This letter is aim to identify all relevant tax issues in relation to AFS for the 2006/07 financial year.
Main Issues
(1)
AFS was incorporated in State of Victoria in 1984; therefore, AFS is an Australian resident as defined in s6(1) ITAA36. AFS will need to pay tax on its taxable income, being the assessable income less deductions[1]. Assessable income includes ordinary and statutory income derived from all sources[2]; therefore, if the $3,300,000 received from the training contract with TCA Airways is ordinary income under s6-5 ITAA97, it will remain assessable even if it is sourced from New York.
The $3.3m, although received as a lump sum, is earned by AFS as a result of carrying on an aviation business as set out in Californian Copper[3]. The diversification of business to a much wider client base does not affect the nature of the income. According to Jennings Industries [4]and Merv Brown[5] case, diversification is only a different method in conducting the business and does not deviate from their original business structure. This amount is regarded as the normal proceeds of a business, based on the fact that it is received as part of their normal business operation by providing aircraft pilot training and specialist instruction services for individuals. Therefore, this recurring receipt is likely to be an assessable income under s6-5. However, it is important to note that there may be double tax agreement between Australia and US that will override s6-5.
(2)
AFS’s intention with the purchase of land on 1 Oct 2006 was to consolidate the land titles to build a large training facility to train students. Given all the effort to defend the disapproval by CAA, this intention is quite firm. Similar to Western Goldmine (NL) v DCT (WA)[6], AFS had not intended to resell the land at the time of its
