Private ruling: Aircraft leasing
Date of advice: 5 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the Trust carrying on a leasing enterprise when it acquired and hired Item one and item two for Goods and Services Tax (GST) purposes under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. Issue 2 | Q2: Is income received for the hire of item one and item two considered assessable income Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Are expenses incurred in relation to item one and item two deductible under section 8-1 of the ITAA 1997 and Division 40 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: The Trust Item one and item two are owned by the Company as trustee (the corporate trustee) for the Trust. The beneficiaries of the Trust are X's family. The directors of the Company are A and B. A is not a beneficiary of the Trust for the 20DD-EE income year. The Trust has not lodged for the 20EE-FF income year. The Trust is a beneficiary of income from another trust in the 20DD-EE income year. All billing and invoicing, including the negotiations for the hire of the aircrafts is carried out by the Trust. Our record shows that you have an Australian Business Number and are registered for GST. A A is not a beneficiary of the Trust, but is an associate of the Trust. A manages and runs the item leasing activities. A is employed, and has had successes in various businesses and enterprises. A has a licence to use the item and has full knowledge of the maintenance required to keep the items in good condition. A was in the process of upgrading their licence through an external instructor and had the option of hiring the item through their instructor or hiring an item externally. A hired both item one and item two from the Trust at commercial rates. As a result, A was not charged by the instructor for the hire of the item. A has since let their qualifications lapse and is now unable to use item two. Item one You decided to acquire item one in order to generate income. You purchased item one in August 20DD which included GST. You decided to acquire a smaller version of the items available which had a lower capital outlay than the larger items. Item one was made available for hire and was suitable for instructors to use for training students. There are no restrictions on the commercial use of item one and you have no priority of use over customers. Item one was hired to B. The item was also listed on websites for hire to the general public. The businesses also approached contacts provided by an entity. B was the main client for item one. B advertises specific pilot training in various media including its website. You approached B and other similar entities to offer the item for this type of training. A used item one to upgrade and maintain their licence through an external instructor. There was an option for A to hire the item through the instructor or hire an item externally. A chose to hire item one at commercial market rates from the Trust as the item met the requirements of the instructor. Item one was first hired by B in location B. The first tax invoice for the hiring of item one was issued by the Trust to B in September 20DD. A copy of a tax invoice dated in September 20DD shows that item one was leased to B for a number of hours at $X per hour including GST. Item one was then transported to the location C for use by C and its members. Item one remained at C for approximately six months before being relocated to B where it was hired by B. Item one was hired regularly from October 20DD to September 20EE at $X per hour including GST. The total income from leasing the aircraft was $XX including GST. Item one was being used for more than 100 hours during your period of ownership. An associate (A) hired the item at the same rate for nearly half of the time. Other than the more than 100 hours (which include the number of hours hired by A), item one has not been used for any other purpose. Item one was available for hire at all times and as such, the hire by an associate of the Trust represents a small percentage of total hours available for hire. The intention for acquiring item one was to commence a profitable item hire business. Unfortunately, the hiring of item one was not as profitable. Following the loss made during the 20EE financial year and the advice sought from the target market such as commercial operators, you realised that item one did not meet the requirements of being a commercial item. Hence, you decided to purchase a larger item which suited the target market needs. You have provided a copy of the Business Plan for aircraft one. You incurred a number of expenses in relation to hiring item one. Item two In December 20EE, you traded item one and purchased item two, which included GST. Item two has continuously been hired out to a client. Item two has been permanently placed at a location close to the client. A has utilised item two for small number of hours since it has been hired out to the client. These hours were recorded and charged to A at commercial market rates. A has since let their licence lapse. There are no restrictions on the commercial use of the item and you have no priority of use over customers. You have continuously hired out item two to the client at $X per hour of utilisation. In addition, all costs in relation to operating item two are covered by the client. All other ongoing and maintenance costs to ensure the item remains in a suitable condition for hire are covered by you (such as X-hourly inspections and insurance). Item two is registered with a safety authority. However item two is not required to be licenced with any government authority for hiring purchases. You have also had interest from other customers in the future hiring of item two. Based on the current use by the client and expected use by a prospective client, you expect item two to generate profits with steady growth projected over a prolonged period. Further, based on the expected earnings before interest, tax, depreciation and amortisation ('EBITDA'), you expect to earn substantial cash flows each year from this investment. Item two is currently located at location D and is available for use by clients. Item two has been hired when demand requires the use of an additional aircraft. The increased demand is expected during April and May while a client's item is scheduled for maintenance. This maintenance was originally scheduled for February and March however was delayed due to circumstances out of your control. Also, negotiations are currently in progress for hire in location E where the item will be moved on the condition of a minimum use of hours. There were no formal contracts between you and the recipients in relation to hiring of item one and item two. However, you have provided copies of the several e-mails between you and the customers in relation to the use of item two. Item two has since produced a profit during its initial six months of trading and is expected to be profitable going forward. You expect that item two will continue to be fit for use for 25 years provided it is properly maintained. The item is expected to last for a much longer period of time, however, it is expected that an engine overhaul will be required after approximately 15,000 to 25,000 hours of use. You have provided a copy of the Business Plan for item two.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 6-5 | A New Tax System (Goods and Services Tax) Act 1999, Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999, Section 11-5 | A New Tax System (Goods and Services Tax) Act 1999, Section 195-1

Reasons for decision: Detailed Reasoning - Issue 1: Are you carrying on an enterprise for GST purposes? The definition of an 'enterprise' in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done: • in the form of a business; or • on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property. Activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise. That is, the activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. Subsection 9-20(1) of the GST Act commences by stating that 'an enterprise is an activity, or series of activities'. Consequently, it is necessary to identify the activity or series or activities that constitute the enterprise to determine whether the acquisition is acquired in carrying on that enterprise. | Detailed Reasoning - In the form of a business: Paragraph 9-20(1)(a) of the GST Act states that an enterprise includes an activity, or series of activities, done in the form of the business. Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of an enterprise and refers to Taxation Ruling 97/11 which discusses whether a particular activity constitutes the carrying on of a business. Paragraph 178 of MT 2006/1 states: 178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are: • a significant commercial activity; • a purpose and intention of the taxpayer to engage in commercial activity; • an intention to make a profit from the activity; • the activity is or will be profitable; • the recurrent or regular nature of the activity; • the activity is carried on in a similar manner to that of other businesses in the same or similar trade; • activity is systematic, organised and carried on in a businesslike manner and records are kept; • the activities are of a reasonable size and scale; • a business plan exists; • commercial sales of product; and • the entity has relevant knowledge or skill. There is no single test to determine whether a business is being carried on. The determination of the question is generally the result of a process of weighing all the relevant indicators. You must demonstrate that you have satisfied these indicators in order for your activities of purchasing the aircrafts (aircraft one and aircraft two) to be considered as done in carrying on a 'business'. Further review of your activities and assessment against these indicators are required in order to conclude whether or not you have satisfied paragraph 9-20(1)(a) of the GST Act. We will however consider paragraph 9-20(1)(c) of the GST Act which is of more relevance to your commercial circumstances. In the form of a lease, license or other grant of an interest in property Paragraph 9-20(1)(c) of the GST Act states that an enterprise includes an activity, or a series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The meaning of 'regular or continuous' is considered in Miscellaneous Taxation Ruling MT 2006/1. Paragraph 306 of MT 2006/1 states: To be an enterprise the grant of a lease, licence or other grant of an interest in property must be done on a regular or continuous basis. The grant need not be done on both a regular and a continuous basis. An activity will be 'continuous' if there is no significant cessation or interruption to the activity. An activity is 'regular' if it is repeated at reasonably proximate intervals. The intervals need not be fixed. Whether an activity is repeated over time on a regular basis is a question of fact and degree. There are some specific statutory exclusions within the definition of an enterprise. The excluded activities include (but not limited to) those done as a private recreational pursuit or hobby; or 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. In your circumstances, you are a trust (with a corporate trustee), and based on the facts given these exclusions will not apply to you. On the basis of the facts provided, you are carrying on an enterprise under paragraph 9-20(1)(c) of the GST Act, as the activities that you are carrying out are the leasing of items, which are done on a regular or continuous basis. You have hired out and made available for hire the items to various third parties (including your associate at the same rates), and therefore you are carrying on an item leasing enterprise. We then consider whether the acquisitions of item one and item two were made in the course or further of carrying on this item leasing enterprise. Goods and Services Tax Ruling GSTR 2008/1 addresses whether the acquisition is made in carrying on an enterprise or whether it is of a private or domestic nature. Paragraphs 64, 69 and 70 of GSTR 2008/1 state: 64. Whether something is acquired in carrying on an enterprise requires a connection or link between the thing acquired and the enterprise. 69. The Commissioner considers that in the GST context it is necessary to make an objective assessment as to whether there is a connection between the thing acquired and the enterprise, based on all the facts and circumstances. Although the subjective purpose of the entity making the acquisition is relevant, it is not determinative. 70. Whether an acquisition is acquired in carrying on an enterprise is a question of fact and degree, making it impractical to provide an exhaustive list of all the factors that may be relevant to determining whether an acquisition is made in carrying on an enterprise. However some factors that would suggest that an acquisition is made in carrying on an enterprise include that: • The acquisition is incidental or relevant to the commencement, continuance or termination of the enterprise; • The thing acquired is used by the enterprise in making supplies; • The acquisition secures a real benefit or advantage for the commencement , continuance or termination of the enterprise; • The acquisition is one which an ordinary business person in the position of the recipient would be likely to make for the enterprise; • The acquisition does not meet the personal needs of individuals such as partners or directors; • The acquisition helps to protect or preserve the enterprise entity, structure or organisation; and • The acquisition is made by the entity in accordance with, or to satisfy, a statutory requirement imposed on the enterprise. As stated above, the activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. On the basis of the facts provided, the acquisitions of the item are incidental or relevant to the commencement and continuance of (used by) your item leasing enterprise. There is a connection between the acquisitions of the item and the leasing enterprise that you carry on. Accordingly, you are carrying on an item leasing enterprise when you acquired and hired out the two item for GST purposes under section 9-20 of the GST Act. | Detailed Reasoning - Issue 2: Assessability of income Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer shall include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the taxation year. Ordinary income has generally been held to include income from three categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. In your case, the income earned from hiring items is relied upon and has elements of periodicity, recurrence or regularity, and is considered ordinary income under section 6-5 of the ITAA 1997. Deductibility of expenses Subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that: a. it is incurred in gaining or producing your assessable income; or b. it is necessarily incurred in carrying on your business for the purpose of gaining or producing your assessable income. However, under subsection 8-1(2) of the ITAA 1997, you cannot deduct a loss or outgoing to the extent that: c. it is a loss or outgoing of capital, or of a capital nature; or d. it is a loss or outgoing of a private or domestic nature; or e. it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income; or f. a provision of the ITAA 1936 of the ITAA 1997 prevents you from deducting it. In your case it is considered that the loss or outgoing is not of a kind referred to in subsection 8-1(2) of the ITAA 1997. Further, expenses relating assets that are capital in nature are considered under division 40 of the ITAA 1997. Paragraph 8-1(1)(a) of the ITAA 1997 provides for the deductibility of losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, that is, to the extent to which the nexus between the expenditure incurred and the income producing activity exists. 'To the extent' may require the apportionment of expenditure between different categories. Characterising an expense enables the determination of whether it has been incurred for the appropriate purpose under section 8-1 of the ITAA 1997. Where it has not been incurred entirely for the appropriate purpose, than only an apportioned deduction may be available. Under the purposive approach to apportionment, courts examine a taxpayer's subjective purpose for incurring expenditure when determining the characterisation of the expense. If examination of a taxpayer's subjective purpose shows that the outgoing was incurred for a purpose other than satisfying the requirements of the positive limb of section 8-1 of the ITAA 1997, the courts will apportion the deduction. We have considered your purposive approach as clarified by the High Court in Fletcher & Ors v. FC of T 91 ATC 4950 and Taxation Ruling TR 95/33. In particular, paragraphs 3 to 6 of TR 95/33 provide that: If an outgoing produces an amount of assessable income greater than the amount of the outgoing, there would normally be no need to examine the taxpayer's subjective thought processes (i.e. motives and intentions) in characterising the outgoing as falling within the first limb of subsection 51(1). If the outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing. If, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, it can be concluded that the expenditure is genuinely, and not colourably, used in an assessable income producing activity, a deduction is allowable for the loss or outgoing. If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective (e.g. to derive exempt income or the obtaining of a tax deduction), then the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher at 91 ATC 4957-8; 22 ATR 621-3. Further, paragraph 30 of TR 95/33 provides that in circumstances where the relevant assessable income is less than the amount of the outgoing: In such cases their Honours said that the disproportion between the detriment of the outgoing and the benefit of the income may give rise to the need to resolve the problem of characterisation by a commonsense or practical weighing of all the circumstances, including the direct and indirect objectives and advantages, which the taxpayer sought in making the outgoing. If, after weighing all the circumstances, it can be concluded that the whole outgoing is properly to be characterised as genuinely, and not colourably, incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of subsection 51(1) unless the outgoing satisfies the exclusory provisions (or negative tests) within the subsection. Subjective purpose, motive or intention Paragraph 13 of TR 95/33 provides that: When considering the subjective purpose, motive or intention in incurring a loss or outgoing, regard must be had to the purpose or motive that the taxpayer had in mind when the loss or outgoing was incurred. It may also be appropriate to have regard to the purposes of those who advised or acted on behalf of the taxpayer and whose acts or intentions as agents must be imputed to the principals: Fletcher 91 ATC 4950 at 4959; (1991) 22 ATR 613 at 624 and Fletcher & Ors v. FC of T 92 ATC 2045; AAT Case 5489A (1992) 23 ATR 1068. In the case of a company, the relevant purpose is the corporate purpose. This requires an examination of the purpose, motive or intention of the company's directors, officers and employees. However, the subjective purpose of any particular director, officer or employee will not by itself be determinative: see Magna Alloys per Deane and Fisher JJ 80 ATC 4542 at 4558; 11 ATR 276 at 294. In the case of a corporate trustee, when considering the knowledge the company's directors, officers and employees may have of the trustee's actions, it is relevant that the arrangements being considered are those where both the company directors, the corporate trustee and the beneficiaries of the trust are entities within the same family group that share the same directing mind and will. The doctrine of a corporation's 'directing mind and will' was explained by Millet J in El Ajou v. Dollar Land Holdings plc and another [1993] 3 All ER 717 at 740 as follows: Since a company is an artificial person, the knowledge of those who manage and control it must be treated as the knowledge of the company … Those who 'constitute the directing mind and will of the company' are the company for this purpose. Their minds are its mind; their intention its intention; their knowledge its knowledge. Application to item one You have advised that the intention for acquiring item one was to commence a profitable item hire business. Unfortunately, the hiring of item one was not as profitable and you made a loss in the 20DD-EE and 20EE-FF income years. It is therefore relevant to consider paragraph 4 of TR 95/33 as the amount of assessable income is less than the amount of the outgoing. As such it is necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing. In such cases, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to the need to resolve the problem of characterisation by a commonsense or practical weighing of all the circumstances, including the direct and indirect objectives and advantages, which the taxpayer sought in making the outgoing. You are a trust with a corporate trustee. The directing mind and will of the corporate trustee will be the knowledge of those who manage and control it, which in this case are the directors of the corporate trustee, A and B. When considering their subjective purpose, paragraph 13 of TR 95/33 requires that regard must be had to the purpose or motive that they had in mind when the loss or outgoing was incurred. If examination of their subjective purpose shows that the loss or outgoing was incurred for a purpose other than satisfying the requirements of the positive limb of paragraph 8-1(1)(a) of the ITAA 1997, then it would be necessary to apportion the loss or outgoing between the pursuit of assessable income and the other objective. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. From the facts given, the intention for acquiring item one was to commence a profitable item hire business. A copy of the Business Plan for item one has been provided which states that: We are confident that the business will return a profit (after depreciation and interest) each year with smaller profits in years of substantial maintenance. Item one was purchased in August 20DD and the item was first hired to B in September 20DD. Item one was then regularly hired out from October 20DD to September 20EE at $X per hour including GST to customers. Item one was being used for approximately more than 100 hours during the Trust's period of ownership. Of the hours, A, being an associate of the Trust, hired item one for nearly half the time and was charged the same rate as other customers. The hiring rate is considered to be commercially realistic. A used item one to upgrade and maintain their licence through an external instructor. There was an option for A to hire an item through the instructor or to hire an item externally. A chose to hire item one at commercial market rates from the Trust as this item met the requirements of the instructor. Whilst it could be argued that an indirect objective and advantage which the Trust sought in making the loss or outgoing was to provide a benefit to A by providing him with the hire of item one, the facts suggest otherwise as A hired the item at commercial rates, the item was available for hire by customers at all times, and neither A nor the Trust had priority of use of the item over other customers. Further whilst it could also be argued that an objective and advantage which the Trust sought in making the loss or outgoing was to provide a benefit to the Trust and its beneficiaries, by the obtaining of a tax deduction due to losses in the Trust, the Commissioner is satisfied that this is not the dominant purpose of entering into the item hiring arrangement. For these reasons, it is accepted that the expenditure in relation to item one can be characterised by reference to the actual or expected production of assessable income which is consistent with normal commercial practices in the industry involved. As such, it is considered that the expenditure incurred in relation to item one comprises a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, and is deductible under section 8-1 of the ITAA 1997 and division 40 of the ITAA 1997. Application to item two You advise that the hiring out of item one was not as profitable as expected. Following the loss in the 20EE financial year and the advice sought from the target market such as commercial item operators, you decided to trade-in item one and purchase item two, which better suites the target market's needs. You advise that item two has since produced a profit during its initial six months of trading and it is expected to be profitable going forward. It is therefore relevant to consider paragraph 3 of TR 95/33 as the amount of the assessable income is greater than the amount of the outgoing. In such circumstances, there would normally be no need to examine the taxpayer's subjective thought processes (that is, motives and intention) in characterising the outgoing as falling within the first limb of paragraph 8-1(1)(a) of the ITAA 1997. Further, paragraph 28 of TR 95/33 provides that where the outgoing gives rise to a receipt of a larger amount of assessable income … in such a case: the characterisation of the particular outgoing as wholly of a kind referred to in s.51(1) will ordinarily not be affected by considerations of the taxpayer's subjective motivation … the objective relationship between the outgoing actually made and the greater amount of assessable income actually earned suffices, without more, to characterise the whole outgoing as one which was incurred in gaining or producing assessable income. From the facts given, the intention for acquiring item two was to commence a profitable item hire business and to generate income for the Trust. A copy of the Business Plan for item two has been provided which states that: Based on the factors outlined above, we are confident that the business will return a profit (after depreciation and interest) each year with smaller profits in years of substantial maintenance. The unique characteristics of the item and the limited availability of similar items indicate demand from various businesses will be strong. In December 20EE, item one was traded in and item two was purchased. Item two has been continuously hired out. A has utilised item two for a small number of hours since the item has been hired. These hours were recorded and charged to Paul at commercial market rates. There are no restrictions on the commercial use of item two and the neither A nor the Trust have priority of use of the aircraft over other customers. A has since let their licence lapse and is now unable to use item two. For these reasons, it is accepted that the expenditure in relation to item two can be characterised by reference to the actual or expected production of assessable income which is consistent with normal commercial practices in the industry involved. As such, it is considered that the expenditure incurred in relation to item two comprises a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, and is deductible under section 8-1 of the ITAA 1997 and division 40 of the ITAA 1997.