Private ruling: Boat hire arrangement - income tax and GST
Date of advice: 14 March 2018
Published: June 2018
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you carrying on a business for Income Tax purposes in your arrangement to charter your boat? | A1: Yes, you are carrying on a business. | Q2: Are you considered to be a small business entity under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes, you are a small business entity. | Q3: Are you conducting an enterprise as defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for your boat charter arrangement? | A3: Yes, you are conducting an enterprise. | Q4: Are you entitled to input tax credits for acquisitions in connection with your enterprise under the GST Act in the relevant tax periods? | A4: Yes, you are entitled to input tax credits to the extent that your acquisitions are acquired in the course of your enterprise and relate to a deductible activity.

Relevant facts and circumstances: You are planning to carry on activities of boat chartering under a partnership agreement. You purchased a specific boat from Company X, in a Sale Agreement signed and dated in the 2018-19 income year. The sale price is $X and you have already paid a deposit of approximately 10% under the sale agreement. Prior to entering the sale agreement for the boat A, the partnership entered into a sale agreement for a smaller boat (boat B), but on further consideration decided that the boat A was a better option for charter. The partnership is registered for GST purposes. You are registered for GST and have been since 1 July 20XX as it conducts an unrelated enterprise. At all relevant times Company X is registered for GST. The estimated delivery of the boat to the delivery location is in the 2018-19 income year. It will then be sent to another location for minor additions/modifications. You plan to spend an additional amount on aftermarket extras once the boat arrives. You have been conditionally approved for finance of the boat through a large bank. The loan is secured by residential property. You entered into a X year Charter Management Agreement (the agreement) with Company Y (charter operator), commencing charters in the 2018-19 income year. At all relevant times, Company Y is registered for GST. At the end of the X year management agreement with Company Y, you intend to access your financial position and if the business is still viable, you will look at entering into another agreement for a further X years with Company Y or another charter operator. Based on your own market research, the boat should have an estimated market value of $X after X years. Under the agreement, Company Y as agent for the partnership will charter the boat to the public and collect the proceeds on the partnership’s behalf. Company Y has exclusive management of the boat for the term of this agreement. The agreement provides that the remuneration for Company Y’s management services as agent will amount to 50% of the charter fees. In addition to the remuneration, the partnership will reimburse Company Y for provisioning, berthing, storage, mooring and docking facilities. These amounts have been included in the partnership’s X year estimate under running costs. Unless agreed in writing, Company Y will facilitate all charter bookings by hirers. However you may refer hirers to Company Y. For referring first time customers, you will receive a referral commission. The boat will only be used within the geographical limits agreed upon. The agreement stipulates that the partnership will not use the boat if it is under charter, but may otherwise use it for private use unless the boat is under maintenance or repairs. You do not plan on using the boat for any more than 21 days as stated in the X year estimate you provided. Charter bookings take precedence over private use. The partnership will carry its own appropriate insurance that relates to the charter of the boat rather than merely holding it as a personal asset. The boat will be moored at the home port of the boat in State A. You do not reside in State A. Company Y will provide ancillary services to you, including inquiry and booking services, pre-charter training and assistance, support infrastructure while the boat is in charter, waste disposal, fueling facilities and provide linen and water. Company Y will also arrange for suitability qualified skippers and crew if required. Company Y is, and will be conducting appropriate promotion, advertising and marketing on the partnership’s behalf. The boat is already advertised on Company Y’s website taking bookings in the 2018-19 income year and beyond. Company Y must clean the boat and perform other checks after each use. Company Y will arrange and/or conducted minor repairs/maintenance up to the value of $500 without prior consent of the owner. Company Y will obtain consent for repairs/maintenance above this amount. You will reimburse Company Y for all expenses incurred. You plan to stay in regular communication with Company Y to ensure that the boat is kept in good condition and to monitor the progress of the charter activities. You plan to be actively involved in the maintenance and polishing to keep the boat in pristine condition to maximise charter fees. You will also be involved in appropriate promotion, website design, advertising and marketing of the boat. Under the agreement, Company Y must furnish the partnership with monthly reports itemising how many days under charter and days not under charter for repairs and maintenance. The expected charter usage of the boat is approximately 170 days based on figures provided by Company Y on a similar boat in their fleet and this forms the basis of the X year plan you prepared after thorough research. You have provided income and expense projections for your X year plan, including a reduction for private use. Your aggregated turnover is below $10 million Amongst other things, you provided the following documents and information in a letter from your accountant which has been considered for this ruling: ● A 10 year estimate of earnings and outgoings. ● A copy of the management agreement ● A copy of Sale agreement for the acquisition of the boat.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 69-5 | Income Tax Assessment Act 1997 Section 26-47 | Income Tax Assessment Act 1997 Section 26-50 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-10 Further issues for you to consider | We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including: | As a small business entity for an income year under section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997), you can choose to take advantage of the concessions set out in the section 328-10 of the ITAA 1997. Some of the concessions have additional, specific conditions that must also be satisfied.

Reasons for decision: Detailed Reasoning - Question 1 – Carrying on a business for Income Tax purposes: Section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997) provides rules for deductions from non-business boating activities. In most cases, costs of boat charter activities can only be used to reduce assessable income received from boat charter activities. They cannot reduce assessable income from other sources. The exception to this is when you use or hold a boat mainly for chartering it on hire in the ordinary course of a business you carry on. Taxation Ruling TR 2003/4 Income tax: boat hire arrangements , states you may carry on a business of boat charter and employ the services of a managing agent to aid this task. Where the boat owner enters into a contract with a charter operator, two issues need to 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 to which you participate in, and the effective control you have over, the operation of the charter activity, as well as the extent to which you share in the risks and rewards of it, will assist in determining the character of the arrangement. The terms and conditions in the agreement or contract with the charter operator will present the facts that determine the answer. In your case you will acquire the boat and enter into a management agreement with the charter operator. Based on the agreement provided, the following facts indicate that the contract is a management agreement: ● the charter agreement affirms that charter operator are acting as your agent and their activities regarding your boat will be undertaken on your behalf, ● you are entitled to all Charter Fees earned in relation to the charter of your boat, less fees, ● you are required to pay management fees in return for the services provided under the agreement, ● you are required to reimburse the charter operator for any costs incurred on your behalf of the boat charter activities, including mooring, repairs, maintenance and insurance costs, ● you have access to the boat given appropriate notice and no conflict with any commercial charter, ● The charter operator is required to consult with you prior to any expenditure for repairs, maintenance or equipment replacement over the value of $500, and ● the arrangement grants exclusive management of the yacht to the charter operator for the term of the agreement. In light of the above facts the arrangement between the charter operator and yourself will have the characteristics of a management agreement as opposed to the characteristics of a rental or lease arrangement. | Detailed Reasoning - Carrying on a business or passive income: Where the arrangement between you and the charter operator does amount to a management agreement, the question still arises as to whether this activity amounts to the carrying on of a business, or instead involves only the passive receipt of income from chartering the boat to the boat hirer. Paragraphs 55 and 56 of TR 2003/4 explains that whether the charter of a boat is carrying on a business will depend on the level of additional services provided to complement the charter of the boat. These services may be provided directly by you, or through the charter operator on your behalf. As part of your activity, additional complementary services will be provided to the hirers of your boat. These services will be provided through your FEBYC as your agent, and include: ● inquiry and booking services, ● pre-charter training and assistance in the correct operation of the yacht and safety equipment, ● support infrastructure for the owner and hirers while the yacht is on charter, ● waste disposal and fuelling facilities, ● cleaning of the boat prior to charter, and ● arrangement of a qualified skipper and crew if required. The extent of the services offered in addition to the hire of the boat is indicative of carrying on a business rather than the passive receipt of income. | Detailed Reasoning - Additional indicators of carrying on a business: The meaning of business is comprehensively considered in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although TR 97/11 deals with carrying on a primary production business, the indicators discussed in paragraph 13 of this ruling apply to any business, and include the following: 1. Significant commercial purpose or character This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. 2. Intention to engage in business Carrying on a business requires activities, not simply the idea, or desire to engage in a business. In your case you have more than a mere intention to engage in business by ordering and paying a deposit on the boat, obtaining financing and entering into a management agreement with the charter operator. 3. Prospect of profit It is important that you are able to show how the activity can make a profit. It is not necessary for the activities to make a profit in every year of income to classify the activities as a business, and as such, you may be carrying on a business even though you are making a small profit or a loss in any given year of income. However, where the objective evidence at the time of entering the boat charter activities shows a significant profit (over the life of operations) is unlikely, this would strongly indicate that entering into the activities was not motivated by profit, and this indicator would not be satisfied. In your case, you have shown that there is a reasonable expectation that you are undertaking this activity with the prospect of making a significant commercial or financial gain from it. Based on the 10 year projections you have provided the activity is profitable from the year ended 30 June 2022 (year 4) and in every year thereafter, the activity makes a significant overall profit. This indicator is passed. 4. 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 similar to those ordinarily used in boat hire activities said to be businesses. Paragraph 84 of TR 2003/4 and paragraph 64 of TR 97/11 outline factors that indicate that a boat hire activity constitutes a business. In applying these factors to the facts of your case: ● the volume of sales you project is comparable to those of other operators, ● your customers are the general public as opposed to mainly friends and family, ● you will market your boat for charter through your agent as is common practice in the industry, ● the charter operator will have the appropriate licenses and permits required, ● you will have appropriate insurance, and ● your private use of the boat is approximately 21 days per year. These factors indicate a business activity is being carried on in a similar manner to others in the industry. 5. Organised, systematic and business-like manner Paragraphs 86 to 88 of TR 2003/4 clarifies that boat hire activities are more likely to amount to carrying on of a business where they are carried out in a systematic and organised manner. Factors that would indicate that a boat hire activity is conducted in a business-like manner by the boat owner, or by a manager on behalf of the boat owner, include: ● the keeping of appropriate business records; ● operations are carried on a consistent basis and are not haphazard in their nature; ● advertising for customers is carried on in a consistent and systematic manners; ● profitable activities are pursued and unprofitable activities are discontinued; and ● person availability or use of the boat by the taxpayer does not take priority over the availability of the boat and use of the boat for charter purposes. As your business meets these factors, it represents a level of organisation and a business-like approach. 6. 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 the more business-like. However, it is possible for you to carry on a business on a small scale. In your case, your boat will be available for hire for the full year other than when the boat is unavailable due to repairs. You expect your boat to be hired for approximately 170 nights, which is less than half a year. Therefore your activities are considered to be carried on at a smaller scale. This indicator is not determinative on whether or not a business is being carried on (paragraph 23 of TR 2003/4). | Detailed Reasoning - Conclusion: When applying your facts to each of the business indicators it is considered that, as a whole, your boat hire activity will meet the requirements and the overall impression would be that you are carrying on a business. TR 2003/4 states that in order to demonstrate that a boat charter activity amounts to the carrying on of a business, a taxpayer needs to show that it is carried on with the intention of making a significant commercial profit. The income and expense projections that you have supplied demonstrate that over the charter operation period, the boat hire activity will make a significant overall commercial profit. Consequently, the activity does have significant commercial purpose and a prospect of profit. Because you are considered to be carrying on a business, sub-section 26-47(3) of the ITAA 1997 will apply so that sub-section 26-47(2) of the ITAA 1997 does not stop you from deducting a loss or outgoing for your boat activities. The expenses associated with conducting the activity will be deductible under section 8-1 of the ITAA 1997 provided they are not of a capital or private nature. | Detailed Reasoning - Question 2 – Small business entity: You will be a small business entity for an income year under section 328-110 of the ITAA 1997 if: (a) you are carrying on a business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million; (ii) your aggregated turnover for the current year is likely to be less than $10 million. Your aggregated turnover is your annual turnover plus the annual turnover of any entities connected or affiliated with you. Your annual turnover is the total ordinary income you derive in the income year in the ordinary course of carrying on a business. As you are carrying on a business with an aggregated turnover below $10 million, you will be a small business entity under section 328-110 of the ITAA 1997. | Detailed Reasoning - Question 3 - Carrying on an enterprise for GST purposes: Purchase of the boat in the carrying on of your enterprise “Enterprise” is defined in section 9-20 of the GST Act which states amongst other things: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a * business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or … (2) However, enterprise does not include an activity, or series of activities, done: … (b) as a private recreational pursuit or hobby; or (c) by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a * partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number states: 174. Although the phrase 'in the form of a business' is broad it requires a focus on and understanding of the concept of a business. Section 195-1 of the GST Act defines 'business' to include: any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 175. The definition is the same as the definition of 'business' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the ITAA 1997. Therefore, as we have already determined that your activities are in the form of a business for income tax purposes, you also meet the definition of enterprise in the GST Act. When did the enterprise commence? “Carrying on” an enterprise is defined in section 195-1 of the GST Act to include anything done in the commencement or termination of the enterprise. In this respect, if you are engaged in an enterprise, activities conducted that relate to the enterprise such as assessing the feasibility of the enterprise would be included in the enterprise itself. This includes the costs obtaining advice prior to acquiring the boat. | Detailed Reasoning - Question 4 – Input tax credits: Section 11-20 of the GST Act provides that when you purchase a thing that is used by you in the carrying on of your business, you are entitled to claim an input tax credit (ITC) for the GST you paid in making that acquisition, provided it is a creditable acquisition. Section 11-5 of the GST Act states that you make a creditable acquisition if: a) you acquire anything solely or partly for a creditable purpose, and b) the supply to you is a taxable supply, and c) you provide, or are liable to provide, consideration for the supply, and d) you are registered, or required to be registered for GST purposes. In your case, we accept that the supply of the boat to you was a taxable supply, you provided consideration for the supply of it to you and you are registered for GST purposes. Section 11-15 of the GST Act provides that you acquire something for a creditable purpose to the extent that you acquire it in the carrying on of your enterprise. However, you do not acquire it for a creditable purpose to the extent that the acquisition is of a private or domestic nature. You can only claim an input tax credit for acquisitions where you hold a tax invoice. So, you are entitled to an input tax credit for the acquisition of the boat if you hold a tax invoice from Company X. Personal use/non-deductible expenses: You stated that you will use the boat for personal purposes for 21 days per year. This activity is not included within the defined enterprise. Any expenses associated with personal use would be non-creditable acquisitions principally because they fall under section 26-50 of the ITAA 1997 and as a result, are non-creditable acquisitions under section 69-5 of the GST Act. Section 69-5 of the GST Act states that “an acquisition is not a creditable acquisition to the extent that it is a non-deductible expense”. You have calculated your personal use on a direct basis of time used for personal reasons over the course of the year as a percentage of the time the boat is actually available for hire and not in for repairs. You must reduce your input tax credit claim to the extent that it is a non-deductible expense which equates to your personal use percentage. This method is fair and reasonable for goods and services tax purposes.