Sex and Tax Law (either way your screwed)
Not the sexiest subject and often the last thing you’d think about when considering your yacht purchase, but Tax and Duty Laws are probably the most important, especially when importing from another country. For many reasons prospective buyers look overseas to purchase yachts and while this article does not consider the rights or wrongs of this practice, when it comes to Super Yacht construction in Australia the reality is this industry is all but gone. Adding to this Australian economic story, the continued strength of the Aussi-dollar and weaknesses in America and European markets have resulted in comparatively cheaper prices and more buying power for Australians. However, any price advantage may be quickly lost if taxes and duties are not considered before money changes hands. Given the breadth of this topic this article will specifically focus on the Duty Payable, Customs Value and Goods and Services Tax (GST) for a super yacht originally built in Italy and purchased from America.
The general rule is that duty is payable at a rate of 5% of the customs value on imported yachts depending where the yacht was originally constructed. The exception when importing from America is as a consequence of the Free Trade Agreement (FTA) between the USA and Australia being a mutual agreement in respect to vessels manufactured in either country. However, if the vessel is constructed in a country with whom Australia does not have a FTA, or similar reciprocal arrangement, duty will be payable regardless of the vessel being purchased in a country such as America, as is the case with our super yacht. There is however another exception that may be able to be used, and does not rely on whether the vessel was not constructed in a country that is a party to the FTA or its equivalent, being where the volume of vessel exceeds150 ‘gross construction tonnes’ (volume rule).
The volume rule exception to duty being payable may be applicable where a large volume yachts exceed 150 ‘gross construction tonnes’. This rule applies a formula to calculate the ‘gross construction tonnes’ being a bureaucratic figure not a design construction figure. Thus, while the displacement of a vessel may be 150 tonnes this is not ‘gross construction tonnes’, which is calculated by the sum of the cubic meter volume of the vessel divided by 2.83. The significance of this figure becomes apparent where for argument sake the customs value of the vessel is estimated at $1,500,000.00, the duty potentially payable would be $75,000.00, plus GST of $7,500.00 payable on that duty with a total of approximately $82 000.00 payable. However, if customs accepts an argument based on the ‘gross construction tonnes’ formula this duty and its GST may not be payable. And while I may have now got your attention, many yachts don’t fit into this exception given the sheer size required.
GST and Duty are calculated based on the concept of ‘customs value’. The customs value is usually based on the purchase price, however may also be an amount customs deems the vessel to be worth after their calculations. The customs value will be an arbitrary judgment where no documentation is provided and may leave you with a nasty unexpected bill. Therefore, it is important to be prepared and provide accurate reports and evaluations to convince the custom’s officer of the lowest possible value of the vessel that does not mislead, so as to this reduce the taxes payable and avoid any possible penalties.
The calculation of the customs value becomes complicated where there is the initial purchase price followed by a refit in the same country potentially increasing the value of the vessel, less any costs that would be considered for repair and maintenance. Any calculation would consider where the vessel was constructed, being crucial, but also whether the country is party to the FTA or an equivalent where the refit occurs. Additionally, in certain circumstances, where the money spent to upgrade is not reflected in a substantial increased in value of the yacht (just providing the owner with better living conditions) it may be better to commission a further survey of the yacht that considers such things as the falling value of larger yachts in international markets and other considerations such as the special market that many yachts fall into such as classic timber yachts. Where often purchased cheaply, due to neglect, the cost of refit is rarely recouped by the owner in the finished product.
Therefore, by getting a final survey and evaluation limits the possibility of a protracted argument over the customs value. As a reasonable increase in the value of the vessel in the new survey, when compared to the purchase price of a neglected yacht, may better reflect the money spent on the boat that reasonably increases the value, while still considering on going repairs and maintenance. This additional survey also gives the added benefit of peace of mind by decreasing the risk of being penalised by customs where it could be shown there was an attempt to evade paying the correct tax.
GST is calculated at 10% of the sum of the customs value, international transport, insurance, duty paid and other non-excluded fees that may be encountered.
- Effectively minimising the customs value, will minimise GST.
- Paying no duty or less duty will also minimise the GST.
However, beyond these strategies, GST will have to be paid as your yacht is a taxable importation and there are no relevant exceptions such as living on the vessel overseas for 12 months or more.
There is however a possibility of converting the GST payable into tax credits. This would allow you to claim this credit against other GST you are liable to pay. Obviously, in order for the credit to be worthwhile, you would need to have a significant GST liability. In essence to be able to claim the credit the yacht would have to be imported for a specific purpose such as a commercial purpose however, the tax department has strict rules around use of vessels, and the onus is upon the user’s to show that in fact the vessel meets this criteria resulting in significant fines if not met.
The bottom line is that no one likes nasty surprise especially where large summons of money are concerned. And while in Australia the purchase of large yachts may be limited, making purchasing overseas more inviting along with a stronger dollar, your next purchase should be undertaken with care. Especially, considering amongst many things where to purchase, where the yacht was built and whether to refit the vessel overseas or in Australia. These are just some of the questions that need to be considered that may have a significant effect on Tax and Duty payable. But significantly the whole process can be simplified with some pre-purchase investigation that allows you to make a fully informed purchase that may also be commercially sensible.