Case Study about Taxation Law 2022

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Author Note

TAXATION LAW1
Question 1
Sophie
Issue 1
The taxation consequences of the lump sum damages for potential loss of reputation.
Rule
As per the legal principle established in the case of Whitaker v FC of T 98 ATC 4285, any
receipt that has been received in way of a compensation for a personal injury would treated as
a capital gain and would be subjected to capital gain taxation.
As per the principle established in the case of FC of T v Sydney Refractive Surgery Centre
Pty Ltd 2008 ATC ¶20-081, any such amount that has been received for the loss of reputation
of the taxpayer would be subjected to taxation as a capital gain asset. This is because the loss
of reputation of an organisation would have the effect reducing the capability of earning
profit of that organisation.
Application
In the instant situation, the newly launched laser has caused Kate, the first client upon
whom Sophie has been using the laser machine purchased from FracPro Pty Ltd, has suffered
from severe blistering. The amount of $100, 000 that has been received by lump sum
damages for potential loss of reputation. This needs to be treated as a capital gain as
reputation has been declared to be a capital asset as per the principles established in the case
of FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081.

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Conclusion
The lump sum damages for potential loss of reputation would be subjected to taxation as
Capital Gain Taxation.
Issue 2
The taxation consequences of the compensation for loss of income whilst the machine was
being replaced.
Rule
It has been contended in the case of Allied Mills Industries Pty Ltd v Commissioner of
Taxation [1989] FCA 135 that any compensation that has been received by a person against
any loss that has been caused to him would be treated under the tax regime as the item the
compensation has been replacing.
It has been held in the case of Phillips v Federal Commissioner of Taxation [1947] HCA
50 that any compensation that has been received against any instance that has the caused the
taxpayer to be deprived of his income would be treated as a taxable income.
Any compensation has been accrued from the loss of an ordinary income, would be taxed
itself as an ordinary income u/s 6-5 of the ITAA 97.
Application
In the instant situation, an amount of $20,000 has been received by Sophie as a
compensation against the loss of income that has been caused to him during the time when
the machined was being replaced. In case the machine would have not been replaced and has
been used by Sophie, it would have yield her an assessable income. The replacement of the
same has caused her the loss of that income, and the compensation depicts that particular
income, hence, would be treated as ordinary income for tax purposes.

TAXATION LAW3
Conclusion
The compensation for loss of income whilst the machine was being replaced would be
treated as an ordinary income.
Issue 3
The taxation consequences for the reimbursement of legal fees.
Rule
Any receipt that has been received as a reimbursement of an expense, which would
normally be allowed as a deduction, will be considered as a capital gain and would be
assessable as a statutory income. This can be illustrated with the case of HR Sinclair & Son
Pty Ltd v FC of T (1966) 114 CLR 537.
It has been held in the case of FC of T v Rowe 97 ATC 4317 that legal fee are required to
be treated as an allowable deduction from the perspective of taxation. The reimbursement of
such a legal fees needs to be treated as a compensation of the expense, which would normally
be treated as an allowable deduction and hence would be treated as a capital gain.
Application
In the present instance, the proceeding has been instituted by Sophie for the loss of his
reputation and profit owing to the faulty functioning of the machine. This machine would
have earned profit to Sophie if it had not been found to be faulty. This would be treated as an
expense that would have been allowed from the assessable income of Sophie. Therefore, it
can be stated that the reimbursement of the same would be treated as a capital gain. This can
be illustrated with the case of FC of T v Rowe 97 ATC 4317.