How to claim a tax return on your boat, and why you shouldn't

If you use it purely for pleasure, there’s unlikely to be anything you can claim on it as a tax deduction – unless, of course, you try and pass it off as a “mobile outdoor floating billboard”.

But if you need the boat to earn income, then there’s every chance you can.

The rise in electronic commerce and smartphone technology has seen some significant changes in the way people use more expensive things such as cars and boats, particularly if they don’t own them.

Hire cars have been around for ages, but the way we use them – everything from taxis to Avis rentals – has changed. While once it was big companies with pools of cars or boats hiring them out to people, the so-called “peer-to-peer” gig economy is starting to take off. By “peer-to-peer”, we generally mean one person directly to another, usually via a service provider specialising in connecting people who own something with people who don’t.

Because the way we do business has become so personal, it’s now easier for individual owners to convert a boat into cash flow, particularly when there is pent-up demand for short-term boat rentals.

Once you start to earn income from your boat, you pay tax, and once every financial year a portion of that tax may come back to you in the form of a tax return that reimburses you for tax paid on business inputs, considered a cost of running the business. 

Of course, you will need to seek independent advice before deciding if trying to earn income off your boat works for you.

So how can recreational boat owners earn income from their vessels? There are two main ways.

The rise of the peer-to-peer economy means that it is now much easier for a boat owner to hire out their vessel to someone who is willing to pay for the short-term opportunity to use it.

But while it sounds straightforward, getting that first payment in the bank isn’t that easy.

Generally speaking, if you start earning money from a boat, such as a commercial charter fishing operation, you will need to have a domestic commercial vessel certificate of survey issued by the Australian Maritime Safety Authority.

That means there are very specific rules about the condition of the boat, who operates it, and the amount and type of safety equipment carried onboard.

For recreational boat owners looking to earn a bit of extra income on the side, having to comply with a certificate of survey would be too onerous. However, if your boat is less than 12 metres long and will stick to sheltered waters you can apply for an exemption from needing the certificate and all the extra baggage it creates.

When you sign up for a peer-to-peer boat rental service, you can usually expect a bit of help with applying for the exemption. 

Owners will also need a certificate of operation issued by AMSA that sets out the conditions that the boat will need to adhere to when it is out on the water. This includes where it can go and how it gets there. 

The cost of getting both certificates is around $390.

Peer-to-peer boat rental services such as rentmyboat.com.au and bookmyboat.com.au charge a fee for every time your boat is rented out. 

While the fee may seem high, bear in mind that the boat rental service needs to pay for its own insurance cover from the moment renters steps onto your boat to the moment they step off it. This is because the private insurance you pay for your boat does not cover it when the boat is used to make money.

On the downside, the terms of the insurance coverage may not suit your boat, particularly if it is new and packed with options. Read the documentation carefully. Likewise, find out if the onus to check if the person renting the boat is licenced to drive it is on you or the service connecting you with the renter – for instance, Northern Territory boaters do not need a marine licence, so can NT tourists drive your boat?

Depending on how much time the boat spends in the hands of renters, you may be able to claim a tax deduction on some of its running costs. Again, seek independent advice about this. 

The gig economy has seen a sharp rise in casual accommodation services such as Airbnb, which helps people to rent out their houses while they are not in them.

Why not do the same for boats?

Services such as bedsonboard.com.au, and even Airbnb try and provide a conduit between yacht owners and people who would like to use them as a rather different form of accommodation.

This is nothing new, with boat rentals covering everything from houseboats to motor yachts and sailboats. However, in this instance, rather than hand the boat over to a skipper to take out, the boat remains tied up in the marina and guests are treated to what amounts to a night in a floating hotel room.

In somewhere such as a city’s central business district, having a floating hotel room could be a unique and cost-effective alternative to a brick-and-mortar hotel.

How much do you earn? Services such as bedsonboard.com.au, and even Airbnb, typically scrape off a flat percentage for listing on the site as well as a service fee that’s built into whatever the customer pays, and you get the rest. 

The boat bed booking services generally leave it up to the owner to work out how much extra they’d like to charge for cleaning once the guests have gone.

The benefit of leaving the boat at the dock is that there’s much less wear and tear on the boat because no one needs to start up and drive it – engine maintenance is a big-ticket item.

Probably one of the biggest ongoing expenses of big-boat ownership is berthing fees, so depending on how popular your boat becomes as an overnight stopover for landlubbers, you may be able to claim some of the cost as a tax deduction. But ask your accountant first.

The Australian Tax Office regards boats as a "lifestyle asset", meaning it is similar to a luxury car, a racehorse, fine art or even an aircraft – nice to have, but not something you need.

Since 2016, the ATO has requested data from insurance companies that it uses to profile peoples' insured assets against their tax returns.

Its purpose? Data-matching allows the ATO to identify and address a number of taxation "risks", including taxpayers who accumulate or improve assets with insufficient income reported in their tax returns to show they have the financial means to pay for them.

“If a taxpayer is reporting a taxable income of $70,000 to us but we know they own
a $3 million yacht then this is likely to raise some red flags,” former ATO small business deputy commissioner Deborah Jenkins said at the time the program was launched.

The tax office also looks unkindly on boats bought as part of a self-managed retirement fund that may be used for "personal enjoyment" rather than as a legitimate superannuation investment.

The ATO has set a $100,000 threshold for the value of a marine vessel, so if your boat is insured for more than that and you're earning a subsistence income, expect a few questions.

If your boat is used to earn an income, then be very clear about what is personal use, and what is a legitimate business expense.

If you claim excessive expenses and the ATO thinks you were using it more for pleasure than business, you could be hit for repaying some of those expenses, as well as the interest that money would have earned.

The ATO already has form in this: one of its case studies relates to a motor yacht that was used as a marketing tool, logging up big expenses in maintenance and servicing, but turned out to be mainly used as a party boat for company directors and their employees. The company was hit with a fringe benefits tax bill, penalties, and interest as a result.

Having a crack at earning income from your boat means you’ll likely need to set yourself up as a small business to keep things at arm’s length from your other assets – should the issue of liability ever raise its ugly head.

That means you may need to apply for an Australian business number, commonly called an ABN, so that you clearly separate your private life from the business one. 

With an ABN, a small business can gain a few tax advantages compared with taxes paid on personal income, and can even apply for government grants and incentives to help keep the business afloat, so to speak. 

You’re also likely to need to create some sort of trust to manage the financial side of the business, making it easier to take investors on board should your business take off, or even when buying a new boat.

All this costs money to set up, so weigh up whether it is worth it financially.

Whatever you do, we’d highly recommend using a registered tax agent to help you lodge your tax returns to make sure you're not losing out or paying too much, and staying on the right side of Australian tax laws.

You can find a certified practising accountant through the CPA Australia website.

Note: The information in this article does not constitute financial advice. Speak to a registered tax accountant for advice on your specific circumstances.