Taxation Law

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

TAXATION LAW1
Question 1
Issue
The issue arising from the given scenario will be to determine the tax implications of the
following transactions:
• Tax implications of $300,000 damages for design patent infringement.
• Tax implications of $200,000 for expected lost revenue over the 12 month period that
Coffee Bean Pty Ltd had been using the other product.
• Tax implications $15,000 interest received on the damages payout.
• Tax implications $40,000 reimbursement of legal fees incurred by Our Earth Pty Ltd.
Rule
The principle of replacement governs the treatment that is extended towards the
compensation payments that has been received against a particular item of income, which is
taxable. Compensation payments are received against the items of income, which are taxable.
Hence, the treatment of the same will also be carried out in the same manner as that of the
item that it has been replacing for the purpose of taxation. The assessment of the
compensation payment under the tax regime yield the same consequences as that of the item
in place of which it has been received. This has been best explained in the case of Blank v
Commissioner of Taxation [2015] FCAFC 154. The court in this case has contended that the
character of the item of income will be taken up by the compensation that has been received
against the same. The tax consequences of such compensation will be the same as that of the
item of income it has received against.
Any income, which can be construed to be an ordinary income as provided under the
Income Tax Assessment Act 1997 (Cth) (ITAA 97) section 6-5, would render any

TAXATION LAW2
compensation that has been received against such items as to be treated and assessed as
ordinary income similar to the item for the purpose imposing tax liability. This is because, if
the item which has been lost and owing to which the compensation has been received is
ordinary income, the compensation has been received as an appropriation of the same and
would also be treated as ordinary income. In the same manner, the any lost asset of capital
nature would receive a compensation which also would require to be treated as capital
income. This is because in case the capital asset has been sold, the proceeds of the same
would be treated to be a capital income and owing to this, the compensation of the lost capital
asset would also be treated as a capital gain. In the case of Hart v Commissioner of Taxation
[2018] FCAFC 61, the court contended that any factory of permanent nature would be
treated to be a capital asset and any compensation that would be received against the same
would also be considered to be a capital gain as the same would be construed to be a proceed
of the same.
In case the taxpayer has been dealing with the product upon which he has exclusive rights
and the same has been cancelled owing to some reason, the compensation received against
the cancellation of such business would be treated as a capital loss and any compensation that
has been received against the same would be treated to be a capital gain. This can be
illustrated with the case of Commissioner of Taxation for Western Australia v Newman
[1921] HCA 37. However, any compensation that has been received against the profit that
has been lost owing to the loss of the abovementioned business would be treated as an
ordinary income as the same has been received against the profit and profit in its general
nature would have been treated as an ordinary income. The same has also been extended in
the case of Liftronic Pty Ltd v Commissioner of Taxation [1996] FCA 348; (1996) ATC
4425.

TAXATION LAW3
Again, in case of any interest accrued and received over the damages is to be treated in
accordance with the treatment given to the ordinary income for the tax purposes. This has
been provided under the ITAA 97 section 6.5. This contention has also been extended in the
case of Sent v Commissioner of Taxation [2012] FCA 382. Any reimbursement that has
been received with mitigate the legal fees and expenses borne would be treated as an ordinary
income. This is owing to the reason that legal fees are generally treated as a deduction under
the Act under section 8.1.
Application
In the present scenario, Our Earth Pty Ltd has been the sole manufacturer and supplier of
the coffee cups that is biodegradable and the materials used in the manufacture of the same is
sustainable. This kind of cups are only distributed by Our Earth Pty Ltd in Australia. From
these facts, it can be analysed that the income of Our Earth Pty Ltd is to treated as ordinary
income by virtue of ITAA 97, under section 6 to 5.
However, it has been brought to the notice of Our Earth Pty Ltd that owner of a chain of
coffee shop namely the Coffee Bean Pty Ltd has been dealing in identical coffee cups as
them. They have been availing the supply of the same from an overseas company and the
coffee cups were supplied for a cheaper price that that of Our Earth Pty Ltd. Moreover,
Coffee Bean Pty Ltd has not informed the clients they have been dealing with that their
coffee cups are the same as that of the Our Earth Pty Ltd. Owing to this, the business of the
Our Earth Pty Ltd has been made to face losses and they have proceeded for a legal action
against the Coffee Bean Pty Ltd. In this legal action, there are certain compensation and gains
that Our Earth Pty Ltd has received.
The compensation that has been received in this context is required to be treated in
accordance with the principle of replacement. The assessment of the compensation payment