The GST Margin Scheme and Multiple Titles
The decision in Landcom vs FCT [2022] FCA 510 may present an opportunity to revisit…
For those buying a luxury asset, there are many issues to navigate before taking delivery of their new pride and joy. Often, for those who wish to make the asset pay its way, the question of tax becomes critical.
In Australia, participation in the taxation system is mostly based around an entity carrying on as an ‘enterprise’ or a ‘business’, depending on the tax in question. The advantage for entities that meet these thresholds is that while revenue is subject to tax, there is some relief on relevant expenditure by way of either tax credits or refunds in the case of the Goods and Services Tax (GST), or offsetting deductions in the case of income tax.
The common luxury assets where an option exists to use them commercially are jets and yachts. There are also examples of where luxury cars and artworks or other types of collectables can be used as part of an enterprise, but these have issues that require a level and nature of activity that is different to the other two. For this article, we will focus on yachts.
Of course, for some owners, the intended use of the yacht will dictate whether tax will ever become a problem that needs to be managed. Where the yacht will only be used privately, the tax question really becomes just having to pay it where it applies.
Most commonly, these are indirect taxes like the GST that may apply to yacht sales in Australia or the importation of yachts acquired overseas and brought here by the owner. After that, it is simply a matter of wearing the GST or any other tax where it applies on any relevant capital or operational costs for the yacht. Direct taxes, such as income tax, are not applicable as there is no operating business from which revenue will be subject to tax.
For owners where the intended use is unclear or being weighed up, a big factor will be the compliance requirements that follow a commercial path. Not only are there more regulatory requirements around the yacht’s registration but, from a tax perspective, the obligations to keep records, report and pay tax, as well as deal with the inevitable enquiries from the Australian Taxation Office (ATO) take some of the shine off being able to access tax credits or deductions.
Perhaps reflecting the intended breadth of Australia’s GST regime, it operates on there being an ‘enterprise’ for taxpayers to participate in the system, whereas for income tax, the test is a narrower one of carrying on a ‘business’. It follows that while every business is also an enterprise, not every enterprise is a business – the joys of Australian tax law!
An enterprise relevantly includes things such as an activity in the form of a business, an activity undertaken on a regular or continuous basis, or where there is an expectation of a profit or gain. While the courts have ruled that a GST enterprise can be as passive as buying and holding artworks with a possibility of a future sale (that was not considered to be a business), from a charter yacht perspective, it is likely the ‘business’ test will be the one that needs to be satisfied.
In determining what is considered to be a ‘business’, there are a number of factors that may apply. Things such as the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised are often described as whether the activities are carried out in a ‘business-like’ manner. In the context of the commercial operation of a yacht, these may include evidence of:
While not definitive, the above may be able to show the substance of the yacht enterprise being considered or undertaken. The activity of the yacht once charter operations commence should also not be discounted. For example, it might not be difficult for the Commissioner of Taxation to mount an argument against a business being carried on if no charters are taking place or future charters are not being actively sought.
It is probably unsurprising that disputes involving yachts and taxation do make it through to the courts. What is surprising, though, is that of the few that have made it that far, the taxpayers have a reasonably good record against the Commissioner, which is definitely not the case in overall tax litigation matters – the commissioner is a very formidable opponent.
A constant theme from those successful cases is they mostly turned on the quality of the evidence the taxpayers could use to support their case. Further, the evidence stood up when tested in court – often with the principal taking the witness box to outline their intentions and actions in undertaking the charter activity. Some notable matters include the following.
Peerless Marine Pty Ltd
This matter involved the construction and sale of a prototype-powered catamaran named White Spirit. The taxpayer constructed White Spirit over a period in excess of three years at a total cost in the order of AU$2.5 million. Then, two years later, she was sold for AU$1.25 million. Production of a line of similar yachts did not occur.
The Commissioner challenged whether the operations of yacht construction and intended sale amounted to either a business for income tax or an enterprise for GST on the basis they were really only carried out to satisfy the private wishes and demands of the majority beneficial owner of Peerless Marine.
While the undertaking was ultimately unsuccessful commercially, the taxpayer was able to demonstrate that it held the relevant intention at the relevant time to be considered a business (and therefore also an enterprise for GST purposes). It followed that it was entitled to relevant income tax deductions and GST input tax credits.
What was crucial to the success enjoyed by the taxpayer in the case was not only the evidence it was able to show about its preparation and planning for the business (both from industry and financial perspectives), but the corroboration of its evidence by industry experts about the crucial importance played in the generation of sales by a proven prototype vessel to show prospective customers. The linkage between prototype and sales enabled a conclusion to be drawn that a business had commenced at the outset of the construction of the prototype.
Hostess Marine Pty Ltd
This matter involved the construction of a 55-foot motor yacht in Taiwan based on the Monte Fino design, with the intent of it being adapted to Australian conditions. The taxpayer then planned to become a joint distributor with the manufacturer of the yachts in parts of Australia. The yacht was completed and shipped to Australia in 1999 for a cost of AU$1.08 million and called Hostess. After appearing at several boat shows around Australia, Hostess was sold in 2001 for AU$1.675 million and the business shut down.
The commissioner’s argument in relation to Hostess was that sales tax should have been payable on the importation as it had been done for the purposes of private use by Hostess Marine’s beneficial owners.
The taxpayer’s arguments were that the importation was exempt from sales tax on the basis that the main use of Hostess was to demonstrate her for business purposes to achieve sales to the public, thereby deriving a commission or share of the profit on each sale of various Monte Fino yachts.
The court found for the taxpayer, and in doing so relied on the evidence of the owner and all the steps put in place to set up the distribution arrangement. The preparation and execution of a marketing strategy for the promotion of the Monte Fino range featuring Hostess and the fact there was no private use (until at least the decision to sell was made) were also relevant.
While the case involved sales tax, the principles around having a requisite business intention to achieve the desired tax outcome are equally relevant to the current GST (which was the tax that replaced sales tax in July 2000).
Lee Group Charters Pty Ltd
The leading Australian case on taxing superyacht charters involves Lee Group Charters Pty Ltd and an associated entity. The Commissioner challenged the taxpayers on whether the operations of the yacht amounted to a business for income tax and, if so, the amount of deductions available on costs associated with the charter operation of the yacht. (Where the yacht was not used or held mainly for letting it on hire in the ordinary course of a business, deductions may be limited to the amount of revenue received.)
The taxpaying companies owned and commercially operated various yachts, the most relevant for the purposes of the litigation being Keri Lee Ill, a 55-metre motor yacht. For each of the yachts, commercial registration was obtained, advertising was conducted, and a crew and chartering agent was employed. Business plans also existed that outlined the taxpayers expected to realise profits from chartering the yachts. Included in projections of charter revenue were payments to be made by the owner, his family and friends for their use of the relevant yacht.
In finding for the taxpayer, the court (as in the other matters) relied heavily on the substance of the evidence before it that a business was taking place. Further, in this matter, the fact the owner used Keri Lee Ill was not enough to mean a business was not carried on. The fact the owner would pay a market charter rate for his time on board left little room for the commissioner to succeed in his arguments the yacht was predominantly for private use.
Owning a yacht can be challenging enough. However, owning a yacht that also forms part of a business presents its own set of unique problems that need to be managed to keep the risk of a dispute with the Commissioner of Taxation low. Good tax planning always starts well before the asset is acquired and yachts are no different.
The court cases have shown the importance of demonstrating a business exists, and this evidence needs to be collected preferably from the very start of the process. It is also the best time to consider the tax question and decide on the preferred path, or at least keep options open should circumstances change at a later date. Either way, the tax side of owning a yacht should sit side by side with the other considerations when looking to acquire the asset.
This article appeared in Ocean Magazine, Issue 104 – November/December 2022.
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