Taxation Consequences for Sophie and Kate

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

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Answer 1:
For Sophie:
Issue No. 1:
The concerned issue here is the taxation consequence of lump sum amount of damages
for the potential reputation loss.
Rules:
A perusal of the principle held in the decision of Whitaker v FC of T 98 ATC 428
provides that any receipt that has been incurred by means of compensation due a personal type of
injury will be considered as capital gain and hence will come under the application of the capital
gain taxation.
Moreover, the decision given in the FC of T v Sydney Refractive Surgery Centre Pty Ltd
2008 ATC ¶20-081 reveals that any sum of money which is being received by an individual
taxpayer for loss of his/her reputation will be exposed to taxation as the capital asset gain. The
reason behind this is that when organization losses its reputation, its capability of incurring profit
will be reduced.
Application:
In the present case, it is observed that a newly launched laser when applied on Kate, the
1st client by using a machine bought from an organization called racPro Pty Ltd by Sophie, Kate
got severe blisters that caused permanent scars. The lump sum money of about 100, 000 $ was
received by Sophie for potential reputation loss. This is required to be treated as capital gain

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because reputation amounts to a capital asset according the judgment given in the case of FC of
T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081.
Conclusion:
From the discussion made above, it can be inferred that the receipt of lump sum amount
of damages will be exposed to taxation according to Capital gain taxation.
Issue No. 2:
The concerned issue here is the taxation consequence of compensation received for
income loss when the machine got replaced.
Rules:
The judgment given in the landmark case of Allied Mills Industries Pty Ltd v
Commissioner of Taxation [1989] FCA 135 states that when any amount of compensation is
being received by an individual taxpayer due to any loss suffered by him will be considered
under the effect of the tax regime as item is being replaced by compensation.
Again, in the decision of Phillips v Federal Commissioner of Taxation [1947] HCA 50
reveals that if any amount of income is being received by a tax payer due to any incident which
caused him without his income will be considered as his taxable income.
Moreover, section 6-5 of the Income Tax Assessment Act states that a compensation
given for any loss of the ordinary income of the tax payer, such compensation will be subjected
to taxation according to ordinary income.

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Application:
In the present case, the sum of 20000 $ is being received by Sophie Jones as
compensation in lieu of her income loss incurred by him during the period in which the machine
was taken for replacement. During that period, if the machine was not taken for replacement,
Sophie could use it and earn income out of it and such income will be her assessable income. She
suffered from income loss due to the replacement. Thus compensation for this will amount to an
income and will be considered as ordinary income for purpose of taxation.
Conclusion:
Thus the taxation consequence of compensation received for income loss when the
machine got replaced will amount to her ordinary income.
Issue No. 3:
The concerned issue here is the taxation consequence for reimbursing of the legal fees.
Rule:
It has been observed in the leading case of HR Sinclair & Son Pty Ltd v FC of T (1966)
114 CLR 537b that any amount of money received as reimbursement of any expenditure which is
normally allowed as deduction will be regarded as capital gain and hence will amount to
assessable income as the statutory income.
Moreover, any legal fee is to be considered as a deduction allowable from the taxation
point of view. It was construed in the decision given in FC of T v Rowe 97 ATC 4317. Such fee
when reimbursed will amount to a compensation for the expense which will be generally
considered to be an allowable deduction and thus it is to be considered as capital gain.