri Lee Charters Pty Ltd (KLC), acquired another boat, the Keri Lee III. | The shares in LGC and KLC (the taxpayers) were owned by the trustee of a family trust controlled by Mr Trevor Lee (Mr Lee). | For each of the boats, commercial registration was obtained, advertising was conducted and a crew and chartering agent employed. Business plans tendered in evidence showed, on projected rates of revenue and cost, that LGC and KLC expected to realise profits from chartering the boats. Included in projections of charter revenue were payments to be made by Mr Lee, his family and friends for their use of the boat. | For all relevant years from the income year ended 30 June 2006 to the income year ended 30 June 2012, the taxpayers derived income from the chartering of the boats and claimed deductions, substantially in excess of that income, for depreciation, superannuation, rent, interest, repairs and maintenance. For those years the major part of the charter income, and in some years all charter income, was received from Mr Lee, his family and friends. In LGC's and KLC's tax returns, the excess of deductions was fully offset by other assessable income. | The Commissioner made amended assessments for the taxpayers for the income years ended 30 June 2009 to 30 June 2012 increasing their taxable incomes by the amount that the claimed deductions exceeded charter income. | Before the Court, the Commissioner's case was that the excess deductions were to be 'quarantined' under section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997). | Note: all subsequent legislative references are to the ITAA 1997, unless otherwise noted. | Issues decided by the court/Tribunal | His Honour Justice Logan decided that the excess deductions were not subject to the operation of section 26-47 as, on the facts of the case, the exception in paragraph 26-47(3)(b) for 'using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you *carry on' applied [at paragraph 130]. | His Honour identified that reaching a conclusion as to whether or not a particular activity amounted to the carrying on of a business involved questions of fact and degree [at paragraph 11], and that the nature and scope of a business must be identified in order to ascertain what is in its ordinary course [at paragraph 13]. | His Honour concluded that, on the whole of evidence including the 'generally reliable evidence' of Mr Lee, each boat was used and held exclusively for letting on hire in the ordinary course of a business being carried on by LGC and KLC [at paragraphs 18 and 129].

Issues decided:
His Honour Justice Logan decided that the excess deductions were not subject to the operation of section 26-47 as, on the facts of the case, the exception in paragraph 26-47(3)(b) for 'using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you *carry on' applied [at paragraph 130]. His Honour identified that reaching a conclusion as to whether or not a particular activity amounted to the carrying on of a business involved questions of fact and degree [at paragraph 11], and that the nature and scope of a business must be identified in order to ascertain what is in its ordinary course [at paragraph 13]. His Honour concluded that, on the whole of evidence including the 'generally reliable evidence' of Mr Lee, each boat was used and held exclusively for letting on hire in the ordinary course of a business being carried on by LGC and KLC [at paragraphs 18 and 129].

ATO view of decision:
The ATO agrees that a conclusion that a particular activity amounts to the carrying on of a business, the anterior conclusion that a person has a profit making purpose, and a conclusion as to the what is in the ordinary course of the business found, all involve questions of fact and degree. His Honour accepted that the testimony of Mr Lee was honest and reliable [at paragraph 18] and, on that premise, it was open to draw the factual conclusions made. | The ATO will continue to administer the law in other cases that concern the question of whether a business is being carried on, and what is in the ordinary course of that business, according to their particular facts. | The ATO notes that the decision of the Court is confined to the operation of section 26-47; neither section 8-1 nor Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) were in issue. | The ATO also observes that the conclusions reached by His Honour were supported by the fact that the taxpayers and the charterer Mr Lee were separate legal persons, and that significant related party chartering was expected and later happened. The ATO would consider the application of Part IVA of the ITAA 1936 in an appropriate case where the evidence demonstrates that structuring activity has been undertaken to obtain tax benefits under a scheme.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) | Nil. | Implications for impacted Law Administration Practice Statements | Nil.

Legislative references: Income Tax Assessment Act 1997 section 26-47