Australian Flying School (‘AFS’) is a company that provides aircraft pilot training and specialist instruction services to individuals (‘clients’) which was incorporated in the State of Victoria in 1980. Tracey Miles and Jenny Wallis are the Directors of AFS, in addition to being the Chief Flying Instructors accredited by the Civil Aviation Authority (‘CAA’).

AFS is located at Newtown Airport, a private airport on the outskirts of Sydney. Each year Newtown Airport is the location of the annual air-show and AFS is a key participant in the air- show’s program. Tracey and Jenny view the expense as a marketing exercise aimed to attract new prospective students.

The flying school employs three Grade 1 Instructors and five Grade 2 Instructors, in addition to five 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 200 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.

AFS is generally a highly profitable business, however in the 2019/20 financial year student enrolments were at an all-time low due to the Covid-19 pandemic and a tax loss of $250,000 was reported.

Question

- For the effective training of commercial pilots for in-the-air “emergency” scenarios, AFSleased a special flight simulator from Australian Aire Services Ltd. The lease agreement contracted AFS for the period of eight years for a cost of $200,000 per annum. Tracey Miles also travelled to New York for four months to attend the American Airways Inc(AA) training program for English based flight crew. Whilst overseas, Tracey decided that her passion was to fly light aircraft for private purposes. Tracey realised that the direction AFS was taking no longer left a place for her in the company. As a result, Tracey tendered her resignation to Jenny effective 20 June 2021. Jenny, worried about the intellectual property Tracey had gained whilst training with AA, entered into a restrictive covenant agreement with Tracey which prohibited Tracey from training commercial pilots in Australia for the period of 3 years at a cost of $500,000.

Required

Consider all issues, including but not limited to, issues that may not be as obvious—for example, tax accounting, tax periods, potential levies, surcharges, offsets and substantiation requirements. 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. You will need to argue and support your view and consider differing views (if applicable)—and finally, indicates your recommended action based on your better view.