Charter boat ownership overview 2:53pm, Tue 01 Nov 2016Overview:
Owning a charter boat is in many ways similar to owning a serviced apartment.
Just as many serviced apartments are located in popular holiday destinations, externally managed for the owners and used personally by the owners at various times of the year, so is a charter boat.
Typically, a charter boat will be located in a popular tourist destination (such as the Whitsundays), will be professionally managed and maintained by a charter boat operator who may have up to 30 boats within their fleet.
The boat will (in the case of the Whitsundays) usually be hired to holiday makers for 150 days or more per annum.
Depending upon the size and configuration of the boat, gross annual income generated by the boat will be between $100,000 and $180,000 with around 65% of that income ($65,000 to $120,000) expended in management fees and maintenance and around 35% ($35,000 to $60,000) remitted as a net income to the owner. These figures will fluctuate depending on the age of the boat (E.g. new boats incur less repairs and maintenance etc)
Comparing a charter boat to a private boat:
The best analogy that can be provided here is to compare buying a serviced apartment which earns income and is available for private use compared to buying a weekend cottage for exclusive private use.
For most people buying a weekend cottage, there is initially great excitement around owning a "retreat" for family and friends to get away to on the weekends, however often quickly becomes a "millstone" for the family with many trips simply maintaining the property and long periods of no use either resulting in greater efforts to keep the property in reasonable order or expenses incurred to have someone else do that for you.
The serviced apartment on the other hand is continually maintained by the letting agents and earning rental income when it is not being used by the owners.
This is precisely the case when comparing a charter boat to a private boat.
There is no doubt that a private boat is available for much more convenient, short notice private use and also potentially located closer to the owner, however all of the costs, maintenance and non-use issues (similar to the weekend cottage) come into play.
It is a sad fact that the average boat usage by private boat owners is less than 30 days a year.
Similar to the Serviced Apartment, the Charter Boat is maintained by the charter boat operator and rented to holiday makers (in the case of the Whitsundays) for typically 150 days a year or more.
Putting aside the "personal labour time" of the owner, from a financial perspective, the following is relevant:-
A private boat will generally incur "holding" costs (Marina fees, Insurance + R & M) of around $30,000 a year ($300,000 over 10 years)
A charter boat will generally earn a net income to the owner around $30-$60,000 a year ($300-$600,000 over 10 years) this net income is after all costs (excluding finance) as the charter boat will earn gross revenues of $100,000-$180,000 each year (with 65% of that revenue being retained by the charter operator to manage and maintain the boat)
Tax deductibility of a Charter Boat:
The majority of charter boats (where the boat owners individually earn income in excess of $250,000 p/a) are seen by the ATO as a hobby based business.
Under a "hobby based business", charter boat owners are permitted to claim deductions through depreciation and interest expenses (if applicable) up to the level of the boat's net income.
In other words, where a charter boat a net income of $46,000, The charter boat owner can claim deductions up to that level.
Typically charter boat owners will pay for their boats through one of the following structures:-
1) Simply use existing funds to pay for the boat
2) Use equity in the existing properties to pay for the boat via "redraw/line of credit" facilities
3) Use a dedicated boat loan (which is similar to a car loan) where a portion of the boat's cost (usually up to 80%) can be financed over a 5 year term with a residual of 40% which can refinanced over a subsequent 4 or 5 year term.
4) Use a hybrid combination of some of the above structures (EG: part cash/part mortgage or part mortgage/part boat loan etc)
The servicing of these various debt structures represent different monthly commitments which are best described below based per $100,000 of debt:-
Interest Only Debt:
An interest only facility at 4.5% will incur costs of $4,500 per annum ($375 per month) however there is no reduction in the principle. It is common place for owners to apply any surplus of boat income to reduce the principal of the debt.
As an example where a $600,000 boat (which has a $400,000 interest only debt) is producing an annual net income of $46,000, the interest only cost p/a is $18,000 (4 x $4,500), the balance of the net income ($46,000 - $18,000) $28,000 is applied as an annual reduction to the core $400,000 debt ($140,000 over 5 years or $280,000 over 10 years)
Dedicated boat loan:
A dedicated boat loan based on the initial 5 year term with a 40% ($40,000) balloon will incur a monthly cost of $1,400 (remembering that $1,000 per month is simply the reduction in capital as the residual value at the end of the five years is $60,000 less than the amount borrowed.)
Often where a component of the boat price is financed through a typical boat loan, charter boat owners look to offset that cost via the net income from the boat.
To put it in other terms, a net income of $46,000 p/a will service a dedicated boat loan of $270,000 over the initial term (EG: 2.7 x $1,400 p/m x 12 = $46,000)
Charter boat owners do need to be mindful that the $46,000 of net income be received sporadically through out year with higher income levels during the high season and minimal income levels in the low season. This is important to note as the finance payments need to be paid regularly each month throughout the year and as a result may be more than the income at certain times of the year.
There are a limited number of banks and finance companies who will finance boats and they all have the same criteria is as much as any borrower needs to be able to service the debt on the boat without taking into account any net income from the boat. As such, borrowers for boats need to have sufficient assessable income to meet this criteria.
This requirement for assessable income is much less when dealing with a simple property based redraw facility on an interest only structure as the servicing requirements for $100,000 of debt is only $375 per month compared to $1400 per month for a dedicated boat loan.
Understanding that a charter boat is a working asset which produces income, it is often seen by potential boat purchasers as an ideal "assisted" way to buy their boat as a part of a long-term strategy.
During its charter life, the boat is being maintained by a professional charter boat operator, available for private use in an attractive destination and earning an income which is assisting in the financing or payment of the boat over the longer term.
Many owners of charter boats will keep their boats in these charter fleets for 5 to 8 years, prior to taking the boat back to their homeport destination to be used as their private boat.
Below is a series of frequently asked questions (FAQ). These are simply a guideline and anyone looking to purchase a charter boat should seek independent legal and accounting advice.
How will the boat be maintained in the charter fleets?
As the boat is a working asset, it is subject to a structured maintenance program. It is within the interests of the charter boat operator to keep the boat well maintained as breakdowns in the field are costly, time consuming and lead to unhappy charterers.
Will the charter boat have a lower resale value than a similar private boat ?
There is typically little difference in resale values between charter and private boats. Although there may be less wear & tear on a private boat, the presence of the "survey" capability of the charter boat is often seen as a positive. Currently as there is a shortage of charter boats, the resale on these charter boats is attracting a premium.
Some caution however, does need to be considered around the configuration of charter boats. As an example, a 4 cabin/4 bathroom catamaran is a high earning boat in charter, however it is not that popular as a private boat.
Will I get a refund of the GST on the purchase price of the charter boat?
Owning a charter boat is in reality operating a charter boat business and as such the GST is refunded as an input credit.
Will I have any future GST obligation on the boat if I sell it or take the boat to private use?
Yes, you do have a GST obligation on the sale price of the boat and 1/11th of the sale price needs to be remitted to the ATO as payment of GST.
You will also have a GST payment to be made in the event you retain the boat and simply change the use of the boat from business (charter) to private use. This is calculated by obtaining a valuation on the boat and remitting 1/11th of that valuation as payment of the GST upon converting the boat to private use.
How often can I use the boat for private use are there any restrictions on the time of year?
Typically, the owner and operator agree to pre booked owner use of up to 28 days per year and this use to be outside of Peak Seasons. We have seen many instances where owners have taken the boats for longer periods in the Off Season and the charter operators are happy for this to occur as it is one less boat to look after for that period
How will I know how much the boat will earn each year?
As with any holiday destination, tourism numbers are subject to many influences such as the weather, the economy, currency exchange rates (a lower AUD keeps more Australians holidaying at home and increases inbound tourism as we are seen as a low cost holiday by overseas tourists, A higher AUD has the reverse effect).
Typically, when looking at the potential Gross & Net incomes of a particular charter boat, the best indications of future revenues is to look at the historic income levels of similar boats and then overlay that with the current market forces.
Should you have any questions, please feel free to contact finlease, more information is contained in their website: www.finlease.com.au
The information contained in this blog should NOT be construed as Tax Advice. Potential Charter Boat Owners should seek qualified, independent and expert advice prior to commencing a Charter Boat Business.