Taxation: Tax Consequences of Compensation and Land Sale

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

TAXATION1
Table of Contents
Answer 1....................................................................................................................................2
Issue........................................................................................................................................2
Rule........................................................................................................................................2
Application.............................................................................................................................4
Conclusion..............................................................................................................................7
Answer 2....................................................................................................................................7
Issue........................................................................................................................................7
Rule........................................................................................................................................8
Application.............................................................................................................................9
Conclusion............................................................................................................................11
Reference..................................................................................................................................12

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Answer 1
Issue
In the given instance, the issue is to evaluate the tax consequences pertaining to the below
mentioned transactions as accrued to the Our Earth Pty Ltd.
Firstly, the issue is the tax implications that Our Earth Pty Ltd has incurred owing to the
compensation of $300,000 received against the damages for design patent infringement.
Secondly, the issue is the tax implications for the compensation amounting to $200,000
received for the loss of revenue that has been caused to Our Earth Pty Ltd for the 12-month
period that Coffee Bean Pty Ltd had been using the other product.
Thirdly, the issue is the tax implication with respect to the interest amounting to $15,000
that has been received on the damages payout.
Fourthly, the issue is the tax implications for the amount of $40,000 received as a
reimbursement of legal fees incurred by Our Earth Pty Ltd.
Rule
The compensations that are received against any loss of items of income are to be treated
in accordance with the doctrine of replacement. Under this doctrine, the compensation that
has been received against any item of income or any prospect that might ensure income needs
to be treated in a similar manner as that of the income that it has been replacing for the
purpose of taxation. This is because the item against which the compensation has been
received, would be have the probability of accruing an income and has the prospect of being
assessed under taxation. The loss of the same has made that probability to disappear and no
tax can be charged with respect to the same. Hence, applying the doctrine of replacement, it
can be stated that the compensation would be construed to have replaced the item against

TAXATION3
which it has been replaced. Similarly, the tax implications that was supposed to accrue to the
items as a replacement of which the compensation has been incurred would also accrue in a
similar manner to the compensation as well. This comes in line with the case of Haritos v
Commissioner of Taxation [2015] FCAFC 92. In this case, it has been contended by the court
that the tax implications that was supposed to be accrued to the to the items of income would
also accrue to the compensation that has been received as a replacement of the same. In this
case, the compensation in question would be treated in the same as that of the item of income
it has been replacing.
The main object of the compensation is to neutralize the losses that has been caused owing
to the destruction of the income or a prospect of income. Hence, it can be illustrated in that
context, the items of income that has been rendered to be an ordinary income under the
section 6.5 of the Income Tax Assessment Act 1997 (Cth), would also be render any
compensation that has been received in place of that as an ordinary income under the same as
well. In this context, it can be stated that the compensation that has been extended towards
the loss of an ordinary income has the effect of appropriating the loss and owing to its effect
of the appropriation of the ordinary income, it also needs to be construed to be an ordinary
income. In the same way, it can be stated that the income, which has the implication for the
purpose of taxation pertaining to capital gain would render the compensation received against
the loss of the same to be directed towards the capital gain. This can further be supported by
the case of August v Commissioner of Taxation [2013] FCAFC 85. In this case, it has been
contended by the court that factory, which is permanent would be construed to be a capital
asset under section 104.5 of the Income Tax Assessment Act 1997 (Cth). Losses that has
been accrued by virtue of the destruction in the same would also be treated as a loss of capital
asset. This would render any loss pertaining to the same to be loss of capital asset. Any
compensation that has been accrued for the loss of the such capital asset would be treated as a