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12 Sep 06 Taxpayer carrying on business as a boat builder - Peerless Marine

The AAT has held that a taxpayer was carrying on the business of a boat builder over a period of 3 years, even though it only built one boat (at a cost of $2.5m) which it sold at the end of the period for $1.25m. As such, it was entitled to deductions for its losses and outgoings incurred in relation to that business. It was also entitled to input tax credits.

The AAT found that the taxpayer started in business with the intention of constructing the boat (a luxury catamaran) as a demonstrator, that is, keeping her for that purpose once constructed, although no doubt if offered enough money a sale would have been agreed to. As costs increased and the time for construction blew out the taxpayer determined to sell the vessel if possible. But until sold the boat was to be available as a demonstrator. Ultimately the notion of building other boats was abandoned and the efforts of the taxpayer were devoted to the sale of the boat in order to recoup some of the investment (see para 100). The AAT rejected the Commissioner's argument that there could only ever be one business and that it had to be either that the taxpayer was constructing the boat for use as a demonstrator or that it was constructing her for sale. The AAT held that despite the change in intentions, the taxpayer was carrying on a business of boat builder.

In addition, the Commissioner argued that the losses and outgoings were denied deduction under s 26-50(1) ITAA 1997, which denies deductions to the extent that they are incurred "to acquire ownership of a leisure facility or boat". For its part, the taxpayer argued that the exception in s 26-50(5)(d) applied on the basis that the boat was used "for a purpose that is essential to the efficient conduct of a business" that was being carried on. The Commissioner's arguments, in response, were twofold. He said, firstly, that the use of the vessel as a demonstrator was not for a use that was essential. And, secondly, he said, that in any event that use could only occur after completion of the boat. However, the AAT held the use of the boat to demonstrate the capability of the taxpayer and the nature of the finished product was a use that was essential and not merely desirable to the efficient conduct of the taxpayer's business, being the construction and marketing of luxury catamarans.

Peerless Marine Pty Ltd and FCT [2006] AATA 765 (AAT, Hack SC DP, 8 September 2006).

For a copy of the decision, go here

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