Tax Laws Amendment (2007 Measures No. 2) Act 2007 (78 of 2007)

Schedule 2   Taxation of boating activities

Part 1   Main amendments

Income Tax Assessment Act 1997

1   After section 26-45

Insert:

26-47 Non-business boating activities

Object

(1) The object of this section is to improve the integrity of the taxation system by preventing deductions from boating activities that are not carried on as a *business being offset against other assessable income.

Rule

(2) This Act applies to you as if so much of the amounts relating to using or *holding boats that you could otherwise deduct for an income year as exceeds your assessable income from using or holding boats for that year:

(a) were not deductible for that income year; and

(b) were an amount (a quarantined amount ) relating to using or holding boats that you can deduct for the next income year.

Note: A quarantined amount may be reduced under subsection (5) (for boat capital gains), reduced under subsection (7) (where you deduct part of a quarantined amount under subsection (6) for boat business profits), reduced under subsection (8) (about exempt income) or affected by subsection (10) (about bankruptcy).

Example: Ian does not use his boat in a business. In Year 1, Ian would be able to claim $100,000 in deductions for the boat (but for this subsection), including interest, depreciation and running costs. He earns only $40,000 of income from the boat. He can only deduct $40,000. He carries the remaining $60,000 forward to Year 2 (the quarantined amount).

In Year 2, Ian has $95,000 of expenses and $30,000 of income for the boat. He can deduct $30,000. The quarantined amount is now $125,000: the quarantined amount from Year 1 plus the excess of expenses over income from Year 2.

In Year 3, Ian has $60,000 of expenses and $150,000 of income from the boat. The expenses from Year 3 plus the quarantined amount is $185,000. Therefore, Ian claims a deduction of $150,000 and carries forward $35,000 to Year 4.

Exception: business use

(3) The rule in subsection (2) does not apply to amounts that are attributable to one or more of the following:

(a) *holding a boat as your *trading stock;

(b) using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you *carry on;

(c) using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on;

(d) using a boat for a purpose that is essential to the efficient conduct of a business that you carry on.

Note: Even if this exception applies to you, you may still have to quarantine losses under Division 35 (deferral of losses from non-commercial business activities).

Exception: fringe benefits

(4) The rule in subsection (2) does not apply to so much of an amount you incur in *providing a *fringe benefit.

Modification if you have boat capital gains

(5) You reduce a quarantined amount you have for an income year by so much of that amount as is applied under section 118-80 to reduce a *capital gain you have for the year in relation to a boat. You make this reduction before you deduct an amount under subsection (6).

Deduction if you have boat business profits

(6) You can deduct all or part of your remaining quarantined amount for an income year if your assessable income for the year from activities of a kind referred to in subsection (3) exceeds your deductions for the year relating to those activities. The amount you can deduct is the lesser of that excess and that remaining quarantined amount.

(7) You reduce your quarantined amount for the year by the amount you deduct. You make this reduction before a reduction under subsection (8).

Modification if you have exempt income

(8) You reduce any remaining quarantined amount you have for an income year by so much of your *net exempt income as is not applied for that income year under section 35-15 (about non-commercial business activities) or section 36-10 or 36-15 (about tax losses).

Modification if you become bankrupt

(9) The modification in subsection (10) has effect if:

(a) in an income year (the current year ) you become bankrupt or are released from a debt by the operation of an Act relating to bankruptcy; or

(b) you became bankrupt before the current year and:

(i) the bankruptcy is annulled in the current year under section 74 of the Bankruptcy Act 1966 because your creditors have accepted a proposal for a composition or scheme of arrangement; and

(ii) under the composition or scheme of arrangement, you have been, will be or may be released from some or all of the debts from which you would have been released if you had instead been discharged from the bankruptcy.

(10) This Act applies to you as if any amount that:

(a) is a quarantined amount for you for the current year or was a quarantined amount for you for an earlier year; and

(b) has not been applied under section 118-80 and that you have not yet deducted;

were not an amount relating to using or holding boats that you can deduct for the current year or a later year.