Taxation Implications on Intellectual Property Rights and Subdivided Farmland

This document discusses the legal implications of intellectual property rights and subdivided farmland on taxation. It covers topics such as patent legislation, capital gain implications for small businesses, and sub-division of farmland. It also provides advice for small businesses on how to avail tax exemptions under CGT.

Running Head: Taxation 1
Taxation
Name:
Date:

Taxation 2
Question 1:
Issue –
Our Earth Pty Ltd is an Australian manufacturing company engaged in designing a special kind
of bio-degradable, disposable coffee cup off ecological resources. The organisation has been
supplying this sort of coffee cups across the coffee shops in Australia. In due course of time a
coffee chain, Coffee Bean Pty Ltd has been contracting a foreign manufacturer to get a similar
sort of coffee cup at a cheaper rate. But the coffee cup supplied by the foreign supplier have the
same design and quality of the Our Earth Pty Ltd product and the latter is unaware of the matter.
As Our Earth Pty Ltd came to know about it, the manufacturer decided to take legal measures
against Coffee Bean Pty Ltd on the design patent of the cup produced by them (Bian, Gan, Li, &
Hu, 2018). So the paper would strive to find out the legal steps to be undertaken by Our Earth
Pty Ltd against Coffee Bean Pty Ltd and the taxation consequence on the former as it is
supposed to get a compensation on violation of its design patent.
The circumstances depicted above apparently strives for an issue of intellectual property (IP)
legislation and need to be studied under the sorts of patent legislations prevailing in Australia.
Legal implications:
Patent –
Patent stands to be a grant of exclusive rights for marketable utilization of the product or service
which is innovative, new and useful to the business and communities (Legislation.gov.au, 2019).
Patent in the Australian scenario could be either a standard patent or innovation patent.
 Standard patents are provided for a longer tenure of 20 years to protect and safeguard
the invention.
 Innovation patents are provided for a maximum tenure of 8 years.
It is noted to have a patent it is required for the organisation to apply for the patent in the
prescribed format having a complete description and characteristics features of the innovation. It
also needs to provide the specifications to manufacture such products for the purpose of
exclusive rights on the inventions (Ipaustralia.gov.au, 2019). The patent documents are
accessible to the public to gain insight of the inventions with reference to certain exceptions. The

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particular process are to be abided by the Patent Act relevant in the Australian and international
scenario as well.
Patent legislations –
There are sorts of patent legislation on the likes of Patents Act 1990, Patents Regulations 1991,
Designs Act 2003 and Designs Regulations 2004 to protect the business interest of the innovator
say Our Earth Pty Ltd from plausible commercial exploitations. In this case it is rightly
established of a gross violation of the patents of the manufacturer, Our Earth Pty Ltd by the
coffee chain owner Coffee Beans Pty Ltd (Ipaustralia.gov.au, 2019). So as per the patent
regulations prevalent in Australia as well as in the international scope, it would be quite likely
that Our Earth Pty Ltd would demand a compensation from Coffee Beans Pty Ltd which the
latter would be liable to pay. It is because Coffee Beans Pty Ltd has used the design inspired by
the product of Our Earth Pty Ltd who has patented it under the Intellectual Property rights. So
Coffee Beans Pty Ltd is an offender in this case and would be required to pay a fine to Our Earth
Pty Ltd for violating the design of its coffee cups (Black, 2018).
Capital gain implications for small businesses –
The CGT legislations strive for concessions to be yearned for small businesses operating across
Australia to promote them (Jones & Temouri, 2016). Accordingly certain CGT exemptions are
being worked out for the small Australian businesses to take advantage of the exemptions and
rollovers provisioned by the competent authorities such as follows –
 15 year exemption – If the organisation has been in business for a continuous period of
15 years and the owner is over 55 years age or have retired or permanently disabled,
there would be no such provision of CGT on the proceed it receives.
 Active asset reduction by 50% - The provision of CGT could be reduced by 50% on
account of reduction of assets by 50% with additional 50% of CGT discount for a
period of 12 months or more than that particular period (Ato.gov.au, 2019).
 Exemption for retirement – The provision is for availing capital gain exemption on
the sales of active resources of the business for worth $500,000 (Redonda, et al., 2019).
If the owner of the associated business is aged below 55 years, the exemption would be
considered taking relevance of his superannuation funds.

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 Rollover – In case of sales of active business resources, there is provision for deferring
the capital gain either fully or proportionately through a period of two years
(Ato.gov.au, 2019). In such a scenario a longer period could also be tended if the assets
get replaced by another one and the owner is required to incur expenses on capital
improvement of the existing organisational resources.
The above mentioned provisions would be applicable only for the small businesses operating
across Australia and the concerned organisation apparently needs to fulfil the criteria of small
business. Accordingly it needs to fulfil the following conditions of small business to get the CGT
exemptions like –
 If the business has an average annual turnover of less than $2 million.
 If the business has varied interest in the small business segment and has operations in
the specified segment (Bennedsen & Zeume, 2017).
 The business having net assets lower than $6 million exclusive of personal resources
like home and vehicles and other personal property.
Intellectual property right implications –
It is noted as per the Australian legislations regarding the IP rights the compensations received
by the company for its damages are required to be taxed in the receipt year only. The income tax
needs to be determined as per Section 116-30 ITAA1997 for ascertaining the damages as
encountered by the business off the determined business losses assuming that the lost
profitability would have enticed tax implications (Legislation.gov.au, 2019). As the business is
supposed to get the requisite compensation it has been entitled for a gross-up adjustment being
performed for assuring the fact that the claimant has not been under-compensated through
taxation of the underlying claims and taxing the receipt for it.
Application:
The patent for Our Earth Pty Ltd would come under the purview of innovation patents as the
manufacturer has strived to manufacture a special kind of bio-degradable, disposable coffee cup
off ecological resources. Further the product is used in the industrial scenario across the coffee
shop chains in Australia making it a vibrant instance of innovation patent.

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It is established that Our Earth Pty Ltd has every right to seek compensation from Coffee Beans
Pty Ltd on account of infringement of its IP rights. The matter is also concerned about the tax
consequence of the compensation that is likely to be received by Our Earth Pty Ltd on account of
violations of its patented design (Rubolino & Waldenström, 2017). It is noted that in a normal
scenario, the compensation received by the business would be considered as capital gains and
stands chance to have capital gains tax (CGT). So the manufacturer is liable to pay CGT if it gets
a compensation on its patent issue (Ato.gov.au, 2019). The tax authorities does not allow any
sort of rollovers in terms of CGT but it is subjected to certain exceptions wherein the capital
gains could undergo certain reductions.
The small businesses has the provision to apply for exemptions and rollovers in multiple
occasions and so far the reference of Our Earth Pty Ltd is concerned, it needs to fulfil the above
conditions to get itself recognised as a small enterprise to get the benefits. It is assumed that Our
Earth Pty Ltd does not have an annual turnover of more than $2 million making it a small
enterprise but the same need to be established with the help of supporting documents
(Cpaaustralia.au, 2019). But the matter need to be studied in the light of Intellectual Property
obligations as the patent concerned in this case belongs to the aspect of IP rights.
In this regard determination of damages play an important part as Our Earth Pty Ltd has suffered
financially owing to its business supplies being initiated by the coffee chain of Coffee Beans Pty
Ltd. The latter has contracted from its overseas supplier similar kind and design of cups
manufacture by Our Earth Pty Ltd and has been using the same in its stores across Australia.
This led to a financial loss on part of the manufacturer as it lost business out of its imitated
design and calls for the manufacturer to determine its business loss for the purpose. In this
critical juncture the compensation being received by the manufacturer from the coffee chain
owner does not qualify to be an income as per the prevailing Australian taxation legislations
(Bian, Gan, Li, & Hu, 2018). The phenomenon could be referred in the case of Commission of
Taxation vs. Sydney Refractive Surgery Centre Pty Ltd (2008) FCAFC 190.
The matter would be evaluated on the basis of differential tax rates and the same gets modified
with the passage of time. The determination of the tax damages would also be done on the basis
of Supreme Court rulings and verdicts on the tax related matters (Ato.gov.au, 2019). The
compensation received in this instance are categorised as capital in nature and so would be

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considered under the legislations of capital gain tax and is necessarily exempted under the CGT
conditions. It could be stated on the light of Section 118-37(1) of the Income Tax Assessment Act
1997 (Tran & Zhu, 2017). And the compensations received on this matter would also be entitled
for the CGT even if the matters gets an out-of court settlement.
Advice for Our Earth Pty Ltd –
It is established that the manufacturer is supposed to receive compensation from the coffee chain
owners of Coffee Bean Pty Ltd and the compensation received from the latter through court
settlement or out-of court settlement is entitled for taxation. The compensation would be
received on account of violation of patents so it would be treated under the obligations of IP Act.
As per the IP legislations it would be entitled as capital gains rather than income to be taxable on
the year of receipt (Bennedsen & Zeume, 2017). But Our Earth Pty Ltd has the opportunity to
appeal for exemption of the tax if it is being able to declare itself as a small enterprise though
subject to fulfilment of certain conditions.
To qualify as a small enterprise the manufacturer, Our Earth Pty Ltd need to show to the
competent authorities that its average annual turnover is within the amount of worth $2 million.
If the business strives to have a turnover more than the prescribed amount, it needs to refer to
other conditions like Our Earth Pty Ltd having net assets lower than $6 million (Ato.gov.au,
2019). This condition could be suitably fulfilled by the manufacturer by writing-off certain assets
to gain the status of small enterprise. As Our Earth Pty Ltd gets the status of a small business it is
required to fulfil certain conditions to have the CGT exemptions. There are conditions like the
compensation being received need to be within the limit of $500,000 and the owner or one of the
owners of the organisation need to be within 55 years of age (Black, 2018). So the following
advices are being provided to Our Earth Pty Ltd to avail the tax exemption as on 30th June, 2019
under CGT –
 Our Earth Pty Ltd need to establish itself as a small enterprise by showing its net
revenue at a worth of less than $6 million.
 In case the worth goes over the prescribed limit it would be advisable to write-off
certain assets for availing the CGT exemption.
 The compensation as received need to be within the limit of $500,000.

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 Our Earth Pty Ltd need to show at least one of its owner as retired or permanently
disabled or over the age of 55 years to avail the CGT exemption.

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Question 2:
Issue –
The case is developed on Sam having a farmland of 80 acres for rearing beef cattle and with the
passage of time he bought an additional 20 acres of farmland in an adjoin area for the purpose. In
2017, the business suffered owing to a drought condition and Sam decided to sell off the 100
acres of farmland as his retirement bid. Sam while pursuing a buyer realised he would be better
off if the farmland is sold to real estate agents yielding higher return to the seller. Sam took the
necessary permission for the purpose of sub-division in May, 2017 and during the period of May,
2017 to January, 2018 certain development costs were incurred on the land. Finally in April,
2018 Sam managed to get a buyer but yet to have the settlement until July, 2018 incurring
substantial costs on legal fees and commission of the agents amongst others (Ato.gov.au, 2019).
Legal Implications:
Subdivided farmland –
The profitability accrued from selling the sub-divided land is subjected to capital gain or general
income treatment based on the given conditions. Sub-division of the land takes place when the
owner sells off the land on which he lives for having profitability leading to capital gain taxation
(Ato.gov.au, 2019). But in case the owner does not live on that particular property, it is subjected
to ordinary income on fulfilment of the following conditions:
 The sole intention of selling the farmland is to accrue profitability out of it.
 The profit is being derived for carrying out the business operations or commercial
activities.
The intention of profitability in this case would be suitable enough to attract the implications of
taxability possessing the characteristics of a commercial transaction of an ongoing business
(Burns, 2018).
Capital gain tax implications on sub-divided land –
The sub-division of farmland does not necessarily attract the implications of CGT on account of
retaining the ownership of the sub-divided block. It implies that no event of capital gain or
capital loss take place during the scenario and the aspect of CGT takes place only when the sub-

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divided blocks get sold (Ato.gov.au, 2019). In this scenario the aspect of date is quite significant
as the tax implications take place amidst the date of acquisition and the costs base of the original
holdings being divided amongst the sub-divided blocks at a reasonable rate. The aspect of
residential property is quite significant in this regard as if the residential unit of the owner on the
plot does not get any sort of deductions (Magnan, 2015).
The activities would be considered as entrepreneurial only if the land is sub-divided for having a
profitability by developing the property thereof for the sole purpose of selling. It is noted that a
one-time venture would also be considered as an entrepreneurial activity (Ato.gov.au, 2019). It
would be required by the developer to pay GST and need to be registered with the competent
authorities for payment of such taxes.
Development of property, building and renovation –
The property development, building and renovation are to be undertaken by the personal
property investor who is generally engaged in business for the sole purpose of profitability
(Gupta, 2016). It would apparently attract the GST implications on the following grounds:
 The buyer constructs a new residential unit for selling purpose and the annual revenue
off the property development activities would be more than $75,000.
 The commercial activities would be counted as entrepreneurial activities.
It would be considered as a profit making effort and liable to pay sorts of taxes say GST on the
sales of property and the associated expenses are to be adjusted against the sales proceeds.
GST treatment on farmland –
The farmland in the Australian scenario are supposed to encounter either a capital gain or capital
loss during selling. The capital gains are supposed to attract the capital gain tax (CGT), however
it has some reservations for small farm businesses and plots having residential units within it
(Sippel, Larder, & Lawrence, 2017). The farmland which is about to be sold would have the
privilege of exemption of Goods and Services Tax (GST) on fulfilment of the following
conditions:
 The farmland has been used for farming purpose for at least 5 years before the sales
decision has been taken (Ato.gov.au, 2019).

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 The buyer strives to use the farmland solely for farming purpose.
Sales for farmland would take account of the attachments like the fences, cattle sheds and
cottages as an integral part of the farmland. If the residential unit of the farmland’s owner is
within the farmland premises, it would also be included for the purpose of farmland and avail the
exemption of GST (Ato.gov.au, 2019).
The sub-divided farmland undergoing sales would avail the GST exemption on fulfilment of the
following conditions:
 The farmland gets the requisite permission to be used as residential purposes.
 The sales need to be made to an accomplice of the farmland owner for a payment less
than the market worth of the land or no payment at all (Ato.gov.au, 2019).
In this case the sales of farmland along with other attachments would be perceived as sales of the
going concern and is supposed to avail the GST exemption. It is noted that if the aforesaid
conditions are not fulfilled the sales proceeds from the farmland is supposed to be taxable and
does not hold exemption for the GST (Asher, 2016).
Application –
In this particular case the sub-divided farmland would not attract capital gain tax implications as
Sam the owner of the concerned farmland does not reside on that particular land (Joseph, 2017).
He stays at the nearby town having implications of ordinary income over that of capital gains
despite of the commercial characteristics of the transaction.
Sam has undertaken sub-division of the land for the purpose of selling and having a good return
out of it, so he strives to have profitability by selling the plot. It is a one-time effort of Sam and
the same would be considered as an entrepreneurial effort on part of the owner (Bennedsen &
Zeume, 2017).
Sam is supposed to act as the property developer and pay GST by undertaking the role of one-
time seller of the land. It is supposed that the 100 acres of land would be suitable to fetch an
annual revenue of $75,000 off the development activities. Sam undertook certain costs like
surveyor fees, utility connection costs, legal fees and commission on agents and such expenses
would be considered as property development costs. These sorts of costs would be adjusted

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against the GST incurred on sales proceed of the land (Magnan, 2015). So Sam would be liable
to pay GST on the sale worth of the land and adjust the costs against the GST by undertaking
one-time role of the entrepreneur to sell off the property.
The given condition presents a unique situation for Sam and strives for the fact that he would not
be entitled for GST exemption. It is because the farmland would be sold for commercial purpose
and not for farming purpose (Bian, Gan, Li, & Hu, 2018). Again Sam would be selling off the
land for having a profitability out of it which opposes the obligations of GST exemption tending
the fact that Sam would be liable to pay GST for the sales of the land.
Advice to Sam on his tax consequences –
It has been rightly established that Sam would not be entitled to have capital gain implications on
the sales of land as he does not stay on that particular ploy and lives at a nearby town. So the
sales proceeds off the farmland would be considered under ordinary taxation rules and the
incumbent would be required to pay GST on it (Joseph, 2017). The matter strives to reduce the
tax consequence of Sam on the aspect of sales of land. Accordingly certain advice are to be
delivered to Sam for the purpose of sales of the farmland –
 Sam needs to be registered as a developer to be able to pay GST. It is because he would
be liable to pay GST off the sales proceeds received by him for selling the land as it is
considered as an ordinary income rather a capital gain.
 It would be suitable for Sam to adjust the development costs shouldered by him to be
adjusted against the GST levied on him. It would substantially reduce the tax burden on
him.
 The costs incurred on the previous year say between July, 2017 and January, 2018 would
be rolled over to the next financial year starting from July, 2018 to be adjusted against
the GST.

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Books:
Black, C. (2018). Taxation of Intellectual Property Under Domestic Law and Tax Treaties:
Australia. In C. Black, Taxation of Intellectual Property under Domestic Law, EU Law
and Tax Treaties" (pp. 52-84). Amsterdam: IBFD.
Rubolino, E., & Waldenström, D. (2017). Tax progressivity and top incomes: Evidence from tax
reforms. Sydney: Sage.
Journals:
Asher, A. (2016). The justice of Australian tax and redistribution in 2016. St Mark's Review,
235(4), 28.
Bennedsen, M., & Zeume, S. (2017). Corporate tax havens and transparency. The Review of
Financial Studies, 31(4), 1221-1264.
Bian, C., Gan, C., Li, Z., & Hu, B. (2018). CEO pay-risk sensitivity, firm policies, and 2009
Australian tax reforms. International Journal of Managerial Finance, 14(1), 54-77.
Burns, A. (2018). Options in succession planning for a family business. Taxation in Australia,
52(10), 543.
Gupta, R. (2016). Filling the land tax void: New Zealand standpoint. eJTR, 14(5), 719.
Jones, C., & Temouri, Y. (2016). The determinants of tax haven FDI. Journal of world Business,
51(2), 237-250.
Joseph, S. (2017). An Examination of the Congruence of the Mining Site Rehabilitation Tax
Deductions & Queensland's Chain of Responsibility Legislation. AJEL, 25(14), 29.
Magnan, A. (2015). The financialization of agri-food in Canada and Australia: Corporate
farmland and farm ownership in the grains and oilseed sector. Journal of Rural Studies,
41(2), 1-12.
Redonda, A., de Sarralde, S., Hallerberg, M., Johnson, L., Melamud, A., Rozemberg, R., . . . von
Haldenwang, C. (2019). Tax expenditure and the treatment of tax incentives for

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investment. Economics: The Open-Access, Open-Assessment E-Journal, 13(2019-12), 1-
11.
Sippel, S., Larder, N., & Lawrence, G. (2017). Grounding the financialization of farmland:
perspectives on financial actors as new land owners in rural Australia. Agriculture and
Human Values, 34(2), 251-265.
Tran, A., & Zhu, Y. (2017). The impact of adopting IFRS on corporate ETR and book-tax
income gap. Austl. Tax F, 32(1), 757.
Online references:
Ato.gov.au. (2019). GST and property. Retrieved April 24, 2019, from
https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-and-
property/?page=5
Ato.gov.au. (2019). Guide to capital gains tax 2018. Retrieved April 24, 2019, from
https://www.ato.gov.au/forms/guide-to-capital-gains-tax-2018/?page=13
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from https://www.ato.gov.au/general/property/property-development,-building-and-
renovating/
Ato.gov.au. (2019, April 24). Small business CGT concessions. Retrieved from Ato.gov.au:
https://www.ato.gov.au/general/capital-gains-tax/small-business-cgt-concessions/
Ato.gov.au. (2019). Subdividing land. Retrieved April 24, 2019, from
https://www.ato.gov.au/General/property/land---vacant-land-and-subdividing/
subdividing-land/
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Cpaaustralia.au. (2019, April 24). Intellectual Property and Tax Implications. Retrieved from
Cpaaustralia.com.au:

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https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
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Ipaustralia.gov.au. (2019). IP legislation | IP Australia. Retrieved April 24, 2019, from
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Legislation.gov.au. (2019). Patents Act 1990. Retrieved April 24, 2019, from
https://www.legislation.gov.au/Details/C2019C00088