Financing an RA-Aus aircraft - any tax benefit?

[damoski]

I went out for a run just now, which is always dangerous, as when left with nothing to do but admire the scenery, my mind tends to go off on its own and come back with 'interesting' ideas.

 

I haven't fully thought this scenario through, but was wondering whether there's any benefit in it:

 

• Let's say I have some capital to invest, and pay a reasonable amount of income tax in my job.
   
   
  
• I'm also a member of a non-profit flying club, which has a few aircraft.
   
   
  
• I'd like an aircraft of my own, but could never justify the cost or expense of owning and maintaining it myself.
   
   
  

 

 

Would there be any merits in:

 

• Joining a syndicate in buying an aircraft
   
   
  
• Perhaps forming a company to hold it as an asset
   
   
  
• Renting it out to the club at market rates
   
   
  

 

 

When I say 'merits', I'm thinking in terms of:

 

• Somehow leveraging some kind of negative gearing - in a sense, getting tax back to finance club (or my) flying
   
   
  
• Obtaining an additional aircraft for our club, and getting some more varied flying that we might not otherwise do
   
   
  

 

 

Is anyone doing this? Are there any benefits, and what are the pitfalls?

 

D

 

 

[cooperplace]

I went out for a run just now, which is always dangerous, as when left with nothing to do but admire the scenery, my mind tends to go off on its own and come back with 'interesting' ideas.I haven't fully thought this scenario through, but was wondering whether there's any benefit in it:

 

• Let's say I have some capital to invest, and pay a reasonable amount of income tax in my job.
   
   
  
• I'm also a member of a non-profit flying club, which has a few aircraft.
   
   
  
• I'd like an aircraft of my own, but could never justify the cost or expense of owning and maintaining it myself.
   
   
  

 

 

Would there be any merits in:

 

• Joining a syndicate in buying an aircraft
   
   
  
• Perhaps forming a company to hold it as an asset
   
   
  
• Renting it out to the club at market rates
   
   
  

 

 

When I say 'merits', I'm thinking in terms of:

 

• Somehow leveraging some kind of negative gearing - in a sense, getting tax back to finance club (or my) flying
   
   
  
• Obtaining an additional aircraft for our club, and getting some more varied flying that we might not otherwise do
   
   
  

 

 

Is anyone doing this? Are there any benefits, and what are the pitfalls?

 

D

I'm not an accountant, but I point out that (i) the flying club is most unlikely, I think, to be a DGR (deductible gift recipient) and (ii) unless you plan to go into the aviation business in some way, the ATO will look askance at attempts to deduct any flying-related costs. Accountants on this forum will quickly prove me wrong, if I am.

 

 

[Gnarly Gnu]

unless you plan to go into the aviation business in some way, the ATO will look askance at attempts to deduct any flying-related costs.

I'm not an accountant but I spend $10 - $20k per year on Qantas for domestic business travel so it would seem entirely legitimate to do some of this travel using my own or a hired aircraft rather than using public transport. I'm not sure if the travel aspect is damoski's position though.

 

 

[David Isaac]

Yes you can, but you need to talk to your accountant to set it up properly. Cross hiring has its problems though, it will certainly be a tax deduction ... LOL. I would suggest there are better ways of investing your capital and obtaining a tax deduction.

 

If you want an aircraft, just buy one in a syndicate or by yourself, but be warned, typically hiring one when you need it in the long term is cheaper. The exception of course may be where you plan to use one for commuting, but even that has its weather challenges; if time is of the essence in your commuting, forget using a private aircraft.

 

 

[FlyingVizsla]

I own a GA aircraft which I have operated as a business since 1995. I am set up as a sole trader with ABN, registered for GST. I don't have a separate account or anything for this venture, but I keep meticulous records. I have slowed down considerably in the past 4 years (hire to single user), so I am not up with the intricacies. The ATO will benchmark you against similar industries so don't expect to be recognised as a legitimate business if you use it predominantly for private use. One way around "private use" is if you hire it back when you need it paying the usual rates to the School.

 

People used to run these "businesses" for personal use and make a loss every year to offset against tax. Some years ago that changed and your losses are now quarantined against profits in future years - ie you don't get a tax benefit till the ATO get some tax.

 

You can make claims for legitimate expenditure:

 

- cost of your BFR, ASIC, some currency flying - only if you are required to 1. Vet new pilots (eg for insurance), 2. ferry your aircraft

 

- cost of memberships, subscriptions; maps, ERSA, magazines - but only if you can show a direct link eg hire aircraft with current maps, need to research industry.

 

- insurance

 

- maintenance, landing fees, fuel

 

- depreciation

 

- cost of borrowing (I didn't borrow - I couldn't have broken even if I did)

 

- costs of running the business - internet, accounting software, advertising, bank fees, home office etc - but it should be apportioned with other uses.

 

The other option is creating or incorporating a reason for flying within your existing business (if you have one) - eg flying vet. Commuting to your employment is not deductible just like driving your car to work. You must prove it is part of the employment and it is best to get a formalised agreement. For example - when I worked at Winton and had to attend Birdsville (part of my jurisdiction) I got written permission to use my aircraft rather than the company car due to the time saving. And for a while, my plane was hired by my employer and flown by myself to get engineering expertise into flood isolated areas. Probably too risk averse now for a company to do this.

 

Traps for young players? I was approached by an Aero Club but declined as their contract required all maintenance to be decided by the Club - their LAME was also a Club member and had a reputation for finding enough work on hired aircraft to fund his holiday home and early retirement. Also bad debts are a fact of life, so are disputes. It helps to know your market so you don't end up the 5th aircraft hirer to not get paid by Joe Blow.

 

The simple message is

 

- do your sums - be realistic - things can and do go wrong

 

- see a Tax Accountant

 

- the ATO are not naive

 

Sue

 

 

[David Isaac]

Great advice Sue,

 

I hope you had a great Christmas break in that great little town of yours. Must come up there one day.

 

 

[FlyingVizsla]

Hi David,

 

Town is dead as a dodo. The boss is at work. Haven't got a plane to fly.

 

I am keeping an eye on a bridge abutment that collapsed in Nov and has lost some more embankment and may compromise the road, and scouring on our incomplete roadworks. Santa didn't bring me anything but I am enjoying the time off to clean, sew, plan, garden, and catch up with all my community groups - strategic plans, grant applications, re-writing tourist literature, clean the museum, do the books etc. Finally found a tipple I like - low alcohol and sweet - Brown Bros Moscato - local pub has never heard of it - so I shall be staying sober for the rest of the year.

 

Busy but bored.

 

Sue

 

 

[poteroo]

G'day damoski,

 

I used a hired V35 Bonanza for 6 years when I was professionally employed by a large company from 1970-76. The company was smart enough to realise that they knew nought about aircraft - except it was more fun to fly than drive long distances.

 

Then I set up my own consultancy, and purchased an old C180 to get around the WA wheatbelt. Remember, this was a long time ago - in the mid 70's - but the ATO was quite happy with my applying 100% of its' costs for business. We flew 300 hrs p.a., which was serious travel.

 

Then, thru the 80's, 90's, 2000's .... I owned a C182,(10 yrs), a C170,(12 yrs),a C152,(10yrs). I used all of these for business travel, about 60%, and the other 40% hiring the aircraft (wet + instructor), to several flying schools to do LL andf TW endorsements. This ceased when I 'retired' in 2008 - but never once did I receive a murmur from ATO.

 

My observations of the 'lets hire our aircraft out to a school -and fly-for-free' dream is that you're very likely to lose money. In some cases, big, big money. There needs to be a very sound business proposition for owning an aircraft and cross-hiring it out, and your accountant needs to be right across your every step.

 

If you want to fly 'cheaper' - join a group, or create a small group and buy a cheap aircraft, or,find a private owner with insurance cover, and finally,do some cost sharing. Whatever - don't rush into ownership, it's not for everyone - as Sue points out in her posts.

 

happy days,

 

 

[damoski]

Thanks Sue, Poteroo,

 

It's what I suspected, but you don't know until you ask, so thanks for clarifying that.

 

I guess the main opportunity I saw, which turns out from Sue's reply to have been closed out, was to reclaim personal salary income tax against expenses of operating the aircraft as an investment. ie. "I've bought this plane share as an investment, but it's at best a break-even one", or rather - "if I'm going to indulge in an expensive hobby, then perhaps the taxman will indulge with me".

 

My fallback position, is that rather than incur the huge expense of owning (or sharing) and operating an aircraft myself, then it would be cheaper to share it with a syndicate, and then rent it to a club to ensure consistent use and maintenance. Again, I was hoping to also share some costs with the taxman - but again, since the club is nonprofit and so am I, there's nothing to offset expenses against in the first place.

 

Damo

 

 

[Guest SAJabiruflyer]

This reminds me of the way to make a little money in aviation - start with a lot of money :)

 

 

[Guest SAJabiruflyer]

My accountant once told me an interesting view on making an investment in order to save tax - he used the common idea of financing a vehicle . He said "let's use a $60k 4WD for this example. Now instead of buying or financing a depreciating asset, take that $60k, give the ATO their cut, and throw the rest off your mortgage, or put it towards an investment that makes money"

 

Of course he had more technical terms and a better explanation, but you get the idea. Hence my business vehicle is 8 yrs old, and is freehold. :)

 

 

[ayavner]

that's a good point...

 

 

[68volksy]

Good tax advantages to owning the aircraft and cross-hiring - especially if you're personally earning a higher income. To get around the "quarantining" that Sue talks of above you just need the business to turn over more than $20k. Make the cross-hire a wet agreement and that's a lot easier to achieve.

 

As the business would get access to the accelerated depreciation rates the plane can be depreciated at a rate of 30% (15% in the first year). That's where the major benefit lies, especially if you're looking at an aircraft worth more than $50k. After the first few years the aircraft will break-even and start generating a profit so you need to be prepared for that. There may also be a profit should you come to sell the aircraft.

 

Generally you're looking at a net taxable loss of $12-15k for the business (on paper) in the first few years on a $50-70k aircraft. Generates a tax saving of $4,440 - $6,750 depending on the loss and tax bracket. The more you spend on maintenance and improving the aircraft in those first few years the better.

 

Talk to your accountant though. Many of them seem to be working for the ATO so make sure you find one that is working for you. Also extremely important to find a good school to hire through and a solid aircraft. Personally I'd avoid this arrangement with an RA-Aus aircraft as there aren't many that are built like the 172's and Warriors that have had 40 years and 20,000 hours pounding and are still going strong.