Taxation Consequences for Sophie

This study material discusses the taxation consequences for Sophie in various scenarios. It covers the tax effects of damages, compensation for earning loss, and reimbursement of legal fees. The material provides relevant legal principles and their application to the given situations. It also includes conclusions drawn from each scenario.

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

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Taxation
Name of the Student
Name of the University
Author Note

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Question 1
Taxation Consequences for Sophie
Issue
The concern accruing from the instant scenario are as enumerated below:
• Whether any damages in form of a lump sum for compensating the potential loss
perpetrated upon the reputation has a tax effect for Sophie.
• Whether compensation devolved upon against the earning loss at the time of
replacements in relation to the machine accrues any tax effect for Sophie.
• Whether the received reimbursement in relation to legal fees that has been paid has a tax
effect for Sophie.
Rule
The legal principle laid down by the judgment delivered in the matter of Whitaker v FC of T 98
ATC 4285 that requires every amount earned in way of compensation conceived to mitigate personal
injury demands to accrue a tax effect under the system of Capital Gain and this requires treatment in the
form of CGT gain.
The legal principle laid down by the judgment delivered in the matter of FC of T v Sydney
Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081 obligating every receipt vested upon an individual
in relation to reputational loss caused requires to be given extended with a treatment under taxation in the
CGT system and needs consideration as a CGT asset. This concept flows from has been a continuation of
the contention that reputational loss occurred to an entity would make him suffer the ability of the venture
to generate profit having the potential to be dealt under taxation.

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The legal principle laid down by the judgment delivered in the matter of Allied Mills Industries
Pty Ltd v Commissioner of Taxation [1989] FCA 135 every compensation which a taxpayer is devolved
with respect to a damage that has been suffered by him requires treatment in the system of tax in a similar
way as the item that was made to be replaced with such compensation.
The legal principle laid down by the judgment delivered in the matter of Phillips v Federal
Commissioner of Taxation [1947] HCA 50 every amount that the taxpayer obtains as compensation that
was devolved upon that taxpayer in return of the event making him lose as well as deprive him from the
earnings that requires dealing as assessable earning.
According to the principle contained in section 6-5, ITA Act 1997, every compensation accrued
to the individual in relation to any damage that requires treatment in the form ordinary earning towards
taxpayer as well as to be assessed accordingly.
The legal principle laid down by the judgment delivered in the matter of HR Sinclair & Son Pty
Ltd v FC of T (1966) 114 CLR 537 every sum that is obtained by the individual by the way of
reimbursement of an expenditure, requires treatment in the form of deduction towards taxable earning,
would be recognized itself as CGT gain and the taxability of that amount should be made as statutory
income.
The legal principle laid down by the judgment delivered in the matter of T v Rowe 97 ATC 4317
every expenditure made by way of legal fee needs recognition as permissible deduction towards taxable
earning of the person paying the tax. The reimbursement the individual taxpayer receives against that
legal fees should be treated as compensation as against the expenditure caused to the taxpayer as well as
is needed to be permitted as deduction. As a compensation, the reimbursement would need treatment as
CGT gain.
Application

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In the present scenario, the laser, which has been launched by the company named FracPro has
caused a severe blistering towards Kate, the client belonging to Sophie on whom the machine has been
used for first time. The compensation devolved upon Sophie in relation to the reputational loss instigated
by the event aggregated to $ 100000. This has been received as a damage in form of lump sum. This
demands the sum to be categorized under the class of CGT income as it was established with the
proceeding in FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081, obligating every
receipt vested upon an individual in relation to reputational loss caused requires to be given extended with
a treatment under taxation in the CGT system and needs consideration as a CGT asset.
The aggregate of 20000 dollars has devolved upon Sophie as a compensation towards the damage
caused to the capacity of her earning while the replacement pertaining to that machine by FracPro. This
machine have been a help to Sophie in producing assessable earning in case it was not been made to be
replaced that has made Sophie to be deprived of her ability to harvest assessable earning. The replacement
made in relation to that machine made Sophie to suffer an earning loss and the sum received in relation to
that needs consideration as compensation with respect to such earning. This needs dealing as ordinary
earning as all compensation is needed to be dealt as the thing it was exchanging.
Sophie has made the proceeding opposite to the company to obtain compensation in relation to
her reputational damage and the earning loss inflicted upon her by virtue of the malfunctioning of that
machine. That machine had the probability of grossing profit in case that machine had functioned in an
apt manner. This needs to be considered to be extended with a treatment as outgoing, which has the
prospect of being allowed as deductible outgoing from the assessable earning belonging to Sophie. This
demands the reimbursement with respect to that expense to be extended a treatment in form of CGT gain
that has been backed in FC of T v Rowe 97 ATC 4317.
Conclusion
The conclusions drawn from the instant scenario are as enumerated below:

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• Any damages in form of a lump sum for compensating the potential loss perpetrated upon
the reputation has a tax effect for Sophie as CGT gain.
• Compensation devolved upon against the earning loss at the time of replacements in
relation to the machine accrues any tax effect for Sophie as an ordinary income.
• The received reimbursement in relation to legal fees that has been paid has a tax effect for
Sophie as a CGT gain.
Taxation Consequences for Sophie
Issue
The concern accruing from the instant scenario are as enumerated below:
• Whether payment obtained in the form of lump sum in relation to the pain as well as
suffering can have a tax consequence for Kate.
• Whether payment obtained for ongoing medical along cosmetic surgery costs can have a
tax consequence for Kate.
• Whether payment obtained as interest devolved against the sum of lump sum can have a
tax consequence for Kate.
Rule
The legal principle laid down by the judgment delivered in the matter of Whitaker v FC of T 98
ATC 4285 demands all the sums obtained as compensation for mitigating personal injury requires to have
consequences for taxation in the system of capital gain and this requires to be taken as CGT gain.
The assessability of the compensation obtained by an individual requires to be performed in in the
manner of statutory income, only if the same has no recognition under s 6-5, ITAA 97. The assessability

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of this compensation needs to be effected as statutory earning under the principle enumerated in s 6-5 of
ITAA 97 and 15-30 of ITAA 97.
Medical outgoing requires dealing to be allowed in the form of tax offset. The individual on
whom the weight of medical outgoing has been conferred needs the outgoing to be permitted in form of
tax offset as to the degree aggregating exactly to the outgoing suffered by the individual taxpayer
(Woellner, 2016).
The legal principle laid down by the judgment delivered in the matter of Allied Mills Industries
Pty Ltd v Commissioner of Taxation [1989] FCA 135 every compensation which a taxpayer is devolved
with respect to a damage that has been suffered by him requires treatment in the system of tax in a similar
way as the item that was made to be replaced with such compensation.
A compensation made to the taxpayer concerned neutralizing the outgoing with respect to
medicinal dedications. A reimbursement or any refund made towards the outgoing would be of lessening
the outgoings experienced by individual taxpayer. This demands such refund to be removed from tax
offsets available to an individual taxpayer towards assessable earning in relation to medicinal dedications
(Barkoczy, 2016).
The legal principle laid down by the judgment delivered in the matter of Federal Wharf Co Ltd v
DFC of T (1930) 44 CLR 24 demanding every compensation obtained by an individual taxpayer as
interest upon a temporary damage to be employed as money is to be dealt with in the form of capital gain.
The legal principle laid down by the judgment delivered in the matter of Adelaide Fruit and
Produce Exchange Co Ltd v DFC of T [1932] 2 ATD 1 demands every interest flowing against a lump
sum vested upon individual taxpayer that would generally have the inference of CGT asset needs
treatment as CGT earnings.
Application

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In the present scenario, the laser, which has been launched by the company named FracPro has
caused a severe blistering towards Kate, the client belonging to Sophie on whom the machine has been
used for first time. This has resulted in the permanent scarring being affected to Kate for this anomaly.
This demands the sum received in the nature of compensation as a motive to lessen private injury requires
to be conceived with the tax consequences under the administration of capital gain and this requires
assessability as capital gain. The inclusion of the same has capital gain is to be conceived as per the
provision in s 6-5, ITAA 1997 and 15-30, ITAA 1997.
Every reimbursement extended against the medical outgoings ongoing demands treatment in form
of medical outgoing reimbursement. Outgoing sacrificed with respect to cosmetic surgery needs to be
implied as tax offset as to Kate. Any refund or any reimbursement, which can be obtained by Kate in the
form of medicinal outgoings needs dealing as a decrease in outgoing and demands to be permitted being
subtracted from that tax offset accessible by Kate.
The summation of $8000 vested upon Kate as the interest accruing from lump sum quantity of
$120000 remitted to the taxpayer in relation to suffering and pain inflicted on her. This compensation as
lump sum quantity has a taxation implication as capital earning. The interest devolved on the capital gain
would demand to be dealt as CGT gain only. This gain authority under the fruit and tree concept owing to
the reason that compensation of capital nature is CGT asset and any benefit obtained from it would be
demand treatment as CGT gain. It can be supported under the principle of Adelaide Fruit and Produce
Exchange Co Ltd v DFC of T [1932] 2 ATD 1.
Conclusion
The conclusions drawn from the instant scenario are as enumerated below:
• Payment obtained in the form of lump sum in relation to the pain as well as suffering can
have a tax consequence for Kate has a taxation consequence for Kate as per s 6-5, ITAA 1997 and 15-30,
ITAA 1997.

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• Payment obtained for ongoing medical along cosmetic surgery costs can have a tax
consequence for Kate as deduction from tax offset.
• Payment obtained as interest devolved against the sum of lump sum can have a tax
consequence for Kate as CGT gain.
Question 2
Taxation Consequences for Joe
Issue
The concerned accruing from the instant scenario is whether Joe can be conceived to have any tax
incidence in relation to the mentioned transactions within the scenario.
Rule
The liability of capital gain tax is incident upon a taxpayer on compliance with two essentials.
The first essential being the involvement of certain capital asset. The capital asset is to have been
purchased by the taxpayer on a date next to 20/9/1985. The second essential that requires presence for the
purpose of being rendered to have created for capital gain taxation liability is the existence of an event of
capital gain as provided for in s 104-5, ITAA 1997. A capital gain event is said to have occurred by the
disposal with respect to a capital asset in the way which resembles a sale or even a transfer needs
recognition as capital gain event. However, in case it has been conceived that the asset involved has been
acquired at a prior date to that of the prescribed one, is required to be excluded from being computed as a
capital gain asset as per s 104-10(5), ITAA 1997. The event of capital gain that involves sale as well as
transfer of an asset of capital origin that has been carried out by the institution of contract and the contract
has been instituted as for agreement is required to be categorised under the capital gain event A1.

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The capital gain asset that has been utilised by the individual taxpayer in the form of chief
residence requires to be allowed as an exemption from the tax liability under the capital gain taxation as
enumerated in s 118-110, ITAA 1997.
The legal principle laid down by the judgement delivered in the matter of Greig v Commissioner
of Taxation [2018] FCA 1084, in case a considerable amount of alterations we need towards a property
for the purpose of attaining excess returns in case of dispersion of the same in the form of sale will
required the same to be treated as business activity. The arrangement requires to be affected in a manner
that depicts business for being treated as a business income to be accrued from the same and treatment of
that income under ordinary earnings.
A few indicators has been provided in Taxation Ruling 97/11 for the purpose of determining
whether an activity can be classified as a business activity. These indicators can be enumerated as below.
• The commercial essence inculcated within the activity.
• The motive of carrying out business.
• Principal intention of generating profit.
• Activities carried out maintaining regularity.
• All the activities involved carried out in similar manner.
• Proper planning and organisation being maintained with respect to all the activities.
• An essence of permanency inculcated in all the ventures.
• No scope of categorisation of such activity as a hobby or as a sport.
Application
In the present scenario, the property in question has been brought into year 1982 in the month of
January by Bob. This contemplates the exclusion of the asset from being held assessable as capital asset.

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However, the taxpayer namely Joe has been awarded with the property on 23/5/2015. This can be
conceived as the inclusion of the asset under the CGT regime. But the property in question was being
utilised by Joe as his chief residence that requires it to be excluded from capital gain taxation as an
exemption. This is because proceeds from the sale of main residence is required to be given a treatment of
exemption from CGT.
On the other hand, listing the property in question in market for being generating a better proceed
need to be conceive does a profit making scheme. This requires the consideration of the probability of
including the activity of making a sale of that property in question as business venture. This can be
supported by the commercial nature and the profit motive lying behind the activity. But the taxpayer
never intended to carry out a business and has never maintain regularity in the venture undertaken. This
requires and exclusion of the transaction from being rendered as business activity. Again, the usage of the
property as main residence would render it to be included as an exemption with respect to capital gain
taxation for the taxpayer.
Conclusion
It can be concluded that the proceeds from the sale of the property needs to be treated as an
exemption from taxation with respect to the assessability for Joe.
Taxation Consequences for Amy
Issue
The concerned accruing from the instant scenario is whether Amy can be conceived to have any
tax incidence in relation to the mentioned transactions within the scenario.
Rule
The liability of capital gain tax is incident upon a taxpayer on compliance with two essentials.
The first essential being the involvement of certain capital asset. The capital asset is to have been

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purchased by the taxpayer on a date next to 20/9/1985. The second essential that requires presence for the
purpose of being rendered to have created for capital gain taxation liability is the existence of an event of
capital gain as provided for in s 104-5, ITAA 1997. A capital gain event is said to have occurred by the
disposal with respect to a capital asset in the way which resembles a sale or even a transfer needs
recognition as capital gain event. However, in case it has been conceived that the asset involved has been
acquired at a prior date to that of the prescribed one, is required to be excluded from being computed as a
capital gain asset as per s 104-10(5), ITAA 1997. The event of capital gain that involves sale as well as
transfer of an asset of capital origin that has been carried out by the institution of contract and the contract
has been instituted as for agreement is required to be categorised under the capital gain event A1.
The capital gain asset that has been utilised by the individual taxpayer in the form of chief
residence requires to be allowed as an exemption from the tax liability under the capital gain taxation as
enumerated in s 118-110, ITAA 1997.
The legal principle laid down by the judgement delivered in the matter of Greig v Commissioner
of Taxation [2018] FCA 1084, in case a considerable amount of alterations we need towards a property
for the purpose of attaining excess returns in case of dispersion of the same in the form of sale will
required the same to be treated as business activity. The arrangement requires to be affected in a manner
that depicts business for being treated as a business income to be accrued from the same and treatment of
that income under ordinary earnings.
A few indicators has been provided in Taxation Ruling 97/11 for the purpose of determining
whether an activity can be classified as a business activity. These indicators can be enumerated as below.
• The commercial essence inculcated within the activity.
• The motive of carrying out business.
• Principal intention of generating profit.

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• Activities carried out maintaining regularity.
• All the activities involved carried out in similar manner.
• Proper planning and organisation being maintained with respect to all the activities.
• An essence of permanency inculcated in all the ventures.
• No scope of categorisation of such activity as a hobby or as a sport.
Application
In the present scenario, the property in question has been brought into year 1982 in the month of
January by Bob. This contemplates the exclusion of the asset from being held assessable as capital asset.
However, the taxpayer namely Amy has been awarded with the property on 23/5/2015. This can be
conceived as the inclusion of the asset under the CGT regime. But the property in question was being
utilised by Joe as his chief residence that requires it to be excluded from capital gain taxation as an
exemption. This is because proceeds from the sale of main residence is required to be given a treatment of
exemption from CGT.
On the other hand, listing the property in question in market for being generating a better proceed
need to be conceive does a profit making scheme. This requires the consideration of the probability of
including the activity of making a sale of that property in question as business venture. This can be
supported by the commercial nature and the profit motive lying behind the activity. But the taxpayer
never intended to carry out a business and has never maintain regularity in the venture undertaken. This
requires and exclusion of the transaction from being rendered as business activity. Again, the usage of the
property as main residence would render it to be included as an exemption with respect to capital gain
taxation for the taxpayer.
Conclusion

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It can be concluded that the proceeds from the sale of the property needs to be treated as an
exemption from taxation with respect to the assessability for Joe.

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Reference
Statute
Tax Ruling 97/11
The Income Tax Assessment Act 1936 (Cth)
The Income Tax Assessment Act 1997 (Cth)
Cases
Adelaide Fruit and Produce Exchange Co Ltd v DFC of T [1932] 2 ATD 1
Allied Mills Industries Pty Ltd v Commissioner of Taxation [1989] FCA 135
FC of T v Rowe 97 ATC 4317
FC of T v Sydney Refractive Surgery Centre Pty Ltd 2008 ATC ¶20-081
Federal Wharf Co Ltd v DFC of T (1930) 44 CLR 24
Greig v Commissioner of Taxation [2018] FCA 1084
HR Sinclair & Son Pty Ltd v FC of T (1966) 114 CLR 537
Phillips v Federal Commissioner of Taxation [1947] HCA 50
Whitaker v FC of T 98 ATC 4285
Books and Journals
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016.
OUP Catalogue.