Taxation Law

Running head: TAXATION LAW
Taxation Law
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1TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................5
Answer to question 2:.................................................................................................................6
Issues:.....................................................................................................................................6
Laws:......................................................................................................................................6
Application:............................................................................................................................8
Conclusion:............................................................................................................................9
References:...............................................................................................................................10

2TAXATION LAW
Answer to question 1:
Issues:
Is the receipt of compensation or settlement amounts to assessable income under
“Division 6” or “subsection 25 (1) of the ITAA 1936”?
Rule:
A compensation receipts or compensation comprises of the amount that is received by
the taxpayer in relation to the right of seeking compensation or the cause of action or any
kind of proceedings that are instituted by the taxpayer in relation to the right or the cause of
action whether or not it is in respect of the underlying assets, originating out of the
proceedings of court or comprising of the dissected amounts. Receipts derived from the
damages and compensation might be taxable as ordinary earnings under “Division 6 of the
ITAA 1997” or as the statutory income.
According to “section 25 (1), ITAA 1997” receipts of compensation payment is
taxable if the payment is a compensation for the loss of income simply such as the previous
year profits or interest (Grange et al., 2014). As held in “Mc Laurin v FC of T (1961)”
compensation payment was considered assessable under “subsection 25 (1), ITAA 1936” to
the extent that the portion of payment received was identifiable and quantifiable in the form
of income.
To determine whether the compensation damages are categorized as ordinary income
or capital receipts, the response is reliant on the nature of receipts. If the compensation
damages are paid for something that relates to the income in agreement with the ordinary
conceptions then “section 6-5, of the ITAA 1997” would be applied (Jover-Ledesma, 2014).
For instance, if the damages or compensation may be treated as assessable income if it is

3TAXATION LAW
received in the series of recurrent, periodic payments that does not constitute instalments of
the lump sum.
Similarly, the law court in “Californian Oil Products Ltd v Federal Commissioner
of Taxation (1934)” amount of money that is paid in the form of damages, compensation or
to indemnify relating to the loss of profit incurred in the ordinary business course of the
enterprise in no doubt be will be treated as income (Kenny, 2013). This is because it is a
portion of profit obtained from performing business activities, although they are caused by
unusual or exceptional events or conditions.
The court of law in “CT (Vic) v Phillips (1936)” held that if the compensation is paid
relating to the loss of business or undertaking or relating to the loss of basis or foundations of
trading activities, then the compensation would be treated as the loss for capital asset (Krever,
2015). Henceforth, due to the absenteeism of countervailing contemplation, the receipts itself
forms a capital in nature. In another example of “FC of T v Spedley Securities Ltd (1988)”
the court of law held that amount received for damage of goodwill is regarded as the item of
capital. The compensation amount received amounted to injury to the capital asset.
Interest that are awarded as the portion of compensation amount is treated as
assessable income to the taxpayer based on the general provision of income. The law court in
“Whitaker v FCT (1998)” held that post judgement interest holds the nature of interest is
regarded ordinary income (Sadiq & Coleman, 2013). Interest is regarded as ordinary income
where the compensation for the lost incomes is involved, given the claimant did not suffered
damages he may have received the interest that is awarded.
Where a taxpayer is allowed deduction for the legal costs that is accessible to the
receiver under the “section 8-1, ITAA 1997” a payment or the award in relation to the legal
costs would be contained within the recipient’s taxable income as the assessable recoupment