Boat chartering and tax deductions
Boat owners claiming tax deductions for chartering out their boats may find it's not all smooth sailing, advises Tina LourasBoating for profit
With the current economic uncertainty and the high price of fuel, boaters may consider hiring or chartering out their boats - providing they are in survey - for part of the year as a way to reduce the costs of what can be an expensive recreation.
However, while creating a sideline business and claiming tax deductions for boat expenses is attractive, owners won't be able to claim deductions if they fail to qualify as a bona fide business under the Australian Taxation Office (ATO) rules governing boat charter.
Tax consultant Tina Louras says that in recent years some boat charters have been established whereby boats are available for hire only when they are not required for use by the owner(s).
"Many boat owners, though, don't realise the requirements imposed by the ATO to rightly claim tax deductions for boat expenses," Louras says.
While part-time hiring out of boats is an attractive option for people struggling to maintain their craft, and who don't want to give up the on-water lifestyle, there are parameters that define the activity.
"If a boat owner is happy to limit his or her access to the boat to a certain number of days or weeks per year then there are some definite commercial prospects for boat owners that will be recognised by the ATO," advices Louras.
PLEASING THE TAXMAN
Louras says that in order to claim deductions for boat expenses, you need to tick all the boxes required by the ATO. The tax office has well-defined rules for determining whether or not a boat owner is carrying on a bona fide business. These include the prospect for profit, the availability of the boat for hire, and repetition and regularity of conduct.
"If a boat owner is only hiring out a boat for a couple of weeks a year to help cover the costs of private use of the same craft then the likelihood of profit is nil and the ATO will not consider this activity as a business.
"Even larger scale chartering activities might not meet the criteria of a business if the activity is sporadic and doesn't show a possibility for financial gain," adds Louras.
"It's also important to note that the ATO will not grant tax concessions for boat owners receiving a passive income from their charter activities.
"This means that a boat owner leasing out his or her boat to charter operators should stay in contact with the charter managers to make sure the boat is being advertised properly and the availability of the boat is being maximised," Louras said.
Meantime, PKF has provided a list of the issues to be considered in determining whether the boat owner is carrying on a business. They are as follows:
- Significant commercial purpose or character: The activity is operated on a commercial basis and in a commercially viable manner with the intention of producing a significant commercial gain.
- Prospect of profit: The activity is carried out with a genuine expectation of making a commercially realistic profit, either through independent chartering or through an arrangement with a charter operator. However, if the overall costs are expected to exceed the income from the activity, it cannot be concluded that the activity is undertaken with the requisite intention of profit.
- Activities carried on in a similar manner to those of ordinary trade: The boat hire activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. Features may include - the boat is available for charter on short notice; the boat owner has the appropriate licences, permits, insurance and experience; and, the use of the boat is not primarily directed at private use. The above may not apply to individual boats leased out to charter operators.
- Organised, systematic, business-like manner: This usually involves advertising for customers in a consistent and systematic manner, maintaining profitable activities, discontinuing unprofitable activities and keeping appropriate business records. These may be carried out by the boat owner or by a manager on behalf of the boat owner.
- Repetition and regularity in conduct: A boat hire activity is more likely to be a business where it displays repetition and regularity in its conduct. However, it should be noted that leasing to a charter-boat operator might also exhibit characteristics of regularity and repetition that would not constitute a business. This activity would be evaluated in light of other determining features.
- The size and scale of the activity: The larger the scale upon which the boat owner conducts the boat hire activity, the more likely it will be considered to be a business.
* Tina Louras is principal of the tax consulting department at PKF, a national chartered accountants and business advisory firm that's part of the international accounting group PKF, which has some 400 offices in 119 countries worldwide.
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