Faculty of Business and Law Swinburne Business School ACC30005 Taxation Semester Two 2018 Group Assignment 2 Details Due date Monday 8h OCTOBER 2018 Required: Length: Weighting: Submission: Case Study 3000 to 3500 words Maximum. Any assignment exceeding this by greater than 10% (i.e. 350 words) will receive a zero grade. The assignment marks total 25 and it is worth 25% of the units total assessment On-line via Canvas site (Late assignments penalty 10% per day) Instructions The Assignment must be prepared in groups of three students. Keep a copy. Candidates must attach a standard assessment cover sheet with their assignment signed by all group members which is available from the current students web site. Assignments are to be written in the candidates own words. The use of unacknowledged directly copied material may result in zero marks. See Page 8 of the Unit Outline re Plagiarism. Marks will be awarded to the candidate based on the detail provided and correctness of their response. Candidates must apply the IRAC principle when addressing the relevant issues (i.e. I= Identify the key issues, R= Cite the relevant legislative provisions and case law (rules) where appropriate, A = apply the relevant rules to the facts presenting arguments for and against and C = form a conclusion based on your stronger argument). If candidates need to make assumptions when responding to any question, the assumption and the reason for the assumption must be clearly specified in their response. GOOD LUCK 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-shows 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. To improve VFAs 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 VFAs Australian bank account. 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. VFAs 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. 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 Melbournes 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. 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. 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. 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 VFAs 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 Instructors professional training costs as required by CSA Professional development courses for administrative staff 88,000 15,000 6 Directors / Chief Flying Instructors salaries Dale Wises 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 Wises 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. [Total 25 marks] * * * * * * Please note in the interests of equity to all students, academic staff will not be able to provide any assistance with this assignment. Your work will be assessed using the following marking guide for each question: Criteria: No pass Pass 5059% Credit 6069% Distinction 7079% High Distinction 80100% Presentation (5%) Did not meet criterion. Satisfactory format and layout, grammar, spelling and footing referencing. Good format and layout, grammar, spelling and footnoting and referencing. Very good format and layout, grammar, spelling and footnoting and referencing. Excellent format and layout, grammar, spelling and footnoting and referencing. Identification of key issues (20%) Did not meet criterion. Identified some issues. Identified some issues although gave incorrect weight to minor and major issues. Identified most issues and gave both correct and incorrect weight to minor and major issues. Identified all issues and gave correct weight to minor and major issues. Correct citation of relevant legislation and case law (25%) Did not meet criterion Cited some incorrect legislation and case law Cited some relevant legislation and case law Cited most relevant legislation and case law Cited all relevant legislation and case law and rulings where appropriate Appropriate application of the relevant law to the facts presenting opposing arguments and analysis (40%) Did not meet criterion Satisfactory application of the law to the facts Good application of the law to the facts and presented only one sided arguments Very good application of the law to the facts and presented both sides of the argument with sound analysis Excellent application of the law to the facts and presented both sides of the argument with through analysis Summary and conclusion based on the stronger argument (10%) Did not meet criterion. Satisfactory conclusion but was vague did not follow analysis Good conclusion based on one side of the argument Very Good summary and conclusion based on the stronger argument Excellent summary and conclusion based on the stronger argument
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