Hattrick and Commissioner of Taxation
[2008] AATA 301
•11 April 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 301
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/0862 &
) 2007/0863
TAXATION APPEALS DIVISION ) Re DAVID HATTRICK Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION AND REASONS FOR DECISION
Tribunal Mr A Sweidan, Senior Member Date11 April 2008
PlacePerth
Decision The Tribunal affirms the decisions under review.
............[Sgd Mr A Sweidan]..............
Senior Member
CATCHWORDS
Income Tax – whether applicant carried on a boat charter business
LEGISLATION
Income Tax Assessment Act 1997 – ss 8-1; 26–50; 40-25 (4) (c); sub-division 328 - D
CASES
Ell v Commissioner of Taxation (2006) 61 ATR 661 at [154]-[155].
Fairway Estates Pty Ltd v Commissioner of Taxation (1970) 123 CLR 153
Inglis v Commissioner of Taxation (1979) 10 ATR 493 at 496-497
Martin v federal Commissioner (1953) 90 CLR 470 at 474
Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 321
Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8
FCT v Walker (1985) 79 FLR 161 at 165
Babka v Federal Commissioner of Taxation (1989) 89 ALR 373 at 380
Phippen and FCT 2005 ATC 2336
Athineous and FCT 2006 ATC 2334REASONS FOR DECISION
11 April 2008
Mr A Sweidan, Senior Member
BACKGROUND
1. The threshold issue is whether the applicant was carrying on a boat charter business at any time before 1 December 2004. The relevant facts are set out in the reasons which follow.
2. The applicant contracted to purchase a Seawind 1200 catamaran on 16 July 2003. He took delivery of the vessel from Seawind on completion of manufacture in Sydney during May 2004. The vessel was named Escapade. The applicant claims he commenced a boat charter business on 8 October 2003 when he registered the business name Escapade Ecotours, and that he commenced hiring Escapade on 14 May 2004.
3. In respect of Escapade Ecotours, the applicant returned income of $590.91 and claimed deductions of $98,095 (including $90,279 depreciation) in his income tax return for the year ended 30 June 2004. In his income tax return for the year ended 30 June 2005 the applicant returned income of $8,972 and claimed deductions of $212,830 (including $153,739 depreciation).
4. The respondent reviewed the applicant’s boat charter activities and disallowed deductions claimed of $97,504 in 2004 and $212,830 in 2005. On deciding the applicant’s objections against the resulting assessments the respondent accepted that the applicant had been carrying on a boat charter business since 1 December 2004 and allowed deductions of $131,436 for the year ended 30 June 2005. The other deductions claimed were disallowed and the applicant seeks a review of those decisions by this Tribunal.
RELEVANT LEGISLATION AND ISSUES
5. The provisions to be considered in respect of the deductions claimed (other than depreciation) are sec 8-1 and sec 26-50 of the Income Tax Assessment Act 1997 (“ITAA 97”). Under sec 8-1(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 under sec 8-1(2) (d) a loss or outgoing will not be deductible to the extent that a provision of the ITAA 97 precludes it from deduction.
6. Section 26-50 specifically denies deductions for outgoings incurred in the acquisition, use, operation, maintenance, repair or obligations associated with the ownership of a boat. However there is an exception to this in sec 26-50(5)(b), if at all times in the income year the boat is used (or held) mainly for letting it on hire in the ordinary course of a business that the taxpayer carries on. The applicant also relies upon a further exception in sec 26-50(5)(d) which allows a deduction, if at all times in the income year the boat is used for a purpose that is essential to the efficient conduct of a business that the taxpayer carries on.
7. The “letting [the boat] on hire” and the “use of [the boat] for a purpose that is essential” must occur in the ordinary course of a business which is carried on by the taxpayer: Ell v Commissioner of Taxation (2006) 61 ATR 661 at [154]-[155].
8. Accordingly, the applicant can only succeed in respect of the general deductions if he is able to show both:
(a) that the expenses are outgoings which fall within s 8-1; and
(b) that the expenses were incurred “for” a boat which the applicant at all times during the relevant income year:-
(i)used or held mainly for letting on hire in the ordinary course of a business which he carried on; or
(ii)used for a purpose that was essential to the efficient conduct of a business that he carried on.
9. With regard to the applicant’s claim for depreciation of Escapade sec 40-25(4)(c) of the ITAA 97 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 sec 26-50 of the ITAA 97.
10. The applicant elected to be a Small Taxation System (STS) taxpayer in his income tax returns for the years ended 30 June 2004 and 2005. He evidently claimed the decline in value of Escapade and its fit out under subdivision 328-D as an asset allocated to a general STS pool of assets having an effective life of less than 25 years. No ground of the original notices of objection relates to subdivision 328-D. The respondent does not oppose the applications now filed by the applicant since the hearing for Tribunal orders to include this subdivision as a ground in his notices of objection. The Tribunal accordingly orders that the grounds of objection be amended accordingly.
11. Under sec 328-365 a taxpayer is only eligible to be an STS taxpayer for an income year if, among other things, he carries on business in that income year. If the applicant was not carrying on a business until 1 December 2004 as the respondent contends, the applicant was not eligible to be an STS taxpayer in the 2004 income year. Accordingly his claim under sec 328-190(2) (a) for the 2005 income year was the subject of an apportionment calculation by the respondent: Tdocs/24-26.
12. Thus if the question of whether the applicant was carrying on a business before 1 December 2004 is found against the applicant, the objection decisions should be affirmed. If, contrary to the respondent’s contentions, the Tribunal finds that the applicant was carrying on a business at any time before 1 December 2004, then the question of whether the balance of the claimed expenses (other than depreciation) fall within s 8-1, and whether the depreciation claim is allowable within Subdivision 328-D or Division 40 will arise for consideration. See Ell v Commissioner of Taxation (2006) 61 ATR 661 at [103].
EVIDENCE
13. The respondent has accepted that the applicant was carrying on a business using Escapade from 1 December 2004. The Tribunal has therefore focussed it’s enquiry mainly on the relevant events that took place before that date
14. The Tribunal had before it the “T” documents as well as a number of documents tendered in evidence.
15. The Tribunal also heard oral evidence from the applicant and a number of other witnesses.
The purchase agreement
16. Under a Purchase and Sale Agreement dated 16 July 2003 Mariglass Sales Pty Ltd trading as Seawind Catamarans (Seawind) as seller agreed to construct for the applicant as purchaser a Seawind 1200 (SW1200) to meet NSW Waterways Survey 1E, 2D and 2C [clause 2.1] to be commissioned in Sydney with a planned launch date of 26 March 2004 [clause 1.4].
17. Under clause 1.5 of the agreement the applicant agreed to allow the seller “the use of the SW1200 for the 2004 Sanctuary Cove Boat Show and the 2004 Mandurah Boat Show at no cost to the Seller”. The quotation provided by the seller to the applicant on 7 July 2003 sets out a “Boat Show Saving 25,863”. Mr Richard Ward, of the seller gave evidence that the purchase price was discounted but he could not remember the details of how the discount was determined. Nor could he recall whether the extent of the discount offered in the quotation was discussed and negotiated with the applicant. He did recall that Seawind representatives were on board Escapade demonstrating the SW1200 at both boat shows.
18. From the time it left the factory, insurance of the SW1200 was the responsibility of the applicant [clause 3]. The applicant also agreed to accept sole responsibility for obtaining all requisite inspections, approvals and certifications and represented and warranted that he was familiar with the requirements of applicable laws, regulations, rules and orders relating to those areas and waters where the SW1200 would be sailed [clause 4]. Mr Ward said that the vessel was constructed to meet NSW Waterways survey and it was subject to NSW Waterways inspections during construction.
19. By clause 5 of the agreement the applicant agreed “to refrain from operating the SW1200 without first acquiring the sailing knowledge and skills applicable to the conditions and area and waters where the SW1200 will be sailed”.
20. The Purchase and Sale Agreement was stated to be the entire agreement [clause 8] and there is no provision in the agreement for the delivery of the SW1200 to Mandurah in Western Australia.
21. The applicant gave oral evidence that delivery of the SW1200 was the subject of a written addendum to the agreement, whereby it was agreed the applicant would be charged a $12,500 delivery fee and he was to pay for fuel and provisioning of Escapade on the voyage to Mandurah. This document was not produced to the Tribunal.
22. Mr Ward could not recall the details of the charge for delivery of Escapade to Mandurah. He said the amount of $12,500 sounded about right. He said it is usual for Seawind to charge a fee for a delivery run to cover the cost of: salary for the skipper and crew and airfares to return them to Sydney after delivery, fuel and maintenance for the boat on the journey and the provisions on board during the voyage. However the applicant said that he incurred the fuel and provisioning costs in addition to the Seawind delivery fee.
May to July 2004
23. The Escapade was launched in Wollongong and delivered to Sydney where the applicant paid the final instalment of the purchase price and took delivery on or about 10 May 2004. He then returned to Perth where he resided at the time.
24. According to the Ships Log Book (Log) [Tdocs/208 - 210], the Escapade travelled from Sydney to Mandurah between 7 May 2004 and 29 July 2004. In his evidence the applicant said that Mr Royce Black skippered the Escapade from Sydney to Cairns and from Darwin to Mandurah and that Mr Richard Ward had skippered Escapade from Cairns to Darwin. Stops were made at:-
Destination
Arrival
Departure
Sydney
7 May 2004
Sanctuary Cove
17 May 2004
24 May 2004
Hamilton Island
30 May 2004
30 May 2004
Cairns
7 June 2004
9 June 2004
Darwin
28 June 2004
2 July 2004
Broome
13 July 2004
16 July 2004
Carnarvon
19 July 2004
20 July 2004
Geraldton
23 July 2004
25 July 2004
Mandurah
29 July 2004
25. Mr Ward confirmed that he and his partner and 2 of their friends took Escapade from Cairns to Darwin. Mr Ward said he did not discuss with the applicant the fact that Mr Ward’s friends would be on board from Cairns to Darwin because the crewing arrangements Seawind made during boat delivery was Seawind’s business. While on board Escapade Mr Ward did not make entries in the Log and said it was not usual to do so.
26. Following a request made by Sentinel Sailing to Seawind, Escapade was used en route to Sanctuary Cove on 14 May 2004 for Sentinel Sailing to conduct a 6 hour team building exercise for Fuji Xerox. This use is referred to below under the heading Charters.
27. The applicant joined the Escapade at Sanctuary Cove on 24 May 2004 before it departed for Cairns. The Log also records that the Escapade took on fuel at Hamilton Island on 30 May 2004. At this stop the applicant’s wife and sons boarded the Escapade. The applicant’s oral evidence was that from Hamilton Island to Cairns the family had a sailing holiday. The applicant and his family left Escapade in Cairns and returned to Perth. Unlike the apportionment made for private use of the Escapade in the 2005 year (see notice of objection Tdocs/73) no apportionment appears to have been made for any private use in the 2004 year.
28. In Darwin friends and acquaintances of the applicant, the Hoffman family and Mr Glen Hunter boarded Escapade under arrangements made previously. The applicant said that he and his brother (who had travelled from England) also joined the Escapade in Darwin. Mr Black had one crew member who left the boat in Broome along with the Hoffman family and the applicant’s brother. Mr Hunter continued on to Carnarvon. Mr Black and the applicant continued through to Mandurah where the boat arrived on 29 July 2004. The Log does not reflect that this was the contingent on board from Darwin. The applicant claims the journey from Darwin to Broome with passengers was a charter. This claim is also referred to below under the heading Charters.
Mandurah to Fremantle 29 July to 30 October 2004
29. The applicant said that he first made inquiries about securing a mooring pen at Port Bouvard Marina in Mandurah in January 2004. Mandurah is some 70 kilometres from Perth. The applicant said that he could not get a mooring at the Royal Perth Yacht Club’s Challenger Harbour, although he said he could have pressed for one. He obtained permission to stand the Escapade alongside at Challenger Harbour when he moved the Escapade to Fremantle on the public holiday weekend of 2 to 4 October 2004. He later obtained a pen inside Challenger Harbour. He also said initially in cross-examination that he could not get a mooring at the Ocean Marina in Mandurah where substantial tourist development was occurring, where the Seashells Resort was to be located and the Mandurah Boat Show was held. Subsequently he stated he could have paid the fee to use 2 pens in Ocean Marina to fit the Escapade.
30. He inspected a mooring pen at the Port Bouvard Marina on 27 June 2004. A Marina Pen Agreement was made on 15 August 2004. The term of the agreement was from 1 August 2004 to 31 July 2005. The permitted use of the pen was “Private” “Charter” and “Recreational”: see clause 1.1(17) and item 9 Reference Schedule and clause 2.1. By the terms of the agreement the applicant could not without prior written consent use the jetty and pen for any commercial purpose: see particularly clause 12.1(14), (4), (7) and clause 4.16 of the agreement.
31. In an undated statement annexed to a letter dated 20 May 2005 from Ernst & Young to the ATO [Tdocs/280], Mr Ritchie of Port Bouvard Marina states that the applicant had written consent under clause 12.1(14) to use the Marina for commercial operations. He also states this consent was contained in item 9 of the Reference Schedule by the inclusion of “Commercial”. This word does not appear in the copy of the agreement in evidence. There is no evidence of any commercial or charter use while the vessel was moored at Port Bouvard.
32. Mr Ritchie’s oral evidence was that item 9 of the Pen Agreement should read “Private Recreational” and “Charter”. He said he considers “Commercial” and “Charter” the same. His evidence was that the applicant could not place signage or business equipment on the jetty but could embark and disembark passengers from the Marina jetty. However what would be permitted would depend on Mr Ritchie’s assessment of any interference with safety and the enjoyment of the facility by others.
33. On 23 August 2004 the applicant made application to the Western Australia Department of Planning and Infrastructure for an exemption to allow the Escapade to operate as a private pleasure vessel in the Geographe Bay to Rottnest Island Fremantle area from 27 August 2004 to 30 November 2004. The exemption for that period of time was granted on 14 September 2004 on conditions, including that Escapade was used solely for recreational purposes and not in the course of a business or in connection with any commercial transaction or activity: see Ex R4 and Ex R5.
34. The Log records at T docs/210-211 that Escapade was in Mandurah from
29 July 2004 until it was moved to Fremantle via Rottnest on the public holiday weekend of 2-4 October 2004. It seems Mr Ritchie was notified by telephone on 8 October 2004 that the applicant had vacated the pen at the Port Bouvard Marina: Ritchie/11-13 and HR6 and HR7. Escapade was returned to Mandurah at the Ocean Marina on Sunday 10 October for the Mandurah Boat Show in accordance with the arrangements previously made by the applicant with Seawind and was sailed back to Fremantle on Saturday 30 October 2004. Escapade remained in Mandurah after the boat show finished but the applicant could not recall the reason why.35. In entries for the period 14 August 2004 to 19 September 2004, the Log notes the following about the Mandurah estuary: “few spots to anchor”, “shallow, poor anchorage, strong winds (SW esp)”, “estuary water clogs engine water filter”. In cross-examination the applicant stated that these sorts of issues were part of the reason for moving Escapade to Fremantle.
Charters
36. There is no evidence of any commercial use of the vessel prior to December 2004 apart from the so called charters referred to below.
37. The applicant claims there were 2 charters of Escapade before December 2004. The first in May 2004 when the boat was used by Sentinel Sailing and the second between 2 and 13 July 2004 when Escapade was sailing between Darwin and Broome on delivery to Mandurah.
38. The applicant did not arrange the charter with Sentinel Sailing, which is a corporate sailing company that conducts team building activities on board sailing catamarans. According to Mr Cawse of Sentinel Sailing [Exhibit A8], they arranged the charter with Seawind Catamarans and Mr Royce Black as they needed an additional boat for the Fuji Xerox team building exercise day and 10 boats were used that day. Mr Ward said that Sentinel Sailing relied on catamarans for their corporate sailing activities and when they needed additional boats would frequently approach Seawind for the use of a boat.
39. Mr Black fixed the charter fee of $591 with Sentinel Sailing and telephoned the applicant to confirm that he was willing to let Sentinel Sailing use the boat. The applicant said that he accepted the fee Mr Black had agreed and after confirming that the charter had gone ahead he faxed Escapade Ecotours invoice 101 dated 14 May 2004 in the amount of $591 to the attention of Mr Cawse. See Exhibit A8, Cawse and Tdocs/215.
40. There is little evidence about the second charter provided in the applicant’s witness statement, which states that “early charter work was also secured when four people were booked to accompany us through the Kimberleys in July 2004 during the delivery run to Western Australia”. In oral evidence the applicant confirmed this eventuated through his friendship with Mr Tim Hoffman who worked with the applicant at Sun Microsystems in Perth. Mr Hunter is also known by the applicant and is a friend of the Hoffmans. In December 2003 at a Christmas get together at the Hoffman’s home, they expressed interest in coming through the Kimberleys on Escapade and confirmed their participation in April 2004.
41. The invoices issued [Tdocs/227 and 228] for 12 days all found on Escapade were:-
(a)$1,100 for Mr Glen Hunter. In cross-examination the applicant said this was discharged in part by Mr Hunter paying for 2 airfares to Darwin for the applicant and his brother. Evidently Mr Hunter was not charged an additional fee to extend his journey from Broome to Carnarvon;
(b)$2,200 paid in cash for all three members of the Hoffman family;
The applicant’s brother was apparently not invoiced for his participation.
42. The applicant agreed these amounts were below commercial rates of about $10,000 each for a Kimberley charter. He said that he had given the Hoffman’s and Glen Hunter “mates rates” to cover his out of pocket costs for fuel and provisioning the boat from Darwin to Broome. He described the “mates rates” as justified because they did not enjoy a normal Kimberley charter with 6 on board plus 2 crew on a delivery run. However he subsequently stated that they took time for sightseeing while travelling through the Kimberley to Broome, meeting ‘Red Sky At Night’ in Crocodile Creek, and that he only takes 6 passengers on an overnight commercial charter. The Tribunal notes that Escapade had been fitted out to a luxury standard under contract before leaving Sydney.
Insurance
43. The applicant produced a Club Marine Limited Insurance Policy Schedule and Extra Premium Adjustment note: see Exhibit A4. The footer to the Policy Schedule records the Insurer as Allianz Australia Insurance Limited. That footer and the Instalment Payment Option form indicate the insurance was processed and accepted by the Insurer on or about 18 March 2004. The period of insurance was from 5 April 2004 to 5 April 2005. The Policy Schedule records at page 2 that Escapade was to be located in a pen moored at Royal Perth Yacht Club Annex and the boat was for private use only.
44. The Extra Premium adjustment note was for an extra premium. Page 2 states the policy alteration was made at the applicant’s request and the Policy is amended with effect from 1 January 2005. The applicant’s bank has been added as an interested party. The boat is still recorded as located at a pen moored at Royal Perth Yacht Club Annex but the general condition was changed to be that the boat was for commercial use. The additional conditions and endorsements, items 10 and 26, extend cover to commercial use for skippered charter and liability to paying passengers. The footer to the Extra Premium adjustment note records the Insurer as Allianz Australia Insurance Limited and indicates the extended cover was processed and accepted by the insurer on or about 1 December 2004.
45. The applicant rejected the proposition put to him in cross-examination that he requested an alteration to the Policy to provide commercial use cover when Escapade went back into survey (as to which see below), the private pleasure use exemption expired on 30 November 2004 and the charter of Escapade over the summer season was to commence. The applicant claimed the alteration was made to correct mistakes made by Club Marine Limited because his previous boat was scheduled for insurance purposes as a private use boat moored at the yacht club. He could not explain how the Insurer would make such a mistake in the face of the policy proposal and how his bank did not pick up the mistake given his earlier evidence that the bank had given loan approval for a commercial operation and had a hire purchase agreement over Escapade.
Survey
46. During construction Escapade was subject to a series of NSW Waterways inspections. Escapade had its final NSW Waterways inspection on 3 May 2004. See Tdocs/277. Mr Ward’s evidence was that on the delivery run to Mandurah Escapade could travel through and make stops in different States and the Northern Territory without needing a separate survey for each.
47. The NSW Waterways Certificates of Survey for Escapade (Ex R1 and Tdocs/130-131) were each dated 5 August 2004 to be renewed on 20 April 2005, and are particularised as follows:-
Cert.No
Class
Persons
Safety Crewing
23627
1E
2 crew
20 passengers
0 berthedMaster/Engineer with a Coxswain qualification
23628
2C
2 crew
8 passengers
8 berthedVoyage less than 12 hours and within 15nm
Master/Engineer with a Coxswain qualification
Voyage less than 12 hours and out to 30nm
Master with Master Class Five (Trading)
Engineer with Marine Engine Driver Grade Three
48. On the same day as the applicant made application to the Western Australia Department of Planning and Infrastructure for an exemption to allow the Escapade to operate as a private pleasure vessel until 30 November 2004, the applicant applied to the Western Australia Department of Planning and Infrastructure for “a reciprocal survey on Escapade for Class 1E and 2C in Western Australia from NSW Waterways”. He also applied to add the class 2B to the survey. See Ex R4.
49. Reciprocal Certificates of Survey from 28 August 2004 to 20 April 2005 were issued by the Western Australia Department of Planning and Infrastructure dated 8 September 2004. The particulars of the Western Australia survey certificates Ex R2 and Ex R3 are as follows:-
Cert.No/
Issue DateClass
Persons
Conditions
49897
8/9/2004
1E
2 crew
20 passengers
0 berthedOperational limits within gazetted smooth waters only
Reciprocal certificate issued in recognition of NSW Cert No 2362749898
8/9/200
2C
2 crew
8 berthed passengers
4 unberthed
passengersOperational limits coastal waters of WA within 30 miles offshore
Reciprocal certificate issued in recognition of NSW Cert No 2362It was this certificate which was the subject of the private vessel exemption
The survey was initially for 8 berthed passengers see below
The vessel can be operated by the holder of a coxswains certificate within inshore waters, that is, not more than 15 miles seaward of the coast or less than 30nm from a safe anchorage.
The west end of Rottnest falls just within 15nm of the coast.
When the vessel is beyond inshore limits it must be operated by the holder of a Master Class V certificate.
50. The applicant engaged a naval architect Mr Ken McAlpine to assist in obtaining the class 2B survey and to have the class 2C survey changed to allow up to 12 passengers. On 23 December 2004 Mr McAlpine informed the applicant that the survey class 2B had been approved and that the class 2C survey had been changed to allow 12 passengers. See Tdocs/219-220. The certificate of survey for class 2B and the change to passenger numbers for class 2C were issued on 6 April 2005: see T docs/134 and 135.
Cert.No/
Issue DateClass
Persons
Conditions
51952
6/4/2005
2B
2 crew
8 berthed passengers
Operational limits coastal waters of WA within 100 miles offshore
Although issued on 6 April 2005, the certificate was valid from 14 February 2005
The vessel can be operated by the holder of a coxswains certificate within inshore waters, that is, not more than 15 miles seaward of the coast or less than 30nm from a safe anchorage.
The west end of Rottnest falls just within 15nm of the coast.
When the vessel is beyond inshore limits it must be operated by the holder of a Master Class V certificate.
Other steps taken by the applicant before December 2004
51. The applicant states at paragraph 6 of his witness statement that he undertook background research involving discussions with other charter boat operators, business brokers in North Queensland, the WA Charter Boat Owners & Operators Association, his bank relationship manager and his accountants. He provides no details of when these discussions took place, who he met with and what was discussed.
52. The applicant stated that his discussions were about identifying the best type of boat to buy for charter. He also looked at the options of buying a boat already on the water or having a new boat built. His discussions with his bank relationship manager were about financing the acquisition of a boat and a business operation. The accountants arranged ABN registration as set out in paragraph 12 of his witness statement. The accountants did not prepare a business plan but did provide him with a package of basic information materials for persons planning to enter into a business. A business plan was prepared in July 2005 by Mr Clem Rogers: see Tdocs/259-274.
53. The applicant’s evidence about the charter operations he was planning in Mandurah was somewhat confusing. Paragraphs 14 and 16 of his witness statement refer to use of Escapade as a “floating B&B” like ‘Red Sky at Night’ and as a resort boat. The applicant agreed in cross-examination that ‘Red Sky at Night’ was purpose built and exclusively operated as a boutique Kimberley cruise boat and had won a string of awards for its Kimberley cruises.
54. In apparent support for the suggestion in paragraph 14 of his written statement that he was going to use Escapade as “a resort boat for the growing number of establishments in the area” he refers in paragraphs 17 and 18 to contact made with the Seashells Hospitality Group stating “Seashells had just completed stage one of the Mandurah Marina developments which included a Seashells resort”. When it was put to the applicant in cross-examination that the Seashells Resort at Mandurah did not open until December 2005 he said he was hoping to attract visiting investors and potential investors in the Marina’s development stages.
55. He also said that he had made contact with the Silver Sands resort at Mandurah but nothing had come of it. He apparently did not approach other centres of holiday accommodation in Mandurah. He also claimed to have been considering offering a package of a round of golf at the Port Bouvard course followed by a leisure cruise on Escapade. However it seems he did nothing to implement this.
56. It appears from paragraphs 27 and 28 of the applicant’s witness statement that he had abandoned any prospect of charter operations in Mandurah towards the end of August 2004, i.e. within 3-4 weeks of Escapade arriving in Mandurah. He also claims that no marketing was required for resort work. This does not sit well with his exchange of emails with Mr Bartholomew Hart of JMG Marketing produced by the applicant during cross-examination as Exhibit A5.
57. In that email of 14 September 2004 (sent at least 2 weeks after charter operations in Mandurah are said to have been abandoned), Mr Hart informs the applicant: “As per my message we have been progressing marketing research as to available marketing channels that we can engage to drive traffic for the Peel Charter business …however we have been progressing with the work and are moving forward. We will be in touch this week to further progress the marketing campaign”. In an email to Mr Hart later that same day the applicant responds “thanks for the update Bart… looking forward to meeting again.”. By the email of 30 September 2004 from Mr Hart to the applicant the marketing efforts appear to be focussed on the summer 2004/2005 market as the list of initiatives and costings therein refer to: “direct mailer for distribution to secretaries of chief executive officers” and “As discussed on the phone just add water are running two specials at 7.30 Sunday night in January. I believe this will be perfect exposure for the business”.
58. There was no business development plan before July 2005. The business model which the applicant says he produced (paragraph 16 of his witness statement) was evidently only a projection of the number of days of charter required to meet Escapade’s operating costs. Apparently no effort was made to secure a skipper notwithstanding that the applicant had been referred to potential skippers in April 2004: see Exhibit A2. The activity towards commencing a charter operation in Mandurah, to which the applicant claims he was committed, therefore appears to be haphazard and sporadic. The Tribunal finds this surprising from a person whose professional work was business development and sales and marketing. It is also in sharp contrast to the professional marketing and business planning efforts subsequently made before the chartering of Escapade commenced in December 2004.
59. In February 2004 the applicant commenced a course of study to obtain a coxswain’s certificate: see Hattrick/15 and Tdocs/122-126. Under the terms of the survey certificates, the insurance cover for Escapade (Ex A4) and his contract with Mariglass Pty Ltd the applicant could not skipper Escapade at all without this certificate. In the meantime he needed to employ personnel with the appropriate maritime qualifications to use Escapade for charter.
60. To find these people the applicant states in paragraphs 32-33 of his witness statement that he used “the people network” in the Royal Perth Yacht Club’s Challenger Harbour and the Fremantle Fishing Harbour. In or around October 2004 he was referred to Mr Simon Milsom who subsequently agreed to source bookings for Escapade and maintain the boat, securing his first charter on 10 December 2004. The applicant’s delay in finding a skipper seems strange in light of the email dated 23 April 2004 which the applicant produced at the hearing: see Exhibit A2. That email addressed to the applicant is from a Ms Sharon Brown, titled in the email as Strategic Business Manager at Alphawest. The content of the email makes it clear that she has referred the applicant to Mr Simon Milsom and another experienced sailor Mr Kingsley Piesse, but the applicant apparently failed to make contact with either of them at that time.
61. At paragraph 36 of his witness statement the applicant says that in September 2004 he commissioned JMG Advertising to produce a corporate brochure and assist with a website. In December 2004 he contracted Sharon Box to manage the marketing process. Due to his own work commitments and delays in the photo shoot the applicant’s hope that these would be in place by December 2004 for the summer season were not met. Completion was delayed until early 2005.
62. According to Mr Milsom’s written statement he worked for the applicant for one summer season from December 2004 until the end of April 2005 and was involved with about 12 charters of Escapade during that time.
APPLICATION OF THE LAW
63. Whether a person is carrying on a business is to be determined by considering all the elements and circumstances of the case including the intention of the taxpayer. Intention may be relevant in determining whether a particular transaction is the first step in a continuing business: Fairway Estates Pty Ltd v Commissioner of Taxation (1970) 123 CLR 153. However a mere intention to carry on a business is not enough: Inglis v Commissioner of Taxation (1979) 10 ATR 493 at 496-497.
64. Whether an activity or series of activities are properly characterised as carrying on a business turns upon an assessment of a number of different indicia, no one of which is necessarily decisive and depends, ultimately, “on the large or general impression gained”: see Martin v Federal Commissioner (1953) 90 CLR 470 at 474 (although the decision of Webb J was successfully appealed to the Full Court, this does not affect his Honour’s statement of principle): see Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 321.
65. The following have been held to be relevant indicia of a business:-
(a) the nature of the activities;
(b) whether the activities are undertaken as a commercial enterprise in the nature of a going concern: see Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8, or on a commercial basis: see FCT v Walker (1985) 79 FLR 161 at 165. However, an immediate purpose of profit-making in a particular income year is not essential. Further, a person can be carrying on a business notwithstanding his profit is small or he is making a loss or there is a slim prospect of making a profit;
(c) whether the taxpayer intends to and has a reasonable prospect of making a profit from the activities: see Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8 – 9, Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314, FCT v Walker (1985) 79 FLR 161 at 162, Babka v Federal Commissioner of Taxation (1989) 89 ALR 373 at 380, Ell v Federal Commissioner of Taxation (2006) 61 ATR 661 at 689;
(d) repetition and regularity of activity or activity conducted systematically is important: see Hope v Council of the City of Bathurst (1980) 144 CLR 1 at 8, Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314;
(e) whether the activity is carried on in a business like way in terms of record keeping, keeping books of account, maintenance of a business plan and otherwise operating in conformity with ordinary commercial principles and in a way characteristic of the industry: Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314, FCT v Walker (1985) 79 FLR 161 at 165;
(f) the size or scale of the activities. While the larger the scale of the activities the more likely they are to constitute a business, a business may be carried on in a small way, and activities which are nonetheless in the nature of a recreation or hobby may be substantial in scale: see Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314.
66. The applicant at paragraph 9 of his written submissions states “the key is to identify when the profit making transactions that form the basis of the business commenced”. In the Tribunal’s opinion the profit making transactions did not commence and could not commence before December 2004. From the outset the applicant did not in the view of the Tribunal seek to charter Escapade at all or in a business like way. This is evident from the following:-
(a)No business plan was prepared until July 2005;
(b)No application was made for reciprocal survey certificates in Western Australia until 28 August 2004;
(c)Reciprocal certificates were issued for survey classes 1E and 2C on
8 September 2004. This permitted the applicant to charter Escapade mastered by a person with a coxswain certificate in the Swan River, Fremantle, Rottnest, Mandurah, Busselton and Pilbara charter being all the markets the applicant stated that he had decided to focus on. However, notwithstanding the applicant’s claims that he moved Escapade from Mandurah to Fremantle in October 2004 for this commercial reason, the applicant made no attempt to employ Escapade on a commercial charter in those markets before December 2004. On the contrary, he obtained an exemption certificate to enable Escapade to be used for private recreational purposes until
30 November 2004 and used the boat accordingly.(d)Although the applicant had the names and contact details of recommended skippers from April 2004 no personnel capable of crewing Escapade on charters were engaged until December 2004 when Mr Simon Milsom commenced to run the charter operations of Escapade;
(e)The conduct of charter operations at Mandurah was at best never more than a haphazard possibility for a business operation and barely explored. The evidence strongly points to the applicant using Mandurah as a temporary mooring until after the boat show. It also strongly points to private pleasure use of Escapade until December 2004;
(f)The marketing for charters on Escapade was only planned to commence in December 2004 to attract the summer season market. Contractors were engaged for that purpose in September and December 2004;
(g)There was no effort to market for business prior to that time:-
(i)The discount on the purchase price of Escapade for Seawind to use the boat in the Sanctuary Cove and Mandurah boat shows amounted to nothing more. The applicant does not suggest that the purchase price discount was a set off of income derived for permitting use of Escapade at the boat shows. Even if this were the case, it could never be more than a passive receipt for the use of the boat. At the time of the boat shows Escapade had not been ventured into any business or any profit making transactions.
(ii)The fees received for use of the boat in May 2004 and July 2004 were not the first steps in a profit making charter business as the applicant contends. In the Tribunal’s opinion they clearly did not arise from a business operation but were passive receipts. In July 2004 as a contribution from friends to the shared costs of the trip from Darwin to Broome, and in May 2004 as a fee for the day use of the Escapade under an arrangement made between the boat builder Seawind and Sentinel Sailing: compare FCT v McDonald (1987) 18 ATR 957;
(iii)If the applicant was in business during the delivery of Escapade to Mandurah as the applicant contends, passengers could have been sought for all or different stages of the relocation journey, but were not.
67. These factors are not, in the opinion of the Tribunal, indicative of the presence before December 2004 of a primary motivation and commitment to operating Escapade with a view to profit and conducting business operations to that end. While it may have been the intention of the applicant to conduct a commercial business chartering Escapade before December 2004, his activities were not the first necessary steps of commencing a business using Escapade. Put at their highest the applicant’s activities and his use of Escapade before December 2004 might be viewed as no more than private pleasure use while planning, doing feasibility research and exploring the existence of a potential charter business market.
68. By 8 September 2004 the applicant had a boat in Western Australia survey for charter. But the applicant had obtained a private pleasure use exemption for Escapade until the end of November 2004 and was using the boat only for personal use on weekends. He did not engage personnel to crew the boat or market the boat for charters on inland waters, to Rottnest or any other destination along the coast within survey. His first activities directed to a profit making operational use of the boat were taken for the commencement of the summer season in December 2004 when Escapade’s exemption from commercial survey expired and he had engaged personnel to run the charters (Mr Simon Milsom) and to undertake extensive marketing (Ms Sharon Box). He also only then had a business review and business plan prepared by a business consultant and obtained an additional survey class 2B to enable Escapade to charter out to 100nm offshore. Compare Phippen and FCT 2005 ATC 2336 and Athineous and FCT 2006 ATC 2334.
69. Consequently the Escapade was not at all times used or held mainly for letting it on hire in the ordinary course of a business that the applicant carried on. Nor was Escapade used at all times for a purpose that is essential to the conduct of a business carried on by the applicant. The Tribunal is of the view that the exceptions in sec 26-50(5) (b) and (d) are not satisfied and accordingly sec 40-25(4) (c) also applies to preclude a deduction for the depreciation that remains in dispute. Subdivision 328-D cannot apply.
DECISION
70. The decisions under review are affirmed.
I certify that the 70 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: ..............[Sgd Ms C Skinner]............................
AssociateDate/s of Hearing 12 & 13 November 2007
Date of Decision 11 April 2008
Counsel for the Applicant Ms C Searle
Solicitor for the Applicant Ernst & Young Law
Counsel for the Respondent Ms L B PriceSolicitor for the Respondent Legal Services Branch
Australian Tax Office
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