Private ruling: Carrying on a business
Published: January 2012
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2014 | Year ended 30 June 2013 | Year ended 30 June 2012 | Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the proposed boat charter activity you are intending to commence be considered to be carrying on a business for the purposes of section 26-47 of the Income Tax Assessment Act 1997 ? | A1: 

Relevant facts and circumstances: You acquired a catamaran in July 2010 with the intention of chartering the vessel. The acquisition was financed largely through a chattel mortgage for a period of five years. You have conducted considerable research into possible markets and determined a region that would provide the best match for your business objectives. This was based on the existing tourist industry, charter yacht providers and climate in the area and was derived from discussion with boat manufacturers, owners and charter operators. You have compiled a business plan for the activity which includes a market analysis of the region in which the activity is to operate, the clients and competitors in the area, and promotional strategies. You have determined that there was a market for your activity in the region that was not being addressed by the existing charter operators. This should enhance the potential for the activity and provide first-mover advantages for the operation. The yacht has passed survey and has been registered and insured as a commercial vessel. You intend to enter into a charter management agreement with an experienced charter operator, who will add your yacht to their fleet of vessels available for charter. Under the charter arrangement, you are entitled to all income from the operation. You will pay a management fee, of a fixed percentage of the charter income, to the charter operator for their services. The management agreement provides that the agreement will be reviewed annually and that you will pay the charter operator a management fee of 25% of the charter income to provide a range of services that include; · manage, promote, advertise and market the boat for hire · provide inquiry and booking services · ensure radio communication is in operation between the charter operator and the charterers · provide garbage disposal and fuelling facilities · provide breakdown or search and rescue operations as required · provide a monthly report itemizing the hiring fees and expenses incurred in relation to the charter of the boat. Additional services that may be provided for an additional fee of 15% include; · arranging suitable mooring or berth facilities · maintaining the boat in a seaworthy condition · pre-charter training and assistance · briefing charterers in relations to the limitations of the boat's permit regarding safe ports and geographical limitations As part of the agreement you agree to; · provide current certificates of registration/survey · provide all insurance in relation to the yacht · maintain the boat in survey condition at all times · reimburse the charter operator for any expenses incurred in relation to the boat (eg. turn around costs, mooring and berthing facilities, repairs and maintenance). The charter operator will do the day-to-day running of the business under an agency agreement, but you will be involved in with the operations on a regular basis through monthly correspondence with the charter operator and review of operation. You intend to be involved in any decisions regarding repair and maintenance of the vessel that is of a significant nature and, any capital improvements to the vessel would be your responsibility. You will keep your own records of all meetings and accounts. In doing so, you will be able to monitor the charter activity on an ongoing basis and be able to review key performance indicators against expectations to ensure maximum return on your investment. You also intend to be involved in the marketing of the boat through attendance at boat shows and advertising in magazines and journals. You intend to set up and maintain a website and pursue a targeted email marketing strategy in relation to the boat. You have developed a 10 year financial projection of the operation and expect to make a profitable return on your investment of over $200,000 over the life of the charter operation. The projection allows for 160 days of hire activity and 10 days for private use per year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 26-47 | Income Tax Assessment Act 1997 Section 26-47(2) | Income Tax Assessment Act 1997 Section 26-47(3)

Reasons for decision: Summary: You would be considered to be carrying on a business with regards to your intended boat hire activity. The conditions in Taxation Ruling TR 2003/4 indicating that a business is being carried on have been met. Subsection 26-47(3) of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to allow the deductions. | Detailed Reasoning - Detailed reasoning: A boat hire activity must amount to the carrying on of a business to claim an amount that exceeds the assessable income from the use of the boat. The excess deductions are not allowed where the activity is only a passive receipt of income from property: Section 26-47 of the ITAA 1997. TR 2003/4 considers the application of section 26-47 and examines: • when the activity amounts to the carrying on of a business • when deductions are not reduced for a boat under section 26-47 • apportionment of expenses between business and non business use where a business is being carried on in relation to the boat. If you only provide a boat under a lease then generally you are not carrying on a boat hiring business and so you would not be entitled to the excess deductions for your boat. If a boat owner receives money from hiring out their boat directly, or under a management agreement with a charter operator, it is still a requirement for this activity to amount to the carrying on of a business in order to claim the excess deductions under section 26-47 of the ITAA 1997. Indicators of a management agreement can include: · The boat owner shares in the risks and rewards of the business activity · The contract for the provision of the boat to the hirer highlights that the charter operator is acting as the agent of the boat owner in the boat hire arrangement · Boat owner derives the income and incurs expenses relating to the charter of the boat to third parties · Boat owner maintains a sufficient level of control over the boat. In your case, the proposed management agreement you provided meets the above indicators. The factors to be considered in determining if you are carrying on a business under this boat hire arrangement are: · Significant commercial purpose or character · Prospect of profit · Activities of the kind carried on in a similar manner to those of ordinary trade · Organised, systematic, businesslike manner · Repetition and regularity · Size and scale of activity. In these activities the prospect of profit is highly significant when assessing if the activity has the character of a business. Where it is clear from the objective evidence that a taxpayer cannot show the existence of a genuine belief that the activity can be profitable, they will not have the requisite intention of profit. In your case, you intend to enter into a charter boat management agreement with a recognised charter boat operator. You have provided profit and loss projections for 10 years indicating that a profit will be made in the 2015 income year. The cumulative profit over the 10 year projection amounts to over $200,000. In this model the decline in value is calculated over the first five years based on the original cost, and the remaining five years as per the estimate of market value provided by the manufacturer. The actual tax deductions for the decline in value have been taken into account for determining this accounting profit. When applying your facts to each of the other factors it is considered that, as a whole, your intended boat hire activity meets the requirements and the overall impression would be that you are carrying on a business. Because you would be 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 a boating activity. The expenses associated with conducting the activity would be deductible under section 8-1 of the ITAA 1997, provided that are not of a capital or private nature.

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