Taxation Consequences for Sophie

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

TAXATION1
Question 1: Taxation Consequences for Sophie
Issue 1
Whether there will be any tax implications for damages received as lump sum in relation to
potential loss caused to reputation.
Rule
Whitaker v FC of T 98 ATC 4285: Any amount received as compensation in relation to an injury
of personal nature needs to subjected capital CGT and is to be regarded as CGT asset.
FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081: any receipt accrued to
the taxpayer as against the reputational loss needs to be taxed as a CGT asset. This can be justified with
the reasoning that a loss towards the reputation of an entity would diminish the capacity of the entity to
earn profit.
Application
In the instant scenario, the laser that has been newly launched by the FracPro Pty Ltd and
acquired by Sophie, which has been used by her on her client named Kate has caused the client to suffer
from acute blistering leading to permanent scarring. This resulted in a suit being brought by Sophie,
which has earned her a lump sum amounting to $100,000 by way of potential loss caused to reputation.
This amount requires a dealing as a CGT gain owing to the fact that reputation is to be construed as a
CGT asset as can be conceived with the case of FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008
ATC ¶20-081. This is because any receipt accrued to the taxpayer as against the reputational loss needs to
be taxed as a CGT asset. This can be justified with the reasoning that a loss towards the reputation of an
entity would diminish the capacity of the entity to earn profit.

TAXATION2
Conclusion
Damages received as lump sum in relation to potential loss caused to reputation is to be treated as
CGT.
Issue 2
Whether there will be tax implications for the compensation received against the loss of income
during the replacement of the machine.
Rule
Allied Mills Industries Pty Ltd v Commissioner of Taxation [1989] FCA 135: The compensation
that the taxpayer has received for any loss caused to him would be extended with the same treatment as
that of the item that it has been compensating.
Phillips v Federal Commissioner of Taxation [1947] HCA 50: The compensation received as a
consequence to an event that caused deprivation towards the taxpayer from his income needs to be
included as assessable income.
Section 6-5 of the ITAA 1997: The compensation received against the loss of ordinary income is
to be taxed as ordinary income.
Application
In the present scenario, for the loss of income that has been suffered by Sophie owing to the
replacement of the machine has been compensated to her with $20,000 as a compensation. The machine
would have yield Sophie taxable income if the same has been in use and has not been replaced. This
compensation received against the loss of income would be an ordinary income while the receipt would
be subjected to taxation. This needs to be construed as per the principles established in the case of Phillips
v Federal Commissioner of Taxation [1947] HCA 50. This is because the compensation received as a
consequence to an event that caused deprivation towards the taxpayer from his income needs to be