Deductions and Expenses: boat charter business - part year use of boat

Does subsection 26-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) deny a deduction for all expenses incurred in relation to a boat used in a boat charter business at all times during part only of an income year?

No. Subsection 26-50(1) of the ITAA 1997 does not deny a deduction for so much of the expenses incurred in relation to a boat used in a boat charter business at all times during part only of an income year as is reasonable in the circumstances.

The taxpayer purchased a boat and commenced carrying on a boat charter business part way through the income year.

The boat was not used for any private purpose.

The taxpayer incurred expenses in relation to the ownership and operation of the boat including: • interest • insurance • maintenance • fuel, oil and water • marina fees • crew outgoings • meals and beverages for passengers and crew • cleaning, and • bed linen and towels

Paragraph 26-50(1)(e) of the ITAA 1997 states:

You cannot deduct under this Act a loss or outgoing to the extent you incur it: ... (e) to use, operate, maintain or repair a ... boat; ...

However, there are exceptions to the operation of subsection 26-50 (1) of the ITAA 1997. Of particular relevance here is paragraph 26-50(5)(b) of the ITAA 1997 which provides that subsection 26-50(1) of the ITAA 1997 does not stop a deduction for a loss or outgoing for a boat if at all times in the income year the taxpayer will ... use the boat (or hold it) mainly for letting it on hire in the ordinary course of a business that you carry on ...

Subsection 26-50(6) of the ITAA 1997 deals with the part year use of boats and states: If you use a boat (or hold it) as described in subsection (5) at all times during part of the income year, then subsection (1) does not stop you deducting so much of the loss or outgoing as is reasonable in the circumstances.

In the circumstances here the taxpayer purchased the boat and commenced carrying on a business part way through the income year. At all times during that part of the year after the business commenced the boat was used as described in paragraph 26-50(5)(b) of the ITAA 1997.

As such, subsection 26-50(6) of the ITAA 1997 will apply and the amount of the deduction allowable will depend on how much of the loss or outgoing is 'reasonable in the circumstances'.

The meaning of the word 'reasonable' was considered in Opera House Investment Pty Ltd v. Devon Buildings Pty Ltd (1936) 55 CLR 110. At p116 Latham CJ said: The word "reasonable" has often been declared to mean "reasonable in all the circumstances of the case." The real question, in my opinion, is to determine what circumstances are relevant. In determining this question regard must be paid to the nature of the transaction. A circumstance which has no relation to the property which was the subject matter of the transaction but which depended entirely upon the personal position or personal desires of the owner of the property, would not, in my opinion, be a relevant circumstance in determining what was reasonable.

In the present case, the expenses were incurred in relation to the boat which was used or held at all times for the relevant part of the year solely for letting it on hire in the ordinary course of a business carried on by the taxpayer. As such, it would be reasonable in the circumstances to allow all of the otherwise deductible expenses incurred from the time that the taxpayer commenced carrying on the boat charter business.

Accordingly, subsection 26-50(1) of the ITAA 1997 will not apply to deny a deduction for so much of the expenses incurred in relation to the boat as is reasonable in the circumstances.