Athineos and Commissioner of Taxation
[2006] AATA 661
•26 July 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 661
ADMINISTRATIVE APPEALS TRIBUNAL )
) NT2004/385
) NT2004/386
) NT2004/387
TAXATION APPEALS DIVISION ) Re NICHOLAS ATHINEOS Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Ms Robin Hunt, Senior Member Date26 July 2006
PlaceSydney
Decision The decision under review is affirmed. [SGD]
Ms R Hunt Senior Member
CATCHWORDS
TAXATION - objections – expenses incurred in connection with two yachts - not allowable deductions – yachts let on hire – not carrying on a business for the purpose of gaining or producing assessable income –expenses not expenditure ‘necessarily incurred in carrying on a business’ for the purpose of gaining or producing assessable income pursuant to s 8-1(1)(b) of the Income Tax Assessment Act 1997 (Cth)
Income Tax Assessment Act 1997 (Cth) ss 8-1, 8-5, 26-50, 42-45, 328
Income Tax Assessment Act 1936 (Cth) ss 222A, 222G, 222H and 222JEll v Commissioner of Taxation [2006] FCA 71
Ericksen v Last (1881) 8 QB 414Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 FCT v Payne 46 ATR 228
Federal Commissioner of Taxation v Stone (2005) ATC 4234
Fletcher v Federal Commissioner of Taxation (1991) 1973 CLR 1
Hope v Bathurst City Council (1980) 144 CLR 1 Robe River Mining Co Pty Ltd v FC of T (1989) ATC 4606
John v Federal Commissioner of Taxation (1989) 166 CLR 417 Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 Spassked Pty Ltd v Commissioner of Taxation (2003) 136 FCR 441
Tweedle v Commissioner of Taxation (1952) 180 CLR 1REASONS FOR DECISION
3 July 2006
summary
1. Mr Nicholas Athineos, the applicant, sought review of the Commissioner’s disallowance of his objections to several assessments of income tax. Mr Athineos objected to amended assessments for the income years ending 30 June 2000, 2001 and 2002 and to the assessment for the income year ending 30 June 2003. His objections related to disallowance of deductions claimed for outgoings and depreciation in respect of two yachts. The tribunal has decided that the decision under review is affirmed.
issue
2. The issue for the tribunal was whether the Commissioner’s decisions on the objections for the contested years were correct. This involved consideration of the following questions:
·Whether the applicant, during the relevant years, used or held the yachts in the prescribed manner as set out in s25-60 of the Income Tax Assessment Act 1997 (ITAA97).
·Whether the income returned by the applicant during the relevant years was income in respect of the use of the yachts in the prescribed manner as set out in s26-50 (ITAA97).
·Whether s.26-50 of the ITAA97 operates to deny a deduction in respect of the outgoings.
·Whether the applicant is entitled to claim any amount of the outgoings as a deduction pursuant to ss8-1 or 8-5 of the ITAA97.
·Whether the applicant is entitled to deduct any amount in respect of depreciation pursuant to s40-25 or Division 328 of the ITAA97.
·Whether tax shortfall penalty levied was properly payable by the applicant.
background
3. The parties agree about the following aspects of the background to the dispute. Mr Athineos traded under a business name of “Yachthire.com.au” (Yachthire) during the years covered by the objection decisions. He purchased a yacht, “Kilulu”, in 1998 and another yacht, “Kioni”, in May 2001. Mr Athineos in 1998 entered into a yacht management agreement with Sunsail (Australia) Pty Ltd giving Sunsail the exclusive right to charter and use Kilulu for a period of years. Sunsail paid Mr Athineos an annual fee in return. The yacht was berthed at Hamilton Island while Mr Athineos lived in Sydney. In October 2002, upon expiry of the agreement, Kilulu underwent repairs and modifications.
4. After delivery in May 2001, the second yacht, Kioni, underwent repairs and modifications over a period of about six months and it generated no income during this time. Kioni continued to generate no income during the income year ending June 2001. During the next income year, ending 30 June 2002, Kioni competed in 14 twilight races in Sydney.
5. On 1 June 2003, Mr Athineos entered into an agreement with Trinity Marine Pty Ltd trading as Whitsunday Rent-A-Yacht (WRAY). Under this agreement, WRAY hired and used Kioni and remunerated Mr Athineos an amount based on a percentage of charter income less fees and outgoings. The parties agreed that Kioni would race for 2 weeks in Queensland and be removed from WRAY’s fleet over this time. The agreement remained in force for 6 months from 23 April 2003.
evidence and consideration
6. The following tables show the amounts declared by Mr Athineos in the years covered by his objections:
2000 Year
Per tax return
Amended
Variation
Assessable business income
24,000
24,000
0
Business deductions
183,339
0
183,339
Taxable business income
(159,339)
24,000
183,339
Total taxable income
177,879
361,218
183,339
Tax on taxable income (include. Medicare levy)
76,873
165,793
88,919
Tax shortfall penalty
22,230
22,230
2001 Year
Per tax return
Amended
Variation
Assessable business income
30,000
30,000
0
Business deductions
264,409
0
264,409
Taxable business income
(234,409)
30,000
264,409
Total taxable income
95,365
359,574
264,409
Tax on taxable income (incl Medicare levy)
33,632
161,773
289,914
Tax shortfall penalty
32,053
32,053
2002 Year
Per tax return
Amended
Variation
Assessable business income
59,527
59,527
0
Business deductions
255,667
0
255,667
Taxable business income
(196,140)
59,527
255,667
Total taxable income
76,224
331,891
255,667
Tax on taxable income (incl Medicare levy)
24,349
148,347
123,998
Tax shortfall penalty
31,000
31,000
2003 Year
Per objection
As assessed
Variation
Assessable business income
50,884
50,884
0
Business deductions
261,571
0
261,571
Taxable business income
(210,687)
50,884
261,571
Total taxable income
83,853
345,424
261,571
Tax on taxable income (include. Medicare levy)
154,910
Year ended 30 June 2000
7. The business income Mr Athineos set out in his return amounted to $24,000. The business expenses he claimed in the return and the objection are set out in the table below. Mr Athineos noted in his objection that these expenses were allowable as deductions pursuant to s26-50 of ITAA 1997. Mr Athineos further argued in his objection that the whole of the expenses, totalling $183,339, was an allowable deduction.
2000 year
Business income
24,000
Interest
23,365
Depreciation
143,796
Repairs
0
Other
15,908
TOTAL EXPENSES
183,339
8. Mr Athineos’s business income declared for 2000 was all related to Kilulu. Mr Athineos was still operating Kilulu in accordance with his agreement with Sunsail. This agreement commenced in 1998 and ended in 2002. Mr Athineos also declared his employment income in his income tax return as well as work related expenses. He gave oral evidence to the tribunal that he was employed by Iona Technologies in Sydney as managing director until he resigned. Mr Athineos and that organisation entered into a separation agreement on 24 January 2003, which Mr Athineos produced to the tribunal. Mr Athineos had not drawn up a formal business plan at this stage and told the tribunal that he was not experienced in accounting or in drawing up business plans. His experience was in computer sales.
Year ended 30 June 2001
9. Mr Athineos returned income and claimed expenses for the 2001 year as set out in the table below:
2001 year
Business income
30,000
Interest
26,922
Depreciation
178,071
Repairs
9,078
Other
50,338
TOTAL EXPENSES
264,409
10. The whole of the business income for this year again consisted of management fees paid in respect of “Kilulu” by Sunsail. Shortly before the end of the financial year, in May 2001, Mr Athineos purchased the second yacht “Kioni”, and kept it berthed at Rushcutters Bay in Sydney. After its purchase, the “Kioni” was engaged for a period of about 6 months in commissioning, completion of safety requirements and survey certification. “Kioni” earned no income during the 2001 year.
11. In May 2001, Mr Athineos compiled a business plan, which is before the tribunal. This contained projections for the next three years, 2002, 2003 and 2004, and explored three different sets of possibilities described as realistic, best case and worst case. The projections are summarised in the reviewable decision. The business plan anticipated cumulative losses for the three years, in the realistic case $546,460, in the best case $412,460 and in the worst case $600,460. The business plan did not elaborate how the sales projections were reached. In the realistic case model, the figure was $60,000 for 2002, $60,000 for 2003 and $100,000 for 2004, however, no explanation is given as to how these projections are estimated and there is no reference to advice or sources.
Year ended 30 June 2002
12. The business income returned and expenses claimed by Mr Athineos for the year ended 30 June 2002 are as follows:
2002 year
Business income
59,527
Interest
50,333
Depreciation
226,717
Repairs
0
Other
28,950
TOTAL EXPENSES
306,000
13. Income for this year comprised:
(a) $30,000 for hire of “Kilulu” under the Sunsail Agreement (Hamilton Island);
(b) $4,950 for hire of “Kioni” to Sunsail (Sydney) on 4 days;
(c) $4,603 for hire of “Kioni” to Eastsail on 5 days;
(d) $20,000 from Iona Technologies as “sponsorship” of “Kioni”.
Year ended 30 June 2003
14. The business income returned and expenses claimed by Mr Athineos for the year ended 30 June 2003 are as follows:
2003 year
Business income
50,884
Interest
46,294
Depreciation
158,702
Repairs
25,258
Other
31,317
TOTAL EXPENSES
261,571
15. Income for this year comprised:
(a) $10,000 for hire of “Kilulu” under the Sunsail Agreement (Hamilton Island);
(b) Two other amounts for charter or hire of “Kilulu” - $2,612 from Simply Sailing and $2,400 from Dean Geason;
(c) In respect of “Kioni” – 5 amounts were received - $5,845 from Eastsail; $1,000 from Christian Branum; $3,540 from Simply Sailing; $11,372 from Sail Australia; $10,000 from Mariner Boating. The Mariner Boating amounts were for 10 days hire plus $10,000 for the Hamilton Island Race Week as per an invoice dated June 2003.
16. In February 2003, Mr Athineos entered into an agreement with Trinity Marine Pty Ltd trading as Whitsunday Rent-a-Yacht (WRAY) in respect of “Kilulu” for a term of 6 months from 15 May 2003. In April 2003, he entered into an agreement with WRAY in respect of “Kioni” for a term of 6 months from 1 June 2003. No income was derived from either of these agreements according to the information before the tribunal.
17. The First Business Plan (bearing date 20 May 2001) was furnished to the Australian Taxation Office (ATO) under cover of a letter dated 8 January 2003. Subsequently, in response to matters raised by the ATO, Mr Athineos provided two further sets of projections, one under cover of a letter dated 14 January 2004 and the second under cover of a letter dated 12 February 2004. These further projections are summarized in the reviewable decision.
Legislation and proper approach to the issues
18. In respect of the deductions claimed, other than depreciation, ss8-1 and s26-50 of ITAA97 apply. Under s8-1(1), a loss or outgoing may be deducted from assessable income to the extent that it is incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, this is modified by s8-1(2)(d), which prevents a loss or outgoing being deductible to the extent that a provision of the ITAA97 so provides.
19. Section 26-50 is one such provision. It operates to deny a deduction for expenses for a leisure facility or boat except where the circumstances under s26-50(5) are satisfied, that is, the taxpayer:
(a)hold the boat as trading stock for sale in the ordinary course of a business that the taxpayer carries on; or
(b)use the boat (or hold it) mainly for letting it on hire in the ordinary course of a business that the taxpayer carries on; or
(c)use the boat (or hold it) mainly for transporting for payment in the ordinary course of a business that the taxpayer carries on, the public or goods; or
(d)use the boat for a purpose that is essential to the efficient conduct of a business that the taxpayer carries on.
20. Subsection 26-50(5)(b) is relevant to the present circumstances as it is the use of the yachts by Mr Athineos most closely resembling those set out as options above. The subsection requires Mr Athineos to show “use” of the boat, or that the boat is held, for letting on hire in the ordinary course of a business. Further, the “letting on hire” must occur in the ordinary course of a business which is carried on by the taxpayer (emphasis added): Ell v Commissioner of Taxation [2006] FCA 71 at 154 – 155. Mr Athineos did not let his boat on hire personally but contracted this task to another. The further aspect of his activities is whether it was a business.
21. The expression “in the ordinary course of” or similar expressions have been considered on a number of occasions in the revenue context: see FCT v Payne 46 ATR 228 at 232. For s26-50(5)(b) to be activated, it is both sufficient and necessary that the boat in question is used (or held) in the course of conducting a business. The addition of the word “ordinary” may narrow the spectrum of events which will qualify the use in business. However, I have not further considered this point as the main question is whether Mr Athineos carried on a business at all. The word “in” also has been judicially construed as a restrictive word: Robe River Mining Co Pty Ltd v FC of T (1989) ATC 4606 at p 4611.
22. It follows that Mr Athineos may succeed in obtaining a deduction under the general deduction provisions only if he is able to show both:
(a)that the expense is a loss or outgoing which falls within s8-1; and
(b)that the expense was incurred “for” a boat which, in terms of s26-50, was used or held mainly for letting on hire in the ordinary course of a business he was carrying on.
23. In respect of the claim for depreciation under s40-25 of ITAA97, s26-50 again affects the matter. Section 40-25(4)(c) operates to prevent a deduction for depreciation claimed in respect of a boat, where the activity has failed to satisfy one of the exceptions in s26-50 of ITAA97.
24. Both the second limb of s8-1 and s26-50(5)(b) require the taxpayer to be carrying on a business. There is no reason to think that the word “business” has a different meaning in the two provisions. Section 8-1 requires the business be carried on “for the purpose of gaining or producing your assessable income” (emphasis added), words which do not appear in s26-50. However, I have discovered no significance in the absence of these words from s26-50(5)(b).
25. Whether a taxpayer relies on the first limb or the second limb of s8-1, he or she must also satisfy the requirements of s26-50. Likewise, the claim for depreciation must satisfy s26-50. If Mr Athineos was not carrying on a business in the years covered by the reviewable objection decision, the objection decision must be upheld. In Ell v Commissioner of Taxation [2006] FCA 71, a case concerning deductions claimed in respect of two boats and similarly raising s26-50, Emmett J approached the issues as follows (at [103]):
“In the light of the Taxpayers’ formulation of the issues and the grounds stated in their Notices of Objection, the Taxpayers must establish that their activities amounted to carrying on a business. The first question, therefore, is whether the Taxpayers were carrying on a business for the purpose of gaining or producing assessable income. If that question is whether the Taxpayers used Athena, or held it, at all times in the relevant income years:
· mainly for letting it out on hire in the ordinary course of a business carried on by the Taxpayers; or
· mainly for transporting, for payment in the ordinary course of a business carried on by the Taxpayers, the public or goods; or
· for a purpose that was essential to the efficient conduct of a business carried on by them.”
26. It should also be noticed that, in a situation where the taxpayer uses or holds more than one boat, s26-50(5) requires the tests in that subsection to be applied separately for each boat. The situation could arise where the taxpayer uses or holds one boat for letting it on hire in the ordinary course of a business, while a second boat is not so used or held. In that circumstance expenses incurred for the second boat would be so prevented. Mr Athineos also urged the tribunal to consider each boat separately rather than take the two yacht enterprises as one business.
27. Thus the issues are:
(a)Was Mr Athineos carrying on a business?
(b)If the answer to (a) is yes, was “Kilulu” used or held mainly for letting on hire in the ordinary course of that business?
(c)If the answer to (b) is yes, were the particular expenses associated with “Kilulu” necessarily incurred in the course of carrying on that business, or otherwise incurred in gaining or producing the applicant’s assessable income from that business?
(d)If the answer to (a) is yes, was “Kioni” used or held mainly for letting on hire in the ordinary course of that business?
(e)If the answer to (d) is yes, were the particular expenses associated with “Kioni” necessarily incurred in the course of carrying on that business, or otherwise incurred in gaining or producing the applicant’s assessable income from that business?
Was the taxpayer carrying on a business?
28. I have adopted much of the reasoning of counsel for the Commissioner in considering whether Mr Athineos was carrying on business. Counsel directed me to the opinion of R.W. Parsons in his authoritative text, Income Taxation in Australia stated:
“(t)he notion of a continuing business involves a pattern of transaction…as if it stood alone… A continuing business involves a number of transactions which are repetitive and systematic and are overall moved by a purpose to profit.”
29. Section 995-1 of ITAA97 defines “business” as including:
“any profession, trade, employment, vocation or calling, but …not…occupation as an employee”.
A similar definition of business was contained in s. 6(1) of the Income Tax Assessment Act 1936. The definition is of little practical assistance and it has been left to courts to add substance to the concept. Whether particular activities constitute a business is very much a matter of fact and degree according to the various indicia formulated in judicial decisions. Each case will turn on its own facts. In Stone v VC of T [2002] FCA 1492 at para 64, Hill J summarised the position:
“Whether a person is carrying on a business depends upon a number of factors. No single factor will be determinative in a particular case. Rather it will be a combination of factors which will lead to the conclusion that a person is in fact carrying on a business. These factors have sometimes been referred to in the English cases as the ‘badges of trade’, where the concept of ‘trade’ is, by statutory definition, used in the broader sense of ”business”, cf inland Revenue Commissioner v Livingston (1927) 11 TC 538 at 542. So, Jesse MR in Ericksen v Last (1881) 8 QB 414 at 416 commented:
‘There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade…’
65 So, it will be relevant, although not determinative, to note whether the activity is carried on in a business-like way, and in accordance with ordinary commercial principles: Livingston supra. It will be relevant if there is system in the activity: Newton v Pyke (1908) 25 TLR 127 and Evans v Federal Commissioner of Taxation (1989) 89 ATC 4,540 at 4,555. Repetition and continuity play a part in the process of characterisation: Hope v Bathurst City Council (1980) 144 CLR 1 at 9, although repetition may come from the closely associated phrase ‘carrying on’ rather than from the word ‘business’ itself: per Mason J in Hope at 8.”
30. The position was explained similarly by the Full Court of the Federal Court as a matter of general impression and degree in Ferguson v FC of T 79 ATC 4261:
“It is necessary to give consideration to the essential nature of the activity, and the question whether it has the characterisation of a business is primarily a matter of general impression and degree.”
31. Again, in Martin v FCT (1953) 90 CLR 470 at 474 Webb J said:
“The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.”
32. Further, in Ferguson v Commissioner of Taxation (1979) 79 ATC 4261, Bowen CJ and Franki J at 4264-4265, speaking of an activity of breeding cattle, said:
“There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held that a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.”
33. In Ell v Commissioner of Taxation [2006] FCA 71 Emmett J stated:
“111 Although not determinative, intention is relevant where, for example, a particular activity produces no income (see John v FCT (1989) 166 CLR 417) or where the first step in a business is undertaken (see Fairway Estates Pty Ltd v FCT (1970) 123 CLR 153. It is necessary to examine the activities engaged in, including their nature and extent (see Martin v FCT (1953) 90 CLR 470 at 474). Activities may constitute the carrying on of a business even though the activities are carried on in a small way and it is not for the Commissioner to dictate to a taxpayer in which business the taxpayer engages or how to run a business profitably or economically (see Tweddle v FCT (1952) 180 CLR 1). Provided that an activity said to constitute carrying on business is engaged in for purpose of profit on a continuous and repetitive basis, that activity may constitute the carrying on of business (see Hope v Bathurst City Council (1980) 144 CLR 1).
112 If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose.
113 Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative (see Fletcher v FCT (1991) 173 CLR 1 at 17-19). Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income (see Spassked Pty Ltd v Commissioner of Taxation (2003) 136 FCR 441 at [64]).
114 The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see Fairway Estates Pty Ltd v FCT (1970) 123 CLR 153 at 166.8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see Tweddle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see FCT v Stone (2005) ATC 4234 at 4243). The Taxpayers say that they had a profit making purpose or intention in relation to the use of Athena.
115 The fact that taxation laws affected the shape of the transaction and even influenced the Taxpayers into entering into the transaction is not fatal to the conclusion that the Taxpayers were embarking upon a business venture. Tax deductions resulted in an early positive cash flow and the fact that there were tax advantages from the transaction does not adversely impact upon a conclusion that the Taxpayers were carrying on a business (see FCT v Spotless Services Ltd (1996) 186 CLR 404 at 415-416). If the Taxpayers entered into the arrangements with a view to profit, or that was their principal motivation, it would be open to conclude that they were engaged in carrying on a business.”
34. Judgments also draw a distinction between carrying on a business and the “passive” receipt of income from property. In American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676, Lord Diplock stated at 684:
“In the case of a private individual it may well be that the mere receipt of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in their Lordships’ view, in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business.”
In a way similar to the collector of rent, Mr Athineos simply collected the hire charges from Sunsail and like organisations for hire of his yatchs. See also FCT v McDonald (1987) 87 ATC 4541.
35. While no one factor will be determinative, the main general indicia referred to by the courts in identifying a business have included:
(a)whether the taxpayer conducted the operations with a prospect of profit;
(b)the extent to which the taxpayer’s activity is characterised by system and organisation;
(c)the scale on which the taxpayer conducts the activities;
(d)the extent to which the taxpayer’s activities involve sustained, regular and frequent transactions;
(e)the commercial character of the transactions themselves;
(f)characteristics or quantities of the property dealt in;
(g)inherent characteristics of the taxpayer.
Prospect of profit
36. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1 at 8-9 Mason J indicated that the carrying on of a business is usually such that the activities are “…engaged in for the purpose of profit on a continuous and repetitive basis.” A business is ordinarily carried on for the purpose of making profits so that the presence of a profit motive would be an expected feature of business activities. But it is not sufficient that the taxpayer merely asserts that they have an intention to make a profit. The state of mind or intention with which a taxpayer undertakes activities giving rise to receipts is relevant, but it is only one fact to take into account: Commissioner of Taxation v Stone [2005] HCA 21 (26 April 2005) at para 55. In examining a person’s intentions as to carrying on a business or not, his acts should be viewed objectively and not subjectively. Lord Buckmaster in J & R O’Kane v IR Commrs (1919-1922) 12 TC 303 observed:
“The intention of a man cannot be considered as determining what it is that his acts amount to.”
For example, evidence of an intention to make a profit may be present when a taxpayer has conducted research into the proposed activity and consulted experts or received advice on the running of the activity, and the profitability of it, before setting it up. Mr Athineos has not demonstrated any such research and his business plan did not evince any research.
System and organisation
37. Carrying on business involves, as was said in FC of T v JR Walker 85 ATC 4179:
“some form of commercial enterprise systematically and regularly…and implicit in this idea are the features of continuity and system…”
Factors that might indicate that a boat hire activity is conducted as a business would include advertising, pursuing profitable activities and discontinuing unprofitable activities, “organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on,”: See Ferguson v FC of T 79 ATC 4261 at 4264. See also FC of T v JR Walker 85 ATC 4179 a case where system and organisation was found.
38. In Ferguson a retired naval officer wished to go into primary production. In order to build up a herd the taxpayer leased five cows, the cattle to be pastured and bred by a management company. The Full Federal Court on the basis that the activities of the taxpayer were carried out in a systematic and well-organised way held that the taxpayer was engaged in a business of primary production. Fisher J said at page 4271:
“The venture as a whole had a commercial flavour, was conducted systematically and…in a business-like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity…”
39. Mr Athineos’s operations with his yachts had little commercial flavour. He achieved negligible business income from the yachts during the years in question and his projections did not anticipate a profit from either yacht. His business plan was sketchy and even the best case scenario anticipated cumulative losses for the three years of $412,460. While he let the yachts in a manner that was in some respects business-like, Mr Athineos was not pursuing profitable activities. As well Mr Athineos’ “business” was on a very small scale, consisting of occasional hire of his yatchts on his behalf. The hire transactions were infrequent and irregular. Mr Athineos did not inherently display business characteristics in relation to either of the yatchts but left their management to others. This is so in the case of Kululu and Kiola. On balance, I can find insufficient indicia of business in Mr Athineos’s activities to find that he was carrying on a business in respect to either of his yachts.
conclusion
40. Mr Athineos was not carrying on a business during the years in question. He had no formal business plan until May 2001. When he did draw up a business plan, it showed continuing and cumulative losses. The business plan indicated no prospects of profit. Some income arose through use of the yachts acquired for the purpose of the purported business. However, the only income earned was passive income derived through arrangements leasing and hire arrangements. This income was disproportionate to the expenses incurred.
41. Kilulu generated some passive income under the Sunsail agreement in 2003. After this income year, Kilulu brought in only $5,000. Kioni generated income from hire over only 10 days in 2003. The amount brought to account was greatly disproportionate to the substantial expenses claimed as tax deductions. The sum of these circumstances shows that the indicia of business are missing. It follows that the disallowance of deductions claimed was correct. The assessments for the years involved and the decisions made on the objections under review are correct. It follows that his objections cannot succeed. Mr Athineos has not discharged the onus of showing that the objection decisions should not have been made or made differently as required under s14ZZK(b)(iii). This means he has not succeeded in the review.
Decision
42. The decisions under review are affirmed.
I certify that the 42 preceding paragraphs are a true copy of the reasons for the decision herein of
Signed: .....................................................................................
AssociateDate/s of Hearing 21 March 2006
Date of Decision 26 July 2006
Self-Represented Applicant Mr Nicholas Athineos
Counsel for the Respondent A.G. Diethelm
Solicitor for the Respondent John Fleming
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