Private ruling: Boating deductions
Date of advice: 23 November 2021
Published: March 2022
Ruling period: Year ending 30 June XXXX | Year ending 30 June XXXX
Date scheme commenced: X June XXXX

Ruling: Q1: Is the boat charter operation you intend to conduct considered to be carrying on a business for the purposes of section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You intend to commence a new business venture of a boat charter operation to which you have obtained an ABN and registered a business name with ASIC. You intend to register for Goods and Services Tax (GST). The proposed location for this operation is split over two areas. You have obtained a mooring licence for one location. You intend to operate for 10 years, at which the vessel will reach the end of commercial life and be sold. You expect the venture to start in June or July XXXX. You have conducted research into the industry, charter operators and obtained advice from industry and financial experts. Your accountant has projected that you will be successful after the second to third year of business. You intend to offer the charter services to the public and will obtain the appropriate insurance. You intend to purchase one vessel, a xxxxx or similar worth approx. $X to $X inclusive of GST. You have obtained pre-approval for finance of $X, with the remaining balance required sourced from private equity. You have had preliminary discussions with charter management company Charter 1 (Charter 1) and have provided a draft management agreement (draft agreement) engaging the services of Charter 1 as the charter operator. The draft agreement version X dated XX XX XXXX states, in the recitals that Charter 1 will act as your agent in managing the charter operations of the boat. You have selected Charter 1 as Charter Manager, to maximise profit, size, and scale. You advise your research demonstrated there is a competitive advantage as being part of a charter fleet. The draft agreement provides the following: • Clause X provides the services and management activities provided by SX under the draft agreement including: o X.X.X - carry out the appropriate promotion, advertising, and marketing of the boat to maximise charter fees; o X.X.X - attach signage to the boat for promotional purposes; o X.X.X - provide services to hirers and potential hirers ancillary to the charter of the boat including but not limited to, inquiry and booking services, pre-charter training and assistance, support infrastructure for the hirers while the boat is on charter and waste disposal and fuelling facilities. On behalf of the owner, the charter operator will also arrange for suitable qualified skippers and crew, if required; o X.X.X and X.X.X - after each charter of the boat the charter operator must clean the boat and perform other turnaround services as requested; o X.X.X - assess the boat to determine repairs and maintenance as required o X.X.X - conduct periodic repairs and maintenance ensuring equipment is replaced as necessary. • Clause XX provides for Revenue, Fees and Expenses, including: o X.X.X - you (as the owner) are entitled to all Charter Fees earned in relation to the chartering of the boat. o X.X.X - You agree to pay Charter 1: • X.X.X - Management Fee at the rate of XX% per month of gross Charter Fees in remuneration for acting as your agent in managing the boat. • X.X.X - Reimbursement of all costs and expenses reasonably incurred by Charter 1 on your behalf, including but not limited to advertising and promotion, insurance, berthing, repairs and maintenance, fuelling, catering, and provisioning of the yacht, breakdown services, search and rescue services, cleaning, and turnaround services etc. • X.X.X - Service Handling Fee being a margin applied to costs incurred of for third party services arranged by Charter 1 on your behalf, not exceeding XX% of gross value of costs incurred or service provided. • X.X.X and X.X.X - Fees for services such as cleaning, incidentals, gas refilling, fuelling fee, berthing and moorings and a reasonable fee for other services provided not specifically contemplated in the draft agreement. • X.X.X - Labour charges at $XX/hour. • Clause XX provides that Charter 1 will provide you with monthly reports which categorises expenses between holding the boat and actual use of the boat. The monthly report will detail the number of days the boat was used for charter and the number of days the boat was used for personal use. You have allowed for XX days per year of personal use. Charter 1 will provide you a monthly report, which will allow you to complete your own financial records to complete your business activity statements (BAS) and tax return preparation. Charters would be for private functions and cruises of X-to-X hours duration. You expect one cruise per day to allow cleaning and turnaround, ready for the next day. The vessel will be available to hire for the full year. During peak season, you expect a heavy booking schedule. Off-peak you expect X bookings per week. After acquiring relevant qualifications and experience, you intend to take over the role of charter operator at one location.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 12-5 | Income Tax Assessment Act 1997 subsection 26-47(3) | Income Tax Assessment Act 1997 section 40-25

Reasons for decision: Summary: Section 26-47 of the ITAA 1997 provides rules for deductions for non-business boating activities. This provision limits the deductibility of expenses incurred from boat hire activities unless such activity amounts to the carrying on of a business. In most cases, costs of boat charter activities can only be used to reduce assessable income received from boat charter activities. They cannot be deducted from assessable income from other sources. The exception to this is when you satisfy the requirements of paragraph 26-47(3)(b), which requires a boat owner to use or hold the boat for hire in the ordinary course of a business they carry on. That is, the boat owner's activities in respect of the boat must amount to the carrying on of a business and letting the boat on hire must be in the ordinary course of that business. In addition, this business must be carried on by the boat owner. If the boat owner is merely in receipt of income for letting the boat to a charter operator, who uses that boat in their business of letting it on hire, this will not satisfy the requirements of paragraph 26-47(3)(b) for the boat owner. Taxation Ruling TR 2003/4 Income tax: boat hire arrangements discuss the Commissioners view on boat hire arrangements and the application of section 26-47 of the ITAA 1997 to such arrangements. Further guidance for determining if you are carrying on a business can be found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business for primary production? Using a boat mainly for chartering it on hire in the ordinary course of a business that you are carrying on Paragraph 9 of TR 2003/4 provides a managing agent may be employed to assist in boat charter activities. However, this activity must be more than passive receipt of income from the boat. Where a boat owner enters a contract with a charter operator, two issues must 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 of your participation in and control over the operation of the charter activity, as well as the extent to which you share in the risks and rewards of it, assists in determining the character of the arrangement. This is indicated by the terms of your draft agreement with Charter 1. You intend to purchase a vessel and have drawn up a draft agreement with SX. Under the draft agreement, Charter 1 will act as your agent with exclusive management of the boat for the term of the agreement. The agreement confirms the following: • Charter 1 acts as your agent and manages your boat on your behalf • You are entitled to all income earned from the charter of your boat • You pay management and service fees to Charter 1 for the services they provide under the agreement • You reimburse Charter 1 for costs incurred on your behalf, and • You are responsible for payment of mooring costs, repairs, and insurance. The terms of the draft agreement between yourself and Charter 1 demonstrate the characteristics of a management agreement as opposed to that of a rental or lease agreement. Carrying on a business or passive income Although having satisfied the requirement of a management arrangement, it must still be determined whether your boating activity amounts to the carrying on of a business or is merely the passive receipt of income from the charter of your boat to Charter 1. Paragraphs 55 and 56 of TR 2003/4 state the level of additional services provided with the boat charter will determine whether the activity amounts to the carrying on of a business. These services may be provided directly by you, or by Charter 1 on your behalf. 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 • Access to jetties with electric power, hot and cold water, waste disposal facilities and fuelling facilities • Support infrastructure for the hirer while the boat is on charter, including a radio and rescue service, and • Additional services connected with the boat charter, including booking services for activities and facilities in the area, entrance permits, flights and other transport, and hotel and dinner reservations. Your agreement with Charter 1 includes a number of additional services to be provided in charter services. These services will be provided through Charter 1 as your agent and include: • Provide services to hirers and potential hirers ancillary to the charter of the boat including but not limited to: • inquiry and booking services • pre-charter training and assistance • support infrastructure for the hirers while the boat is on charter and waste disposal and fuelling facilities • on behalf of the owner, the charter operator will also arrange for suitable qualified skippers and crew as required. • Carry out the appropriate promotion, advertising, and marketing of the boat to maximise charter fees • Attach signage to the boat for promotional purposes. These additional services provided by Charter 1, on your behalf, to hirers indicate you are carrying on a business and are not merely receiving passive income from hiring your boat. Additional indicators of carrying on a business TR 97/11 provides a number of general principles which indicate whether a business is being carried on. Although this Taxation Ruling is directed at determining whether a business of primary production is being carried on, these principles apply to determining whether other forms of activity amount to the carrying on of a business. TR 97/11 lists the relevant indicators as: • Whether the activity has a significant commercial purpose or character • Whether there is more than just a mere intention to engage in business • Whether there is 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 out 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. Whether you are carrying on a business of charter boating must be determined in accordance with the principles provided in TR 97/11. Significant commercial purpose or character This indicator requires a taxpayer be able to demonstrate the activity is carried on for commercial reasons and in a commercially viable manner. Your charter boat activity should be capable of producing a significant overall profit over the term of the activity and not implemented for private of tax benefits. The size and scale of your activity, its repetition and regularity and your intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. In your case, you: • Are in the process of acquiring the boat sourced through a mixture of private funds and a commercial loan with an industry provider • Have conducted research into the boat charter industry to determine the most significant site for boat chartering. You advise your research demonstrated there is a competitive advantage as being part of a charter fleet. • Will engage the services of a local charter operator under an agreement for day-to-day operation • Sought advice from numerous sources within the boat charter industry and financial experts, and • Have prepared a ten-year projection which you advise indicates the operation will become profitable in your second to third year of operation and each year thereafter. The steps you have taken demonstrate your commercial basis for entering into the boat hire arrangement rather for private or tax minimising purposes. As provided in your financial projection, a profit is expected to be made over the ten-year period. Your charter boat activity demonstrates significant commercial purpose and character. Intention to engage in business Carrying on a business requires actual action and is not the mere idea or desire to engage in business. The extent of actions you have taken will determine whether you are carrying on a business. In your case, you have demonstrated more than an intention to engage in business and have taken multiple steps to engage in the business of charter boating, including: • Obtained an ABN, • Obtained a mooring licence for one location • Registered your business name with ASIC • Arranged finance approval • Engaged with Charter 1 and prepared a draft agreement for Charter 1 as your charter operator and entering into an agreement with Charter 1, and • Conducting research and obtaining advice from industry and financial experts. Prospect of profit In order to demonstrate your boat hire activity amounts to the carrying on of a business, you must demonstrate an intention of making a significant commercial profit. Demonstrating the prospect of profit comprises of 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. You may be carrying on a business even though you are making a small profit or loss in any given year. In your case: • You have not confirmed the commencement date or term of your arrangement with Charter 1 however, you have indicated that you expect the lifespan of the boat to be approximately xxx years • You have projected you would generate a profit in your second to third year of operation and every year thereafter • Your projected profit considers all expected income and expenses. This has included any decline in value of the boat for the duration of the agreement, as well as interest deductions. You have demonstrated there is reasonable expectation you are undertaking this activity with the prospect of making a significant commercial or financial gain from it. Based on the projections you have provided; you have satisfied this requirement. 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 ordinarily used in boat hire activities carried on as a business. TR 2003/4 and TR 97/11 provide factors which may indicate a boat hire activity is a business, including: • The volume of the sales • The types of customers - wholesalers, retailers, the public at large, or friends and relatives • The manner in which marketing takes place • The sort of expenses you incur • Capital investment • Whether you own any licences or permits required • Whether you and/or the operator have appropriate experience and indemnity cover, and • The use of the boat is not primarily private use. In your case: • Your customers are the public as opposed to mainly friends and family • You will market your boat for charter through your agent Charter 1. This is common practice in the charter industry • You will have appropriate insurance, and • Your private use of the boat is expected to be around XX days per year. These factors indicate you are carrying on a business. Organised, systematic, and business-like manner Your boat hire activity is more likely to amount to carrying on a business where the activity is carried out in a systematic and organised manner. An individual may still be carrying on a business despite having poor organisational skills. Factors which indicate your boating activity is conducted in a business-like manner are: • The keeping of appropriate business records • Operations being carried out on a consistent basis and not haphazardly • Advertisement for customers is carried out in a consistent and systemic manner • Profitable activities are pursued, and unprofitable activities are discontinued, and • Personal boat use does not take priority over use for charter purposes. In your case: • You will receive monthly reporting from Charter 1, complete your own financial records and will keep records to assist with BAS and tax return preparation • You have conducted research into the industry, including research of the area of operation, charter operators and financial implications of the activity. You have projected profitability over a xxx year period and will review the profitability of your operation on an ongoing basis in consultation with Charter 1 • Although you have not finalised the agreement with Charter 1, you intend to register for GST, finalise the purchase of the boat and finalise the agreement. • Advertisement for boat hire will be carried out by CHarter 1 in a consistent manner in accordance with their regular industry advertisement. • Personal use of the boat is intended to be minimal, to maximise profitability of the activity. These factors indicate you are carrying on a business in an organised and systemic manner. 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 of the activity, the more business-like it is likely to be. However, it is possible for you to carry on a business of small-scale activities. Your boat will be available for hire for the full year, other than private days and unavailability due to repairs. You intend for your boat to be chartered regularly. You have one boat available for hire and are carrying out your business on a small scale. Application to your circumstances The boat charter scheme you are implementing demonstrates an intention and prospect that the boat's use will be more than passive receipt of income from leasing the boat for rental income. You intend to engage Charter 1 to act as your agent until you obtain the relevant qualifications and experience to provide the service at your chosen locations yourself. You intend to enter into a charter fleet, to maximise profit, size, and scale. You have taken steps to commence a business and share a similarity of other businesses in the same industry. Applying the business indicators provided in TR 2003/4 and TR 97/11 to your intended boat hire activity, you are considered to be carrying on a business for the purpose of section 26-47 of the ITAA 1997.