The ATO has released some guidance to assist taxpayers in correctly accounting for their private use of these assets, which can include ensuring deductions are only claimed for business use, correctly apportioning deductions, making sure FBT or Division 7A issues are considered and maintaining appropriate records to reduce the likelihood of mistakes.
The ATO’s guide provides practical examples, which include situations where boats, aircraft and racing cars are involved and explains the key tax issues that need to be considered by clients and their tax agents. Examples are as follows:
EXAMPLE 1: CLAIMING DEDUCTIONS
A tavern operator purchased a boat for $2 million dollars and claimed it was purchased by the company with the intention of offering boat charters to patrons of the tavern.
The business claimed large deductions for expenses associated with chartering and maintaining the boat, however they also reported minimal income. This attracted the attention of the ATO and when a review was conducted it was discovered that the:
- tavern was sold soon after the boat was purchased;
- boat was never insured to legally operate as a commercial vessel and didn’t meet specifications required to gain the appropriate insurance cover; and
- boat was used as a home office for the director and for other private purposes.
The ATO determined the boat was not used in the business, but rather for the private use of the director. The deductions were disallowed, and the client was required to pay the tax shortfall, with interest and penalties.
EXAMPLE 2: APPORTIONING DEDUCTIONS
A director claimed an aircraft was purchased by their business for the purpose of expanding into regional areas of the state and to provide chartered flights to the public.
Over several financial years, the company’s accountant claimed ongoing large deductions for expenses associated with the cost of hiring out the plane. However, there was minimal, or no income generated by business activities linked to the aircraft.
The tax outcomes related to this asset attracted the attention of the ATO and a review was conducted. The review found that the:
- relationship couldn’t be established between use of the aircraft and expansion of the business;
- company stopped offering chartered flights soon after the aircraft was purchased as it didn’t meet legal requirements to operate commercially;
- aircraft was predominately unavailable for hire to the public; and
- majority of flight hours were undertaken by the director and were of a private nature.
The ATO determined the overall use of the aircraft was a private pursuit, with limited periods of business use through chartered flights. The company’s tax returns were amended to reduce the amount of deductions claimed, by apportioning and removing the private component of the expenses. The company was required to pay the tax shortfall and interest as well as penalties.
EXAMPLE 3: PRIVATE COMPANY BENEFITS – DIVISION 7A DEEMED DIVIDEND
A director who operated a consulting business claimed they personally competed in a racing network. The company purchased vehicles and claimed over a million dollars in deductions for racing activities over several financial years. They stated the vehicles and activities were used for advertising and to further their business income.
This behaviour attracted the attention of the ATO, and a review of the business was conducted. The review found:
- there were some vehicle and racing expenses associated with running the business; however, the scale of these expenses was disproportionate in comparison to business income;
- the company’s business plan, client base and use of the vehicles were not sufficient to justify that the racing costs were an expense incurred to build a client base;
- the vehicles were owned by the company but stored and used privately by the director.
The ATO determined the company was claiming deductions for a private pursuit and not for the purpose of furthering the consulting business. As a result, the deductions claimed for racing expenses were disallowed and the company had to pay the tax shortfall, as well as interest and penalties.
The private use of the racing vehicles was treated as a deemed dividend on the basis that the company had provided assets for the personal benefit of the director who was a shareholder. The director was required to include the deemed dividend in their assessable income. Their personal tax returns were amended, and they had to pay the tax shortfall, interest and penalties.