Final Ruling on tax laws

The review of tax laws for charterboat owners and operators by the Australian Taxation Office was a protracted and costly 11-month affair. Hopefully, the Final Ruling released in late May brings calmer waters to the beleaguered industry.

Implemented by Tax Commissioner Michael Carmody, the review led to the creation of the Charter Boating Industry Survival Campaign, a subcommittee of the Australian Marine Industry Federation. The CBISC appointed a Canberra-based lobbyist to put its views to the Australian Taxation Office.

Of particular concern were two issues in the ATO's Draft Ruling.

The first was that charter-fleet management agreements were not legitimate business models, and therefore deductions weren't allowed. The second key issue has to do with profitability.

In both cases, substantial law changes were mooted and it was said the new rules would be applied retrospectively. Naturally, this instilled fear into the hearts of would-be boat investors, and those existing operators whose charter businesses were operating close to the breeze.

Guy Pearse, the industry-appointed lobbyist, says the ATO now appreciates that the vast majority of management agreements go beyond being mere leases. Elements of what would constitute a suitable management agreement for the purposes of satisfying the business criteria have been included in the ATO's Final Ruling.

On the issue of profit motives, the ATO makes it quite clear in paragraph 18 of Prospect of Profit in its Final Ruling that: Where an objective analysis of boat-hire activity demonstrates that boat owners offer the service with a bona fide expectation of making a commercially realistic profit, this indicator will be satisfied. It is not necessary that a profit actually be made in every year (particularly in earlier years) provided there is a bona fide expectation of a commercially realistic profit over the life of the activity.

To this end, some charterboat operators and owners may be required to rewrite their business plan so they can see a profit. If it is impossible to see a boat ever making a profit, it is likely it won't be deemed a legitimate business and expenses won't be deductible.

The ATO also said that putting a boat in survey and chartering it is not a ticket to claiming depreciation, loan interest and other expenses tied to a boat. In fact, it is possible that the owner won't be entitled to deductions and that money received from chartering is included as assessable income.

It is also important that personal availability, or use of the boat by the taxpayer, does not take priority over the availability of the boat for charter purposes, says the ATO, adding that expenses need to be apportioned between private and business use.

Thankfully, the ATO dropped its position on retrospectivity. Charterboat owners and operators have till the end of the calendar year to comply with the Final Ruling.

This is a one-off for owners to realign their businesses with acceptable models. Naturally, assistance from a professional tax adviser should be sought.

Meanwhile, the charterboat industry will work with the ATO to create an industry code of conduct. An audit program starting in 2003/04 will be used to test Carmody's new arrangements.

The 28-page Final Ruling, charterboat business models and practical examples are all available from the ATO. To download and viewing documents, visit www.ato.gov.au (follow Links to updates) dated May 21). The ATO will be providing Fact Sheets to assist stakeholders in coming months.