Reference no: EM132123501

Business Overview

Victorian Flight Academy ('VFA') is a flying school that provides aircraft pilot training and specialist instruction services to individuals ('clients') which was incorporated in the State of Victoria in 1984.  Ross Mc Kinnon and Dale Wise are the Directors of VFA, in addition to being the Chief Flying Instructors accredited by the Civil Aviation Authority ('CAA').

VFA is located at Lysterfield Airport, a private airport on the outskirts of Melbourne.  Each year Lysterfield Airport is the location of the annual air-show and VFA is a key participant in the air-show's program.  Ross and Dale view the expense as a marketing exercise aimed to attract new prospective students.

The flying academy employs three Grade 1 Instructors and five Grade 2 Instructors, in addition to four administrative staff who manage the accounts receivables and payable functions, and student licensing confirmations with the CAA.  The instructors receive company benefits of "free" independent (non-instruction) flying time of 150 hours per year to any location in Australia; however this flying time is the minimum required by the CAA to maintain the Instructor rating licence.

VFA is generally a highly profitable business, however in the 2016/17 financial year student enrolments were at an all-time low and a tax loss of $190,000 was reported.

Strategic Business Transactions & Key Client Matters

The Directors have provided the following statement of the strategic business transactions and key client matters which have occurred over the 2017/18 financial year.

i. To improve VFA's profitability, VFA decided to diversify the scope of services offered to their clients and to widen their client base.  After discussions with various international airlines, on 1 September 2017, Ross and Dale signed a pilot training contract with TCA Airways Inc. in London, United Kingdom.  The contract provided for the exclusive training contract for all new Australian based and recruited flight crew.  This cost TCA Airways AUD $1,200,000 per annum, payable to VFA in a lump sum on 1 October of each year for five years.  It was agreed between the parties that the annual lump sum will be paid into a VFA's Australian bank account.

ii. Owing to the potential expansion of VFA, on 1 October 2017 VFA purchased the adjoining three blocks of land from Lysterfield Airport at a total cost of $6 million (each block had equal value).  VFA borrowed 90% of the total cost from the Victorian State Bank at an interest rate of 6.8% per annual repayable over 25 years.  Due to the risky nature of the loan, the bank secured the title to Ross Mc Kinnon and Dale Wise personal homes, both located in the exclusive Melbourne suburb of Toorak.

VFA's intention was to consolidate the land titles and build a large training facility, to train students to fly commercial aircraft using flight simulators.  However, when the planning application to consolidate the land titles was lodged, VFA met heavy opposition from Lysterfield Airport together with the CAA.  Both organisations' argued that the airport facility was only suitable for training of pilots for light aircraft. 

As a result, VFA incurred $380,000 in solicitor and court fees to assist with the application approval; however the Land Tribunal on the advice of the CAA, ruled VFA unsuccessful and the Tribunal instructed the Council to reject the planning application.  In light of this, VFA sold both recently purchased blocks of land back to Lysterfield Airport for a total sum of $6.85 million on 31 January 2018, with settlement on 1 March 2018.  A deposit of 15% was paid on contract date.

iii. VFA was approached by the Chandler Airports Corporation (CAC) with the offer to lease a commercially zoned flight-training centre, located on the outskirts of Melbourne's international airport.  CAC also offered a $60,000 cash incentive and twelve months rent-free valued at $100,000 if VFA relocated their entire business to the new facility.  VFA accepted and moved premises on 10 April 2018.

iv. For the effective training of commercial pilots for in-the-air "emergency" scenarios, VFA leased a special flight simulator from Flight Services Ltd.  The lease agreement contracted VFA for the period of five years for a cost of $150,000 per annum. 

v. Dale Wise travelled to London for six months to attend the TCA Airways training program for English and European based flight crew.  Whilst overseas, Dale decided that his passion was to fly light aircraft for private purposes.  He realised that the direction VFA was heading no longer left a place for him in the company.  As a result, Dale tendered his resignation to Ross effective 15 June 2018.  Ross worried about the intellectual property Dale gained whilst training with TCA Airways, entered into a restrictive covenant agreement with Dale which prohibited Dale from training commercial pilots in Australia for the period of 4 years at a cost of $350,000.

vi. After heavy marketing, Ross managed to secure a training contract with an Australian based commercial airline, Flyhigh Ltd.  The contract provided for VFA to train their first officers for a period of five years, commencing 1 May 2018 at a cost of $500,000 per annum.  However, on 15 June 2018, Flyhigh decided to terminate their contract, effective immediately due to undisclosed reasons.  Flyhigh refused to compensate VFA and VFA engaged their solicitors to recover the loss in revenue.  On 30 June 2018, Flyhigh agreed to pay compensation of $750,000 after lengthy legal discussions.

Please note that the list above only contains information of VFA's strategic transactions which have occurred in the 2017/18 financial year.  Other transactions are detailed below in the Statement of Cash Receipts and Payments and the notes.

Statement of Cash Receipts and Cash Payments for VFA Pty Ltd

Cash Receipts	Note	$ AUD
TCA Airways Contract	No Note	1,200,000
Other Client Fees	1	1,380,750
Sale of Land - Receipt of Deposit	No Note	1,027,500

 

Cash Payments	Note	$ AUD
Australian Taxation Office	2	1,015,000
Bank Charges	3	177,400
Car Expenses	4	217,600
Education Expenses	5	103,000
Employee Remuneration	6	1,855,000
Entertainment	7	7,431
Flight Simulator Lease	No Note	150,000
Furniture	8	30 544
Fuel, Aircraft Maintenance & Other Aircraft Costs	9	428,000
Land Purchase - Payment of Deposit	No Note	450,000
Marketing Costs	10	24,125
Solicitors Fees	11	388,190
Telephone	12	40,641
Travel Expenses	13	74,250

Notes Regarding AFS Pty Ltd

Note	Description / Further Information	$ AUD
1	Flyhigh Ltd settlement Outstanding debtors at 30 June 2018   Debts written off after 6 months (client refused to pay) Debts written off > 12 months old	750,000 129,800 6,705 10,130
	It is the policy of VFA Pty Ltd to have provision for doubtful debts equal to 1.5% of outstanding debtors at the end of the financial year.
2	PAYG instalments (quarterly equal payments) GST	600,000 415,000
3	Bank interest charges on property purchase Card transaction fees (charged at 2.5% on credit card sales)	151,000 26,400
4	Vehicle purchases: Jaguar for Ross Mc Kinnon Acquired 20 November 2017; Business use: 77% Running costs: Jaguar (acquired 20 November 2017)	210,000     7,600
5	Instructor's professional training costs as required by CSA Professional development courses for administrative staff	88,000 15,000
6	Directors / Chief Flying Instructors salaries Dale Wise's Restrictive Covenant Payment Instructor: Grade 1 Salaries Instructor: Grade 2 Salaries Administrative Staff Salaries   Note: the mandatory minimum superannuation contribution is included in the salaries noted above.   Annual CSA Flight Instructors Rating Licences for Instructors Value of Instructor "free flying" time (refer Business Overview)	550,000 350,000 400,000 425,000 130,000         12,000 110,000
7	Staff lunches and staff Christmas party	7,431
8	Opening written down value Acquisition of Furniture & Office Equipment - 2017/18 Desks and Chairs (acquired 1 July 2017) Computers (acquired 9 July 2017) Partitions (acquired 10 July 2017)	305,000   7,850 13,444 9,250
9	Fuel - Aircraft Aircraft Maintenance Costs	133,000 295,000
10	Marketing costs for the annual air-show Advertising costs in magazines	15,425 8,700
11	Solicitors fees incurred in relation to: Application approval for land at Lysterfield Airport Resignation of Dale Wise from VFA Pty Ltd Lease agreement review for flight simulator	380,000 1,890 6,300
12	Office telephone lines and fax line Mobile phones for Instructors	11,518 29,123
13	Business class airfare for Dale Wise to London Six month lease of apartment for Dale Wise in London Meals and incidentals for Dale Wise's trip	15,150 46,600 12,500

Note: All amounts include Australian GST where applicable.

REQUIRED:

You have been approached by Ross Mc Kinnon and Dale Wise in your capacity as their tax agent.  They have asked you to prepare the necessary documentation to meet the tax compliance obligations for VFA for the income year ending 30 June 2018.

Prepare a letter of advice which identifies all relevant tax issues, critically analyses and applies the taxation treatment to the issues, i.e., you will need to argue and support your view and consider differing views (if applicable), and finally, indicate your recommended action based on your better view, i.e., your conclusion (IRAC principle).

You must ensure that your analysis used to determine your recommended action is fully supported with relevant authority, for example, tax legislation and case law.

The letter must not exceed 3,500 words,excluding footnotes and the reference list.  Assignments exceeding 3,850 words (10%) will not be assessed and you will receive zero marks (fail grade).  You must indicate your word count on the cover sheet.