I recently discussed with Ocean’s Editor-In-Chief the interest “Legal Matter “ was invoking amongst its readers who had then contacted our office for legal advice and it was agreed that these scenarios should be shared in a question and answer format.
The first scenario that presented itself was where a large super yacht was purchased in America and was being refitted and made sea worthy in Canada at great cost to the owner, with a view to importing it to Australia. Apart from the legal issues the real issue lies in how committed the boat owner is to such a restoration, given the expense followed by the importation costs. Based on the information that was provided we now provide the following reply.
- The vessel exceeded 150 ‘gross construction tonnes’ thus a 5% duty based on the ‘customs value’ would not be payable.
- 10% GST would be payable however, the total GST may be reduced as a result of duty not being payable,
- And the total GST payable may be lowered if customs accepts a reduced value of vessel despite the yacht’s refit.
- Lowering the customs value of the vessel lowers the GST liability. Therefore, a second marine evaluation survey of the vessel would be required.
Usually the customs import duty payable is 5% of the customs value on imported goods and in most yachting matters this is the case due to the smaller physical size/volume of the vessel however, in view of the large physical size/volume of the vessel there is an exception to this rule.
The exceptions when importing from the United States of America (USA) are as a consequence of the free trade agreement between the USA and Australia and being a mutual agreement in respect to goods manufactured in either country. Further, there are some exceptions in respect to importing goods from Canada these exceptions are taxed at a special rate however; unfortunately the vessel does not fall within the Canadian exceptions.
If a purchaser was to rely upon the free trade exception between the USA and Australia, the goods being used in the upgrade would have to be separated from the goods that originate in Canada or elsewhere, thus duty would still be payable in some form. However, as the vessel exceeds 150 ‘gross construction tonnes’ the 5% duty is not payable.
Both GST and Duty are calculated based on the concept of ‘customs value’. The customs value is the amount customs officers deem the vessel to be worth after their own evaluations. However, this value may be an arbitrary where no documentation is provided by the importer to the customs officer. Therefore, the task is to convince the officer of the lowest possible value of the vessel that does not mislead the officer, so as to this reduce the taxes payable and avoid any possible penalties.
The customs value is usually based on the amount paid for the vessel or as previously stated an arbitrary figure, after inspecting the vessel. Hence, in view of work being completed on the vessel it would be folly not prepare the relevant documentation for customs showing a reasonable increase in value.
However, one strategy to reduce customs value is to start with the purchase price and add to it based on the improvements, not including those costs that would be considered for repair and maintenance. The problem is that we understand that there is a significant amount of work in improving rather than maintaining. And anticipate that the long list of modifications would mean that the purchase price alone would have little weight when deciding the customs value. We also understand that when completed, the purchase price and the refit will amount to approximately three million dollars. So this strategy may not be the most effective way of lowering the customs value.
A second strategy that’s possible in this circumstances is that an evaluation survey could show the market value as less than the refit cost, especially considering the falling international market for larger yachts and given the special market the vessel falls within. Therefore, this survey would need to incorporate the refit and market considerations and assist the customs officer when deciding the customs value. As a reasonable increase in the value of the vessel in the new survey, when compared to the purchase price, may reflect money spent on the boat that reasonably increases the value while considering repair and maintenance.
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 the vessel is a taxable importation unless an exception can be found such as the vessel being used as a business or for charitable purposes. Further, the current law is that GST will have to be paid even if the vessel has been lived on overseas for the past 12 months.
In conclusion, the whole process from purchase to repair to shipping is an incredibly expensive process that must not be taken lightly with the additional taxes that may be incurred and puts the reasonability of purchasing a vessel in question. However, where the vessel is special and a new build is out of the question, this course may be the only way to achieve the desired vessel.
A second question that presented itself was where the purchaser, based in Singapore, was interested in purchasing the latest racing yacht in Australia. Raising several concerns around certainty and contractual issues given that he was not based in Australia.
Ultimately, this is a question of due diligence, that is doing the relevant searches to ascertain the history and financial circumstances of the yacht builder and associated business’s, being no different to buying a business. An interesting point, is that for many of us that buy a yacht, we leave our sensible hat at home and allow our hart strings to rule.
The first issue was whether the yachts builder is financially sound. While the yacht design was a well-known name the builder had only been operating for one year. And there were also issues around who owned the yacht building facilities causing questions of certainty.
In summary our research found an issue as to whether the yacht builder was financially sound, despite being a well-known name, the builders new business had only been operating for a year and while having experienced staff the business was effectively a start-up venture being bankrolled by a silent partner. Therefore, on one hand there was a real risk, in the circumstances, that money would be paid for the deposit and further progression payments that could be lost however; any loss would be limited to each single payment.
The second issue was whether there was certainty and security in where the yacht would be built not only in respect to the actual yacht but also the storage/separation of materials owned by the purchaser. And further to that that a fixed a floating charge could be placed over the vessel and materials being pre-Personal Property Security Register (PPSR).
The problem for the purchaser was that the vessel was being constructed on leased premises to a liquidator who was managing a failed business that previously owned the premises. In other words, our client could have been pouring money into a hole that may be difficult to get out of, if the vessel or its materials were mixed up in the existing business in liquidation. From our perspective the importance of having an agent on the ground to ensure separation was imperative.
While it may have appeared from the outset that the purchase and build of the yacht in the circumstances was less than favourable, ultimately the purchaser, if they wanted this specific vessel had no other option but to accept the circumstances. The important point for the purchaser was that they were warned of the potential problems and had their radar up if anything untoward occurred, highlighting the importance of due diligence.
For future articles if you have legal questions that need answering please contact Ocean or Vaarzon-Morel Lawyers and we will do our best to get them published.