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Since Russell Coutts and the late Sir Peter Blake convincingly won
the America's Cup in 1995 and then successfully defended it again
in 2000, GST auditors at Inland Revenue have seen a proliferation
in the establishment of charter boat operations.
It would seem that Inland Revenue's ostensible aversion to boat chartering
operations is often premised on the fact that many luxurious boat owners
consider their vessels a taxable activity to be used in the making
of taxable supplies. Where a taxable activity is undertaken and taxable
supplies are made, a GST registered taxpayer is able to either claim
GST input tax deductions on the cost of purchasing the boat or have
the transaction zero-rated for the purposes of GST where it can be
shown that the boat is a going concern. In most circumstances luxury
private boats have a significant GST impost, so there is every incentive
for a taxpayer to assert that the boat has been acquired for the purpose
of making taxable supplies.
Put simply, the legitimacy of many of these boat chartering operations
has been questioned by the Inland Revenue and recently many taxpayers
have found themselves embroiled in GST disputes with the Department
as a result.
Case law on the issue is unequivocal. Unless a boat chartering operation
is legitimate in every respect, taxpayers, regardless of their assertions
and protestations, will be hard pressed to prove their chartering operation
is a valid source of business. In Case P 73 the GST registered taxpayer
purchased a boat and claimed input tax deductions. There was every
intention to conduct a taxable activity including the preparation of
budgets and projections, Ministry of Transport modifications to the
vessel, the acquisition of commercial marine berths, and marketing
and sponsorship negotiations. However the taxpayer only managed to
charter the vessel a few times and mainly raced it for promotion. The
court held that at material times the taxpayer was not carrying on
a taxable activity. It was held that although the taxpayer intended
to take all steps necessary to establish the business as a charterer,
it did not achieve that enterprise. Its activities were no more than
preparatory of that.
In addition the TRA held that the activity undertaken by the taxpayer
was not "continuous or regular" as required under section
6(1)(a) of the GST Act and that the activities carried on amounted
to a recreational private pursuit or hobby, namely that of pleasure
or recreational yacht sailing or racing.
In Allen Yacht Charters Ltd the High Court held that for there to
be a taxable activity the activity carried on must be continuous or
regular (ie at reasonably short intervals). An activity that is intermittent
or occasional does not qualify. In that case the taxpayer exhibited
a pattern of chartering the vessel (although not continuous, but certainly
on a number of occasions). The High Court was therefore satisfied that
a taxable activity did exist.
It occurs to us that before a taxpayer considers the establishment
of a chartering operation, they would need to show, at the very least,
that they have undertaken preparatory and development work, marketing
and promotion, the availability of crew, Ministry of Transport certification
and that it has a commercial berth. Once the operation is up and running,
the taxpayer will also need to exhibit a pattern of chartering the
yacht. These factors alone would not necessarily preclude the Inland
Revenue from challenging the operation on the grounds that it does
not constitute a taxable activity.
If you are considering the acquisition of a boat chartering operation,
or have found yourself embroiled in a GST audit/dispute, Brookfields
is well placed to assist you.
Regulation of Electricity
Lines Businesses
Electricity lines businesses, as the distributors of electricity,
enjoy a monopoly and accordingly the prices that they charge have been
under Governmental scrutiny for some time. The Government directed
responsibility for the control of prices charged by electricity line
businesses to the Commerce Commission.
The Commission has been actively fulfilling that responsibility by
holding conferences with interested parties and inviting submissions
in response to a series of discussion papers. In doing so, it has been
working to a deadline of 1 April 2003 at which time regulations imposing
price controls for electricity distribution services are to become
effective.
Against all odds it now appears that the Commission will meet this
deadline. This follows from the 31 January 2003 release of the Commission's
draft decisions on the intended targeted control regime. We provide
a summary of that regime below.
The purpose of the regulatory regime is broadly to promote the efficient
operation of markets directly related to electricity distribution and
transmission series through targeted control by ensuring that suppliers:
- are limited in their ability to extract excessive profits;
- face strong incentives to improve efficiency; and
- share the benefits of efficiency gains with consumers, including
through lower prices.
This purpose is to be achieved by establishing three thresholds, to have
effect from 1 April 2003 to 31 March 2008. These thresholds are intended
to provide incentives to businesses to modify their behaviour (so they
do not breach the thresholds). The ultimate penalty for breaching them
is a declaration of control by the Commission, meaning that the business
may no longer supply services without a specific authorisation from the
Commission, and then only in accordance with that authorisation.
These thresholds are:
- a price path threshold, against which lines businesses will be
assessed initially in 2003, and thereafter annually for the next
5 years;
- a quality threshold, against which lines businesses will be assessed
annually, based on trends in reliability performance; and
- an excess profit threshold, against which lines businesses will
be assessed in 5 years time.
The price path threshold targets increased efficiency; i.e. a business
that did not improve its efficiency over time would breach the threshold.
Essentially, this threshold requires lines businesses to reduce their
prices, measured in real terms allowing for the CPI, over time. The quality
threshold is based on a set of reliability measures (e.g. unplanned downtime
in electricity supply). A lines business would breach the threshold if
its reliability trends were to indicate a material deterioration.
The profit threshold targets excessive profits. The Commission proposes
using a weighted average cost of capital (WACC) model to determine
an appropriate level of profit for an electricity lines business, profits
above which will be considered excessive and in breach of the threshold.
WACC represents what return on capital the providers of that capital
could be earning by committing their funds to an alternative project
of similar risk - their opportunity costs of capital. The commission
proposes a WACC in the range of 6%-8%.
Hand in hand with the WACC model is the need to value a provider's "capital" i.e.
the value of the electricity lines business. Methodologies for doing
so are varied and are referred to as "asset valuation methodologies".
The Commission proposes two alternatives for valuing systems assets
for these purposes, namely Depreciated Historic Cost (DHC) or Optimised
Deprival Value (ODV). The Commission intends to publish a handbook
to explain both these valuation methods.
For more information, please contact:
Brendan Meech
Partner
t: +64 9 979 2209
e: Brendan Meech
Last updated:
These articles are intended to be brief in nature and should be used for information only. They should not be relied on as legal advice. |
