Decision Impact Statement
 AATA 1073
2006 ATC 257
64 ATR 1273
Venue: AAT Melbourne
Venue Reference No: VT2005/554-556
Judge Name: Mr B.H. Pascoe, Senior Member
Judgment date: 12 December 2006
Appeal on foot:
Administrative Treatment (Implication on current Public Rulings and Determinations)
TR 2003/4 - Income Tax: boat hire arrangements
carrying on a business of boat chartering
is loss or outgoing deductible
passive income or business
prospect of profit
This document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.
Outlines the Tax Office's response to this case which concerned whether the taxpayer was entitled to income tax deductions in a business of boat charter, or whether his activities were no more than a passive investment.
Brief Summary of Facts
The Commissioner disallowed deductions claimed by VCK in respect of a boat on the basis that he did not use or hold the boat mainly for letting it on hire in the ordinary course of a business that he carried on, as required by section 26-50.
Pursuant to two separate Management Agreements, (one with QC from 4 October 2001 until it was terminated in October 2003 and one with HCC from 20 October 2003), VCK appointed charter operators to hire out his boat.
VCK's evidence was that he entered the arrangements in reliance on a one page "Analysis of Charter Boat Ownership Benefits" which contained projections of annual income and expenses for a comparable boat. The Analysis projected a cash return of $23,804; however it did not take into account depreciation of the boat and any interest payable on the loan used to acquire the boat.
VCK's accountant reviewed the Analysis and concluded that, taking into account all expenses (including depreciation and interest), profits would be generated after three years, with progressive increases each year thereafter.
Income did not meet expectations and maintenance costs were much higher than anticipated. VCK made losses of approximately $50,000 in each of the relevant years (compared to the projected loss of $32,571 referred to in the Accountant's advice). VCK became increasingly concerned and in October 2003 he removed the boat from the QC arrangement and placed it in charter with another charter operator (HCC).
The Commissioner had argued that the agreement between VCK and QC contained certain features that characterised it as a lease agreement rather than an agency agreement. The Tribunal found that the agreement was correctly characterised as an agreement under which QC was the agent for VCK. The Commissioner did not question this characterisation of the agreement between VCK and HCC.
VCK did not use the boat for private use notwithstanding that the respective Management Agreements allowed up to four weeks of personal use.
Issues decided by the Court or Tribunal
- Was VCK carrying on a business of chartering his boat?
- Were his activities no more than a passive investment?
- Whether section 26-50 of the ITAA97 operates to deny deductions claimed in relation to a boat.
The Tribunal found that VCK's activities in chartering the boat through HCC constituted a business. The Tribunal accepted that VCK, relying on the projections provided by QC, had an expectation of profit. This was notwithstanding that he may have been "naïve in accepting the projections from [QC] who might be seen as having an interest in persuading [him] to become involved in chartering" and "naïve in not factoring in the interest costs on borrowings and depreciation of the boat". Nevertheless, the Tribunal accepted evidence from VCK's accountant that not only would 'there... be a positive cash flow before interest and depreciation', but also that 'a profit should emerge in later years'. That is, the accountant considered that the activity would be profitable, taking into account interest and depreciation as elements of calculating the profitability of the activity.
The Tribunal therefore found that 'on balance and on the particular facts of this case ... [VCK] was carrying on a business of chartering his boat'. As noted above, the Tribunal had also found that the arrangement between VCK and QC was correctly characterised as an agency agreement, rather than the provision of a boat to QC under the terms of a lease.
Section 26-50 therefore did not operate to deny the deductions claimed; the taxpayer was carrying on a business of chartering his boat and as such the outgoings and depreciation were deductible.
Tax Office view of Decision
An appeal from a decision of the Administrative Appeal Tribunal lies only for errors of law, not of fact. A conclusion of fact may, however, constitute an error of law if the conclusion is not reasonably open to it on the evidence. The Tribunal's conclusions of fact were open to it on the evidence. Conclusions as to whether a business is being carried on are usually only involve questions of fact.
In relation to whether the taxpayer was engaged in more than the mere passive receipt of income (i.e., a business), the Tribunal had regard to both the character of the contract, as a contract of an agency not a lease, and also to the additional activities undertaken by the taxpayer and his partner, to show that an active business was being carried on by the taxpayer. It accepted, as a fact, the taxpayer's evidence of his profit-making intentions. The Commissioner considers that the decision was, as noted by the Tribunal, one that turned on its own particular facts. It raises no implications for the views expressed in Taxation Ruling TR 2003/4.
Implications on current Public Rulings & Determinations
In light of the findings of the Tribunal in this case, particular attention will be paid in current and future cases to:
- The actual activities of the taxpayer in addition to the form of contract, to determine whether the activity is correctly characterised as the carrying on of a business rather than the receipt of passive income; and
- Consistent with evidence produced to the Tribunal in this matter, whether there is evidence available that the taxpayer, and (where available) their professional advisers have considered the profitability of the boat chartering activity, including interest and depreciation.
Implications on Law Administration Practice Statements
We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.
| Date Issued:
|| 16 March 2007
| Due Date:
|| 11 May 2007
| Contact officer:
|| John Horsnell
| Email address:
|| (08) 8208 1935
|| (08) 8208 1898
|| Australian Taxation Office|
GPO Box 9990
Adelaide SA 5001
Income Tax Assessment Act 1997
Taxation Administration Act 1953
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Ferguson v. Federal Commissioner of Taxation
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