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Water-Jet Ferries Case study


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ASSIGNMENT
Water-Jet Ferries is a successful ferry operator providing roll-on/roll-off ferry
services to the larger islands off the coast using vessels that are propelled by
water-jets powered by diesel engines. Over the last twelve months the company’s
profitability has been badly affected by rising fuel costs and a fall in patronage. As
a consequence management has decided to examine the possibility of modifying
the existing engines to reduce their fuel consumption. Not only would the
modifications result in reduced fuel costs, the modified engines would produce
increased power permitting the vessels to travel at higher speeds and so enable
more services to be provided. A further benefit would be that the modified engines
would be environmentally friendlier which is important to the island communities
serviced by the company.

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Their decision was arrived at after receiving advice from the engine manufacturer
that Water-Jet would be able to treat the modifications as a repair and by doing so
claim a tax deduction for the cost incurred.
Water-Jet has requested your company to provide them with an opinion as to the
correctness of this claim by the engine manufacturer. Your opinion, which should
also include an outline of the alternate tax treatment(s)that may be available, must
be supported by reference to any applicable tax legislation and/or case law

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