Private ruling: Am I in business - Charter Boat
Ruling period: Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2009

Ruling: Q1: Does your yacht charter activity constitute carrying on a business for tax purposes? | A1: Yes.

Relevant facts and circumstances: You purchased a second-hand yacht. The previous owner of the vessel was engaged in a charter yacht activity. Since purchase, the vessel has continued activities with the same charter operator. The vessel was acquired on a five year loan. Since purchase the vessel has been upgraded to improve the marketability of the vessel. You have obtained an ABN and registered for GST in anticipation of the charter activity. The charter operator has approximately ten vessels. A charter agreement is in place between you and the charter operator. The charter agreement states that the charter operator is responsible for the day to day running of the charter activity while acting as your agent. The charter agreement also shows that all the charter income from this venture belongs to you and that you pay a management fee to the charter operator in return for the services provided under the agreement. This fee is a fixed percentage of the charter income. You have to arrange for all insurance necessary for the running of the vessel. The charter operator has to provide you with monthly reports which itemise all income and expenditure as well as the details of the days that the vessel was chartered. You are in constant contact with the charter operator via phone and email. You also undertake monthly visits to inspect the vessel, monitor the charter activity and discuss any matters of concern or interest with the charter operator. The charter operation continues throughout the year and on average it is expected to be chartered for approximately 167 days each year. Private use is kept to a minimum with the charter agreement clearly stating that charter operations take priority. You intend to use the yacht seven days a year for private use. The vessel is advertised on the charter operator's website. You have a ten year financial projection for this operation, which indicates that this venture will be a profitable undertaking. You have engaged a bookkeeper to prepare records which are then used for the preparation of BAS returns. You have opened a separate bank account used solely for the charter operation.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 26-47.

Reasons for decision: Summary: Your activities have the character and elements of carrying on a business rather than the passive receipt of income or the lease of the yacht for use in the business of a third party. As such, your yacht charter activities will constitute carrying on a business. This means you will be able to offset any losses from the activity against your income from other sources. | Detailed Reasoning - Detailed reasoning: 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 discusses the Commissioner's view on boat hire arrangements and the application of the above provision. Further guidance for determining if you are carrying on a business can be found in Taxation Ruling TR 97/11. | Detailed Reasoning - Using a boat mainly for chartering it on hire in the ordinary course of a business that you are carrying on: TR 2003/4 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. Use of the boat for private purposes also influences an assessment of carrying on of a boat charter business. A comparison of the time used for private or business purposes can often provide an accurate indication of the primary purpose; however, other factors can be relevant. For example, a boat made available for hire for more than half of the year, but taken for private use for all or most of the peak commercial hiring periods may indicate a dominant private purpose. In your case you have purchased a yacht and entered into a formal contract with a charter operator. The following facts indicate that the contract is a management agreement: · The charter agreement affirms that the charter operator is acting as your agent and their activities regarding your yacht will be undertaken on your behalf, · you are entitled to all hiring fees earned in relation to the charter of your yacht, · 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 yacht charter activities, · you have access to the vessel 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, · you are responsible for the payment of mooring costs, repairs and insurance, and · the arrangement grants exclusive management of the yacht to charter operator excluding you from utilising other charter operators for management services without their consent. In light of the above facts the arrangement between the charter operator and yourself has 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 you behalf. If this is the case, the extent of those services will be relevant in considering whether the activity amounts to carrying on a business or passive receipt of income. TR 2003/4 provides examples of complementary services as: · customer inquiry and booking services, · issuing of accounts and processing of deposits and payments, · reception area for charter guests, · pre-charter briefing including training and assistance in the correct operation of the boat and safety equipment, · access to jetties with electric power, hot and cold water, waste disposal facilities and fuelling facilities, and · support infrastructure for the hirer while the boat is on charter, including a radio and rescue service. As part of your activity, additional services are provided to the hirers of your yacht. These services are provided through the charter operator, as your agent, or yourself and include: Customer inquiry and booking services, · pre-charter training and assistance in the correct operation of the yacht and safety equipment, · support infrastructure for the hirers while the yacht is on charter, · waste disposal and fuelling facilities, · cleaning of the vessel 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 yacht is indicative of carrying on a business rather than the passive receipt of income. | Detailed Reasoning - Additional indicators of carrying on a business: Throughout TR 2003/4 several indicators of carrying on a business are discussed, which are also found in TR 97/11 with regards to primary production. The principles discussed in TR 97/11 apply equally to determining whether other forms of activity amount to carrying on a business. TR 97/11 lists the relevant indicators as: · whether the activity has a significant commercial purpose or character, · whether you have more than just an intention to engage in business, · whether you have a purpose of profit as well as a prospect of profit from the activity, · whether there is repetition and regularity of the activity, · whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business, · whether the activity is planned, organised and carried on in a business like manner such that it is directed at making a profit, · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or a sporting activity. An assessment needs to consider the overall impression as to whether the activities have a commercial flavour. No one indicator is decisive and they are to be considered in combination to arrive at a decision. | Detailed Reasoning - Significant commercial purpose or character: The significant commercial purpose or character indicator is closely linked to the other indicators and is a generalisation drawn from the interaction with the other indicators. It is particularly linked to the size and scale of the activity, the repetition and regularity of the activity and the profit indicators. | Detailed Reasoning - In your case you:: · sought financial advice prior to the purchase of the vessel, · obtained all registrations, insurance and certifications necessary for the running of a commercial maritime operation, · obtained an ABN and registered for GST prior to commencing the venture, · entered into a charter agreement with the charter operator, · intend on using the yacht seven days per year for private use, however the charter agreement states that the priority is the charter operation and that there would be minimal scope for the vessel to be used for private purposes, and · promote the hire of the yacht on the charter operator's website. The evidence provided indicates that there is a significant commercial purpose to the yacht charter activities and that it is carried on for commercial reasons in a commercially viable manner. | Detailed Reasoning - Prospect of profit: We consider this to be a very important indicator. It is important that you are able to show how the activity can make a profit. This indicator reflects three elements: · a genuine belief that profit is attainable · the intention to produce profits from the yacht charter activities, and · that the activities are capable of producing 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 yacht 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 (TR 2003/4 paragraph 75). The financial plan that you have provided indicates that over the course of this ten year projection, it is estimated that you will have a significant cumulative profit. Based on this there is reasonable expectation that you are undertaking this activity with the prospect of the venture being profitable. | Detailed Reasoning - 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. TR 97/11 and TR 2003/4 state that the following factors may indicate that a boat hire activity constitutes a business: · the volume of sales, · the types of customers - wholesalers, retailers, the public at large, or friends and relatives, · the manner in which the marketing takes place, · the sort of expenses incurred by you, · the amount invested in capital items, · you own the appropriate licences and permits required, · you and/or the operator have the appropriate experience, · you and/or the operator have appropriate indemnity cover, and · use of the boat is not primarily directed at private use. · In applying the facts of your case to the above factors: · the volume of sales you project is equivalent to those of other operators, · your customers are the general public as opposed to mainly friends and family, · you will market your yacht for charter through your agent as is common practice in the industry, · you own the appropriate licences and permits required, · you have appropriate insurance, and · your proposed use of the yacht is only seven days per year. These factors indicate a business activity is being carried on. | Detailed Reasoning - Organised, systematic and business-like manner: Paragraph 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 which indicate this include: · operations are not haphazard and are carried on in a consistent manner, · profitable activities are pursued and unprofitable activities are discontinued, · boat charter transactions and financial arrangements are managed separately and distinctly from personal finances, · appropriate business records are kept, and · personal use of the boat does not take priority over use of the boat for charter purposes. These factors may be carried out by you or your manager on your behalf. A taxpayer may still carry on a business despite having poor organisational skills. In your case: · you have a legal basis for the business with the charter agreement, · you have a bookkeeper to prepare records based on monthly reports provided from the charter operator, · you have a separate bank account solely for the purposes of the charter business, · you intend to regularly review and revise the plan and to meet with the charter operator management to discuss issues concerning the yacht. This represents a moderate level of organisation and a business-like approach. | Detailed Reasoning - 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. Your yacht will be available for hire for the full year other than the private use days and when the yacht is unavailable for charter due to repairs. Although your activities are small this is not sufficient to indicate that a business is not being carried on. | Detailed Reasoning - Intention to engage in business: Carrying on a business requires activities, not simply the idea, or desire to engage in a business. The extent of activity determines whether a business is being carried on. In your case you have commenced the activity by purchasing and entering into a management agreement to charter the yacht. | Detailed Reasoning - Conclusion: Based on the above facts, your activities have the character and elements of carrying on a business rather than the passive receipt of income or the lease of the yacht for use in the business of a third party. As such, your yacht charter activities will constitute a business for the purposes of section 26-47 of the ITAA 1997. This means you will be able to offset any losses from the activity against your income from other sources.

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