Two taxpayers have been successful before the Federal Court in a matter concerning boating expense claims and the quarantining rule under s 26-47 of the ITAA 1997.
The Commissioner concluded that s 26-47 applied to boat chartering activities conducted by the taxpayers and therefore quarantined deductions claimed by the taxpayers that exceeded the respective company’s assessable income from those activities. In doing so, the Commissioner issued amended assessments and shortfall penalties (for the first taxpayer – for the 2009 and 2010 income years, and for the second taxpayer – for the 2010 to 2013 income years).
The matter concerned whether losses or outgoings claimed by the taxpayers fell within the exception to the quarantining rule under s 26-47(3)(b). That exception would apply if the subject vessels (luxury motor yachts or “super yachts”) were used (or held) mainly for letting on hire in the ordinary course of a business conducted by the taxpayers.
The Federal Court found that each vessel was used or held mainly for letting on hire in the ordinary course of a business carried on by the taxpayers. It therefore held the losses and outgoings claimed by the taxpayers did fall within the exception. Accordingly, it allowed the taxpayers’ objections in full against the various amended assessments and shortfall penalties for the relevant years.
(Lee Group Charters Pty Ltd & Anor v FCT [2016] FCA 322, Federal Court, Logan J, 7 April 2016.)
[LTN 66, 8/4/16]
The facts were that LGC bought a ‘super yacht’ for about USD 5.5m, in Florida, and offered the yacht for charter, at rates in the order of AUD 75,000 per week. Mr Lee and his wife had a long history of interest in luxury yacht cruising and, after achieving success in another business, they spent a good may years investigating the viability of a market in Queensland cruising waters for chartering super yachts. This included extensive discussions with Mr Keith Williams, who developed Hamilton Island into a successful tourist resort and boating venue. Mr Williams also had a similar yacht which he let out on charter and he was prepared to show Mr Lee ‘the books’. Mr Lee made other similar investigations and carefully assessed the prospects. Mr Lee was the chief witness for the Applicant taxpayer and the Court found his evidence (both by affidavit and under cross-examination) candid and convincing. Mr Lee intended his company’s activities to be a business and he/it conducted themselves consistently with this.
In the course of argument, and in the judgement, reference was made to a case: Hostess Marine [2006] FCA 1651, where similar issues were relevant for sales tax exemption. Here, too, the taxpayer was successful (partly due to my preparation of the taxpayer’s evidence).
[FJM]
- the controller of the taxpayer companies Mr Lee was a very honest and reliable witness;
- the taxpayer companies carried on a business of chartering (whether separate or as one business) with an expectation and purpose of profit, and each of the superyachts was held exclusively for letting on hire in the ordinary course of that business;
- expected charters made to Mr Lee, his family and associates were made at a commercial rate, in the ordinary course of that business, and the fact that those persons would derive personal enjoyment or pleasure from the charters was irrelevant to the statutory exception relied upon by the taxpayer companies (paragraph 14); and
- evidence of ten years of trust distributions from entities that control Mr Lee’s profitable business operations to the taxpayer companies to absorb the excess boating deductions did not detract from the conclusion that a business was carried on. It was consistent with Mr Lee’s evidence of taking a long term view of the profitability of the superyacht chartering businesses and a willingness to back that view (paragraph 126).
[ATO LPR 8/4/16]
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Extract from s26-47 of the Income Tax Assessment Act 1997
Object
(1) The object of this section is to improve the integrity of the taxation system by preventing deductions from boating activities that are not carried on as a *business being offset against other assessable income.
Rule
(2) This Act applies to you as if so much of the amounts relating to using or * holding boats that you could otherwise deduct for an income year as exceeds your assessable income from using or holding boats for that year:
(a) were not deductible for that income year; and
(b) were an amount (a quarantined amount) relating to using or holding boats that you can deduct for the next income year.
Note: A quarantined amount may be reduced under subsection (5) (for boat capital gains), reduced under subsection (7) (where you deduct part of a quarantined amount under subsection (6) for boat business profits), reduced under subsection (8) (about exempt income) or affected by subsection (10) (about bankruptcy).
Example ….
Exception: business use
(3) The rule in subsection (2) does not apply to amounts that are attributable to one or more of the following:
(a) *holding a boat as your *trading stock;
(b) using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you carry on;
(c) using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on;
(d) using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.
Note: Even if this exception applies to you, you may still have to quarantine losses under Division 35 (deferral of losses from non-commercial business activities).
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