Taxation 1

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Running Head: TAXATION 1
Taxation 1
Student’s Name
Affiliate Institution
Date

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TAXATION 1
QUESTION ONE
Issue
Our Earth Pty Ltd has received some capital gains as a result of compensation paid by
coffee bean patty ltd which was found to have infringed patent rights of our company. Some of
the amounts payable to the company by coffee bean party ltd were capital gains and ordinary
capital gains. Although the company had incurred a loss due to the patent infringement, the
interests received from the paid money for damages and the refurbishment of the legal fees are in
a way ordinary capital gain to the company and thus attracts tax obligation to the company. Due
to the paid compensation, Our Earth Pty Ltd should expect to face some tax obligations resulting
from the transactions. Failing to plan forward, the company might be spreading the tax obligation
to her shareholders. In case there is no truism in the claims of Our Earth Pty Ltd did of incurring
a loss as a result of the patent right infringement the amount received will be valid for taxation.
Law
The amount payable as a result of damages and other infringement incidents can be
classified as ordinary income or even as statutory income. This can be found under Div 6 of
(income tax assessment act 1997) (ITAA97). According to this act legislative gains refer to the
capital gains received by a company, eligible termination payments (ETPs), insurance for income
losses which are assessable, assessable recoupment, and finally the employment allowances
(Gummow, 2011). Concession exception considerations are required in the case of any damages
payment, in cases where the recipient is assessable in more than one provision, the introduction
of an anti-overlap regulation is necessary to enable the assessment of the exemption to have fair
taxation on compensation which is being received. In most cases, compensation payments may

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TAXATION 1
be subject to deductions under the (DIV8) deductions as well as the capital expenditure (s40-80)
of ITAA97.
The fundamental principle of the damages assessment states that such an amount of money
received from compensation should be awarded to the injured party by the tribunal to help in
regaining the state of the company. This principle does not apply in cases whereby the party had
not incurred any injuries in her incomes and operations. The second principle states that all the
damages are to be assessed once by reference and concerning the probability which is has been
proved and is available (Gummow, 2011). The above principle is then broken down forming
several taxation rules which apply to the compensated damages. The rules are as follows;
 If the award of damage compensation is accounted for and the defendant found to have
wrongful conducts such as inflating, deducting, hastening or even delaying the plaintiff
tax borne incidence, the taxation is concerned as irrelevant to the damage to be
compensated. In such cases, there is no adjustment in the amount to be paid due to
modification of the taxation law (Richardson & Lanis, 2007). Mostly this is considered
during incidents when the damages and what is to be compensated would or will be
subject to taxation. Furthermore, this is also discussed in events where the statutory
compensation rights are applied to the net amount after tax has been affected.
 Secondly, if the defendants’ infringement actions are found to have a negative effect
on the taxation of the plaintiff, for instance, alteration of the taxation incidences which
are subjective to remoteness, taxation incidence which has been altered becomes an
appropriate damages assessment for the tax obligation to be affected (Richardson &
Lanis, 2007). This is because those actions have resulted in a loss in the taxation process.

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TAXATION 1
If the incident hadn't happened, the adjusted prevalence would be liable to taxation and
the loss incurred would have been income which would be subject to tax.
 Finally, For a conclusion to be made in determining whether the defendant's actions
affect the liability to tax of the plaintiff, tax computation for the period of the damage that
the plaintiff would have been taxed should be conducted. Besides, the calculation of what
the plaintiff is expected to be liable to impose on the damages also should be performed
(Richardson & Lanis, 2007).
Another principle is the Quid pro quo, the replacement or the whole policy. This principle
refers to questioning the reasons and the accounts to which the compensation was made. This is a
further assessment on payment whether settlements were made to income account or the capital
account which includes lost wages or the loss of profit. If compensation were made to damage
concerned with income, ordinary concept, ITAA97 s6-5 would have applied to the beneficially.
Some other factors override the principle of Quid pro quo; for instance if the damages payment
constitutes income gains which are arrived at as a result of periodic payment which is not
associated with installments of a large amount of money (Sikka & Willmott, 2010). Regarding
ITAA97, ss20-35, 20-20 and 20-40 outgoings are not to be subject to deductions as they are not
categorized as general deductions. This is because these deductions do not follow the reception
of deductible compensations.
After resolving patent infringement cases either by agreements or through the judgmental
ruling, the infringer is responsible for compensation, and the plaintiff gets subjected to several
tax obligations. The primary attention arises to the infringer tax deductions and also the winner is