Assessability of the Receipts for Sophie

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

TAXATION LAW1
Answer 1
Assessability of the Receipts for Sophie
Issue
The transactions that are required to be assessed with respect to their assessability can be listed as
below:
a) A sum of 100000 dollars received as damages in the form of lump sum for potential
reputational injury.
b) A sum of $20,000 received as compensation for the earning loss caused by the
replacement of the machine.
c) A sum of $7,000 received as reimbursement to mitigate the effect of legal fees.
Rule
Whitaker v FC of T 98 ATC 4285: All the sums that are receivable by a TP for compensating a
personal injury caused to that individual will given a treatment for taxation purposes as a capital gain tax
and when received this amount will be inferred as capital gain.
FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081: All the receivable
amount that a TP has the probability of receiving for neutralizing reputational loss to that person will be
given at treatment in capital gain taxation and this to be input as capital gain when received. The
reasoning existing behind such a treatment is that reputation is to be treated as a capital asset as the same
in hence the profit making power of a business and the payment made against the same for being lost will
be given a treatment is capital gain.

TAXATION LAW2
Allied Mills Industries Pty Ltd v Commissioner of Taxation [1989] FCA 135: All the sum that are
receivable by the TP as against the damage caused towards him needs treatment for the compensation of
the same as per the item, the loss of which needs to be compensated with such a compensation.
Phillips v Federal Commissioner of Taxation [1947] HCA 50: All the sums that has been
devolved upon TP as can be treated as a compensation for all the outgoing that has been suffered by the
TP depriving him from earning assessable income needs treatment an incoming value that is taxable.
ITA Act 97, s 6-5: all the sums that has been received as compensation towards the TP, for any
loss with respect to ordinary income would render the compensation to be treated as an ordinary income
as well.
HR Sinclair & Son Pty Ltd v FC of T (1966) 114 CLR 537: All the sums receivable by a TP as
reimbursement for and outgoing when received needs recognition as capital gain, if the outgoing has been
deductible in nature and such reimbursement when received is to be brought under statutory earnings.
FC of T v Rowe 97 ATC 4317: All the outgoings that has been experienced by TP as a fee for
legal proceedings would have the probability of being treated as deduction from the assessable income.
Any such deductible legal expense when reimbursed towards the TP, is required to be inferred as a
compensation against such expense, which has already been permitted as deduction. Having the nature of
a compensation with respect to a deductible outgoing in form of reimbursement requires regard as CGT
gain.
Application
As can be conceived from the situation presented in this scenario, the machine has been launched
by FracPro and has consequently been purchased by Sophie and being used upon Kate. The machine
turned out to be defective causing serious blistering injuries being caused to Kate. This has also resulted
in Kate being having a permanent scarring. As this has caused Sophie to have incurred a reputational loss
in her business, an amount of 100000 dollars has been extended towards her as lump sum for the loss.

TAXATION LAW3
This needs consideration of the amount received to be subjected to taxation under capital gain tax and the
same can be supported as per the judgement in the proceeding of FC of T v Sydney Refractive Surgery
Centre Pty Ltd 2008 ATC ¶20-081.
The aggregate of $20,000 Sophie has been made to receive in the form of an amount that has the
effect of compensating the loss that she has suffered for the time she has not been able to use the machine
owing to its replacement process. In case the replacement process has not been taken place the machine
would have acquired Sophie assessable income. The aggregate received against such loss that has been
experienced by Sophie by virtue of such replacement would have the effect of compensating the same. As
the presence of the machine would have earned ordinary income, the compensation received against its
loss will also be treated as ordinary income.
The proceeding was brought by Sophie for availing compensation with respect to the reputation
she has lost going to the defect existing in the machine which has caused her loss of profit. This machine
in case would have functioned properly the probability of devolving taxable income. The cost incurred for
carrying out this proceeding needs to be inferred as outgoing for Sophie that is deductible from the
assessable income. Reimbursement of such outgoing requires treatment as capital gain as per FC of T v
Rowe 97 ATC 4317.
Conclusion
It can be concluded that:
a) A sum of 100000 dollars received as damages in the form of lump sum for potential
reputational injury is a CGT earning.
b) A sum of $20,000 received as compensation for the earning loss caused by the
replacement of the machine is an ordinary earning.