Charter Investment Business Models
Multihull Solutions has assisted many people in their purchase of a catamaran for charter, and we know that with careful and cautious decision making, owning a charter boat can be an extremely rewarding decision.
The purchase price of owning a boat for operation in charter can often be more than that for a private yacht because of the costs associated with making the boat suitable for use as a commercial vessel. These additional costs might inflate the new boat price by between five and ten per cent, depending on the level of work required.
When considering the pricing difference between what the factories call a “base boat price” and the complete price for a charter boat, it is important to realise that many of the additional extras listed are extras that a private owner would also request when ordering their boat.
In Australia, when considering purchasing a boat for operation as a charter boat, the owners can refer to the ATO website and consider, among other things explained on the site, the May 2006 press release which relates to the additional “safety net” legislation. In essence, owners have a choice between two models,depending on their personal circumstances and the operating circumstances of the boat:
- A charter boat business which in all respects meets the tests of a complete charter boat business as described in the Charter Boat Tax Ruling TR 2003/04 released in May 2003. This can be accessed via the ATO website using a keyword search function. A significant factor in this ruling is the need for the business to indicate prospect of profit and significant commercial purpose, as shown in the examples within the ruling. This model, set up and operated correctly, potentially allows full negative gearing (FNG) in a similar manner to an investment property where surplus losses from one business may be offset against other assessable income. With any potential charter boat purchase, where you are seeking to obtain Full Negative Gearing we would highly recommend any buyer seek a Private Ruling from the ATO to ensure its compliance with current tax law. Peter Jabour (Ph: 02 4929 4068) is a Newcastle based accountant who is very familiar with the Private Ruling process.
- A charter boat enterprise which may not meet all of the tests of a complete charter boat business as described in the Charter Boat Tax Ruling TR 2003/04 released in May 2003, however is still an income producing enterprise. This model potentially allows expenses from the boat to be offset against income from that boat, however limited to that income only and any additional losses “quarantined” to be offset against any future revenue from that boat (including any profit on sale). This style of business is also referred to as a Hobby Based Enterprise.
Potential charter boat owners should see this new two-tiered approach as a stable, common sense platform from which to evaluate their charter boat investment and determine the type of structure which would best suit their circumstances.
Example circumstances of Charter Investment ownership
If the owner is operating a $600,000 charter boat as a “charter boat business” and has matched the right boat with the right charter company with suitable occupancy and revenue levels being achieved, it could be assumed that approximately 35 per cent of the Gross Revenue will be retained as a net return before any interest or depreciation is considered (over a 3 to 5 year period).
If the boat was to earn gross income of $150,000 per annum (excluding GST) from an estimated 175 days of charter revenue (an average over a year), it would be appropriate to assume approximately $100,000 of costs would be incurred as expenses, including insurance, berthing, annual haul-out and antifoul, engine servicing, other maintenance, cleaning and turn arounds between charters, operator management fees, marketing contributions, annual registration costs, fuel and all other costs associated with the boat’s operation.
This would deliver approximately $50,000 net return to the owner per annum. From this position the end outcome with regards the financial benefits of owning a charter boat vary greatly depending on the personal situation of the boat owner and would need to be considered in light of such variables as:
a) Any loan structure on the boat including the % of purchase price borrowed;
b) The personal tax profile of the owner;
c) The period of time the boat will remain as a charter boat;
d) The intended circumstance of the boat once it has completed its charter life.