Private ruling: Am I in business - boat charter
Date of advice: 9 February 2017
Published: July 2017
Ruling period: The year ending 30 June 201Y | The year ending 30 June 201Z
Date scheme commenced: 1 July 201X

Ruling: Q1: Is the boat hire activity considered to be carrying on a business for the purpose of section 26-47 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You (you and your spouse) are in the process of acquiring a boat for a specified price (incl. GST). You have signed a purchase agreement and paid an initial deposit. You have financed the deposit for the vessel by drawdowns from an existing home loan. The acquisition is being funded through a combination of your own and borrowed funds The boat is currently being constructed in will be ready for handover in mid-201X. This activity will be conducted under a partnership agreement, under an ABN which you have not yet applied for. You have provided a copy of the charter agreement and a signed copy of the execution clause. You intend to have the vessel in charter for a total of XX years. The initial term of your agreement is X years, which made be extended to XX years. After the initial X year term, the performance of the operation and level of satisfaction with the charter operator will be evaluated; and if satisfactory, the agreement will be extended for an additional X years. If the performance of the charter operator is unsatisfactory, you intend to engage an alternative operator for another X years. You expect to sell the boat following XX years of charter. In your XX year income projection you calculated the depreciation using the straight line method over the first X years and the remaining X years as per the estimate of the market value. The charter operator will provide you with regular reports of income and expenditure as well as future booking status, forming the basis of your records for you to monitor the operation. You have conducted research into the market for charter boats of similar type in the area. You have used a XX year income projection to evaluate the viability of the activity.

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: Section 26-47 of the 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 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 Income tax: am I carrying on a business or primary production?. 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. In your case you will acquire the boat and enter into a management agreement with a charter operator. Based on the agreement provided, 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 boat will be undertaken on your behalf, ● you are entitled to all hiring fees earned in relation to the charter of your boat, ● 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, ● 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 a certain amount, ● you are responsible for the payment of mooring costs, repairs and insurance, and ● the arrangement grants exclusive management of the boat to 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. 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. 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 the activity, additional services will be provided to the hirers of your boat. These services will be provided through the charter operator, as your agent, or yourself and include: ● inquiry and booking services, ● pre-charter training and assistance in the correct operation of the boat and safety equipment, ● support infrastructure for the hirers while the boat 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. 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. It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on. | Detailed Reasoning - 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. In your case you: ● have undertaken preliminary research into charter operations in the boat charter region including evaluation of boats, charter operators and trends in tourism over time; ● will engage a charter operator with considerable experience under a charter agreement for the day-to-day operation; ● sought advice from a number of sources within the industry and accounting experts; ● you will fund the boat through a combination of available funds and borrowings; and ● from your projections, you expect to make a significant profit over the charter boat management agreement period. You satisfy this criterion and have demonstrated the commercial basis for entering into the boat hire arrangement; a significant profit is expected to be made over the charter boat management agreement period. | 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 more than an intention to engage in business. | 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 boat 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 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 (TR 2003/4 paragraph 75). You have projected you will generate a profit in the third year of operation, and in ever year thereafter. You project that you will make a significant overall profit after XX years. This is considered to be at a commercial level. Importantly your projected profit does take into account all of the expected income and expenses. This has included any decline in value of the boat while used in the activity (TR2003/4 paragraphs 17 and 78). 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 projections you have provided the activity is profitable from the third year of operation and in every year thereafter, the activity makes a significant overall profit. This indicator is passed. | 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 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; ● you will have the appropriate licences and permits required; ● you will have appropriate insurance; and ● your private use of the boat is minimal 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 conducted research into the industry, area of operation, charter operators and financial implications of the activity; ● you will receive monthly reporting from the charter operator; ● you will hold regular meetings with the charter operator to review the activity and discuss future growth; ● you will keep records to assist with BAS and tax return preparation, and ● you have signed an agency agreement with the charter operator. 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. In your case, your boat will be available for hire for the full year other than the private use days and when the boat may be unavailable due to repairs. Your activities are considered to be carried on at a smaller scale. This indicator is not determinative by itself refer paragraph 23 TR 2003/4. 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 boating activity. 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. Note This private ruling is binding on the facts provided. The main reason this activity as described is qualifying as a business is in regard to its overall profitability particularly when the boat is sold. You should review the actual figures at the end of 30 June 201Y and 30 June 201Z. Should the boat charter income and expenses vary significantly from the financial information that you provided with this private ruling application, this private ruling decision will have no application. If this is the situation you could apply for a new private ruling based on the different facts if you are unsure of how the ATO view would apply to your circumstances. Limit to future years rulings You had requested the Commissioner to provide you with a private ruling for a period from 1 July 201X for an indefinite period. Due to the possibility of changes in your circumstances (the fact that your income projections and expenses, particularly the income may vary significantly), the possibility of change to the law, and the risk that a subsequently issued public ruling might override a private ruling the Commissioner has issued, the Commissioner has provided a private ruling from 1 July 201X until the 30 June 201Z only. You may request a further ruling after this time if you require further binding advice.