Taxation Law Assignment: Analysis of Taxation Issues in Australia

This taxation law assignment addresses two key problem-solving questions. The first question analyzes the tax implications for a company, Our Earth Pty Ltd, that received compensation for patent infringement, lost revenue, interest, and reimbursement of legal fees. The assignment examines whether these amounts are considered capital receipts or assessable income under Australian tax law, referencing relevant case law such as Glenboig Union Fireclay Co Ltd v IRC, Federal Wharf Co Ltd v FCT, and Californian Oil Products Ltd v FCT. The second question explores the tax consequences of subdividing and selling land, considering the application of sections 25(1) and 26(a) of the relevant legislation. The analysis considers capital gains tax and its impact on an individual taxpayer's income tax liability, including the treatment of net capital gains and losses. The assignment provides a detailed examination of each issue, applying relevant legislation and case law to reach conclusions regarding the tax treatment of each scenario.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................5
Conclusion:............................................................................................................................7
Answer to question 2:.................................................................................................................8
Issues:.....................................................................................................................................8
Laws:......................................................................................................................................8
Application:..........................................................................................................................11
Conclusion:..........................................................................................................................13
References:...............................................................................................................................14

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Answer to question 1:
Issues:
a. Will the taxpayer be held assessable for the amount of $300,000 received as the
damages for patent infringement?
b. Will the amount of $200,000 will be included into the taxable income of the taxpayer
in the form of lost revenue over the period of twelve months?
c. Is the interest that is received by the taxpayer will be considered taxable under the
ordinary meaning of section 6-5, ITAA 1997.
d. Whether the reimbursement of the legal expenditure incurred by the taxpayer amounts
to income under ordinary concept?
Rule:
Amounts that are received as the sterilisation of assets such as in the form of loss of
operation or use of the asset or some income generating capacity are generally treated as
capital. As held in the case of “Glenboig Union Fireclay Co Ltd v IRC (1921)” the house of
lords considered the compensation payment as the capital because it was received by the
taxpayer relating to the loss of capital asset or the usage of it (Graetz, 2013). This is because
of the fact that the amount that is received in the case was entirely based on the profits that
was foregone and was treated as immaterial.
Where the lump sum amount is received by the taxpayer as the compensation may
have both the income and capital and are usually not dissected into their actual components.
The high court in the case of “Federal Wharf Co Ltd v FCT” held that typical compensation
payment that are received by the business in the form of insurance payments, payments
received by the third party on failure to carry-out the contractual duties, payments received
for entering into the restrictive covenants and the loss relating to the loss of money are treated

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as income in nature (Mumford, 2017). Where it is noticed that the compensation payment
receipts that are received by business in the form of right to seek compensation or because of
the cause of action that are introduced by the business as the right for the underlying asset are
usually held as compensation receipts (McCluskey & Franzsen, 2017). On receiving an
amount as compensation for the damages then the amount will be included for assessment
purpose in relation to the legislative concept of “Division 6 of the ITAA 1997” or it will be
considered for assessment purpose as statutory income.
According to the explanation given under the “section 25 (1), ITAA 1997”
compensation payments that are made to the taxpayer provided the compensation amount that
is received in respect of the loss of income, especially for the profits or interest that is
associated to the previous year (Barkoczy, 2016). The verdict passed in the case of “Mc
Laurin v FC of T (1961)” stated that the compensation that was received by the taxpayer was
held as taxable under the legislation of “subsection 25 (1), ITAA 1936” up to the extent that
the payment was held identifiable and chargeable as income (Nichols & Rothstein, 2015).
Income is generally considered as the amount that is received on the regular basis
while the capital amount is generally related with the assets that are used to generate income
and tends to be received as the solitary or erratically (Buenker, 2018). Capital amounts may
be realised from the disposal of assets or compensation from the loss of the capital assets.
Usually, the amounts that is received in relation with the termination of contracts, or the
variation of contracts or of the commercial trading nature that is made in the ordinary
business course or treated as having the nature of income. These compensation amount are
treated as the loss of profits under the contract and generally takes the nature of income. The
amount is assumed to be paid as the substitution of lost income.

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The federal court in “Californian Oil Products Ltd v FCT (1934)” the amount for
compensation damages that is paid to cover the income loss in the ordinary business course
of the company then the amount will be treated as taxable earnings under the “section 6-5,
ITAA 1997” (Ciconte et al., 2016). The primary objective for treating the profit as income
because it was earned from performing the business activities despite it occurred due to the
unusual or extraordinary circumstances.
In an another judgement made by the law court in “CT (Vic) v Phillips (1936)” held
that on receiving any compensation for damages which is having connection with the
business loss or commercial structure and becomes the part of business activities then the
compensation should be held as loss of capital asset (Black, 2018). The law court in the case
of “FCT v Spedley Securities Ltd (1988)” the federal court held that the amount that was
received relates to the damaged caused to business goodwill. Therefore, the compensation
amount was held as injury to the capital asset.
On receiving any interest as the portion of compensation then the interest amount is
viewed as assessable income with in the judicial concept of “section 6-5, ITAA 1997”. The
judgement denoted in the case of “Whitaker v DFCT (1998)” held that the post-verdict
interest is characterised as income under the ordinary meaning of “section 6-5, ITAA 1997”
(Choudhary et al., 2016). Interest is regarded as the ordinary income when the amount is
received as the lost income compensation such that, had the plaintiff has not suffered damage,
he may have received the interest awarded. In addition to this, interest is also considered as
the ordinary income, given the post judgement interest is payable on the amount which is in
relation to the period based on which it is calculated becomes ascertainable and due.
Meanwhile, if the taxpayers are entitled to claim income tax deduction for the legal
expenditure under “section 8-1 of the ITAA 1997” then the payment or the award related to

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the legal expenditure must be included for assessment purpose as recovery within the
“subdivision 20-A” (Hunt et al., 2017). Legal expenses are paid to an individual or business
as to indemnify the receiver relating to the expense of lawsuit. The legal fees are not held as
ordinary income under the legislative provision of ordinary income rather it is held as the
taxable recoupment under the “subsection 20-20 (2)”.
Application:
The case facts of Our Earth Pty Ltd explains that the main activity of the company is
to make coffee cups that are bio-degradable and environmental friendly. The company holds
the patent for its design. However, it is noticed that Coffee Beans Pty Ltd allegedly stole the
design of the coffee cups and produced similar design coffee cups to the overseas customers
at a much cheaper price. In this manner this resulted the company to loss a significant amount
of revenue loss and also caused an eventual damage to the goodwill of the business. Upon
bringing the lawsuit against the Coffee Beans Pty Ltd, a compensation payment for causing
the damage or infringement to the patent was received by Our Earth Pty Ltd. The
compensation amount that was received was related to the right of getting compensation for
the infringement of patent design.
Whether or not the compensation amount that is received for damages to infringement
is held as ordinary income or capital receipts the judgement for such receipts is entirely
dependent on its character. With regard to the law court verdict in “CT (Vic) v Phillips
(1936)” the amount of $300,000 that is received as the compensation damages by Coffee
Beans Pty Ltd must be observed as loss to business or the basis of business activities (Miller
& Oats, 2016). Evidently, the sum of $300,000 constitutes the compensatory payment for
breaching the patent rights and triggering injury to capital asset. therefore, the compensation
damages that is received by the business should be regarded as capital receipts which is not
assessable as income.

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More specifically the decision of federal court in “FC of T v Spedley Securities Ltd
(1988)”, can be referred to the event of Our Earth Pty Ltd, it is understood that the amount of
$300,000 that is received for recompensing the injury to capital asset itself forms the
character of capital receipts (Sheffrin, 2018). Conclusively, the damages received amounting
to $300,000 should not be considered assessable within the judicial concept of income
because it is a receipts of capital in nature.
The case facts that is obtained later suggest that Coffee Beans Pty Ltd paid a sum of
$200,000 to Our Earth Pty Ltd in the form of revenue loss in the last twelve months. By
citing the judgment of federal court in “Californian Oil Products Ltd FCT (1934)” the
amount of $200,000 is an assessable income for Our Earth Pty Ltd (Jones & Rhoades-
Catanach, 2015). This is because the amount of $200,000 that is received amounts to loss of
revenue which carries the income characteristics. Therefore, the amount will be treated as
income based on the judicial conception of “section 6-5, of the ITAA 1997”.
Apart from the compensation an amount of $15,000 was received by Our Earth Pty
Ltd as interest. By referring to the case of “Whitaker v FCT (1998)” the post judgement
interest that is received by the Our Earth Pty Ltd is having the nature of interest which is
earned as ordinary income. In other words, the interest that is received by Our Earth Pty Ltd
is an income since it is associated to the compensation of lost earnings (Bond & Brown,
2017). The interest amount will be included for assessment purpose as the ordinary income
based on the legislative reference of “section 6-5, ITAA 1997”.
Beside the interest income a reimbursement of legal fees was received by Our Earth
Pty Ltd. The amount of legal fees that is paid to the Our Earth Pty Ltd is to compensate the
company as the successful party to incur the legal expenses. As a result, the legal expenses
that is reimbursed to Our Earth Pty Ltd must not be treated as ordinary income. Therefore, the

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reimbursement of legal expenditure constitutes payment that is assessable income as
recoupment of loss in terms of the legislative provision of “subdivision 20-A”.
Conclusion:
To conclude the above stated analysis it can be stated that the amount of $300,000
will not be treated as income because it is a capital receipt for causing damage to the patent or
in other words it amounts to injury to capital assets. Whereas the amount of $200,000 which
is received as recovery of business loss for over twelve months’ amounts to revenue receipts
which is treated as taxable income under the ordinary concept of “section 6-5, ITAA 1997”.
Consequently, the post judgement interest that is received by Our Earth Pty Ltd also amounts
to income under the meaning of “section 6-5, ITAA 1997”. While the reimbursement of the
legal expenditure is taxable under “subdivision 20-A” as recoupment of loss.

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Answer to question 2:
Issues:
The case study brings forward the issues associated to the tax consequences of
subdividing and selling the land either within the “section 25 (1)” or “section 26 (a)”.
Laws:
A gain that are characterised as capital is not treated as the subject of income tax
within the ordinary concepts. The capital gains tax began on 20 September 1985 and takes
into the account the capital receipts within the tax base. An individual taxpayer’s income tax
liability comprises of the net capital gains as well (Raritska, 2015). Eventually, the net
amount of capital gains is included into the assessable income of the taxpayer. liability to
impose capital gains tax originates when the taxpayer makes net capital gains or loss. To
ascertain whether the net capital gains or capital loss has been made by the taxpayer it is
necessary to understand that whether any CGT event has taken place or not. A taxpayer
usually makes the capital gains or loss if the CGT event happens under “section 102-20 of
the ITAA 1997”.
Under “section 104-10, ITAA 1997” CGT event takes place when the CGT asset is
sold by the taxpayer. It is noteworthy to denote that the capital gains tax is applicable on the
assets that are purchased or other types of events taking place on or after the 20 September
1985 (Schön, 2016). Accordingly, the word pre-CGT and post-CGT are the most frequently
used terms to refer the assets that are purchased or events that takes place prior to or
afterward that date. As a general rule, CGT functions prospectively and it is applicable only
if the CGT events takes place when the CGT asset is acquired on or following the 20
September 1985. For majority of the CGT events, there is also the exception if the CGT asset

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is purchased prior to 20 September 1985 (Brabazon, 2019). As a result, asset which is
purchased before the CGT is introduced is usually exempted from the capital gains tax.
As understood numerous instances suggest that the landowners have the chance of
subdividing and selling the land which they owned for a very long period of time. This
generally happens to the primary producers that own the land on the outskirts of urban
centres and housing development suggests that the best usage of land is for the purpose of
residential development instead of farming purpose (Morgan & Castelyn, 2018). There are
certain situations, where the taxpayer may engage themselves in substantial property
development with the objective of deriving large amount of profit. As a result of this, several
questions is introduced of how the profits may be characterised. This includes;
a. The subdividing and sale of land may be regarded as the simple realisation of the
capital asset.
b. The scale of development might be such that it amounts to performing the property
development business
c. The property development may be such that it goes beyond the simple realisation of
the land but may lack the appropriate requirements of performing the business and in
this the gains will be held as the profit making scheme (Gashenko et al., 2019).
Appropriately classifying the activities is considered very much important especially
where the land is considered as the pre-CGT asset or the taxpayers will be able to implement
the small business concession if they make the capital gains on the disposal of land. As it has
been defining under the “Taxation Determination TD 97/3” simply subdividing the land will
be not being held as the sale of land (Mitu & Stanciu, 2018). The ruling is helpful in
ascertaining whether profits derived from the isolated transaction are considered income and
henceforth taxable under the “subsection 25 (1) of the ITAA 1936”. Prior to being dependent

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on the detailed discussion, it is noteworthy to denote that it is essential to determine whether
the development of land is held as simple realisation (Sadiq, 2019). However, it is should be
noted that if the land is purchased for the purpose of deriving profit on resale or for land
development, they any gains or profits that is made from the sale as well as development of
land is considered taxable ordinary income.
Profits which arises as a result of carrying the business of profit making scheme in
respect of the property that are bought when the CGT regimes was not introduced are usually
termed as the Pre-CGT asset (Butler, 2019). The amounts that are derived from the sale of the
pre-CGT asset after making construction on the land then any assessable income derived
thereof will be included for assessment purpose within the regulation of “section 15-15,
ITAA 1997”. The capital improvements that are performed on the CGT asset will be
subjected to capital gains tax (Morgan et al., 2018). Meanwhile, if the taxpayer on purchasing
the land makes a substantial amount of capital improvements following the acquisition date
then the capital expenditure incurred is added into the cost base of asset for the purpose of
capital gains tax.
The decision made by the court in “Scottish Australian Mining Co Ltd v FCT
(1950)” held that the profits that were made from the disposal of numerous lots were taxable
under the “section 25 (1) of ITAA 1936”, as the income from performing the business of land
development or under the “section 26 (a)” as the profit from performing the profit-deriving
scheme (Liu, 2018). The court of law stated that the taxpayer carried out the extensive work
on the land so that it can fetch the best possible price.
In addition to this, the decision made in “FCT v Whitfords Beach Pty Ltd (1982)”
considered the issue of income and whether or not the subdivision and the sale of land
constituted income or capital or in nature (Robin, 2019). The taxpayer in this case was

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considered taxable for the profits made from the disposal of land under the “section 25 (1)”
as it has simply gone beyond to realize the capital asset and the activities of the taxpayer
indicated that he carried on the land development business.
Application:
The case facts obtained from the events suggest that Sam during the year 1984 in May
bought a farmland that costed $270,000 for performing the cattle breeding business. While in
February 1995 Sam bought a 20 acres of land adjoining to the previous farmland for
$110,000 to expand his operations. The taxpayer here Sam took the advice from real estate
agent and decided to pursue the subdivision of land. Sam following the rezoning of land
ultimately sold it for $1,100,000.
In order to ascertain the capital gains tax for Sam at first it is necessary to determine
whether the land constitute a pre-CGT or the post-CGT asset. At first Sam purchased the 80
acres’ land during the year 1984. As a result of this, the 80 acres’ land should be viewed as
the pre-CGT asset because the land was bought by Sam before the introduction of the capital
gains tax regimes. As the land is pre-CGT asset therefore any capital gains made thereon are
usually excluded or exempted from the CGT.
In the meanwhile, Sam also purchased a 20- acre land that is located adjacent to the
farm land that was bought previously. The land must be regarded as the post-CGT since it is
purchased following the establishment of capital gains tax systems. The sub-division began in
2017, and Sam ultimately sold the land during April 2018. As a result of this, the capital
gains that are made from the disposal of 20-acre land should be considered as taxable for
capital gains tax purpose and the land will be treated as post-CGT asset.
The evidences that is obtained from the case study suggest that the land development
performed by Sam was substantial in nature since it involved the intention of deriving profit.

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By citing the case of “Taxation Determination TD 97/3” it must be noted that to determine
whether the profits and gains that are derived from the disposal of subdivided land is ought to
be held as income and therefore taxable under the legislation of “subsection 25 (1), ITAA
1936” (Robin & Barkoczy, 2019). In order to engage in the detailed assessment, it is
noteworthy to denote that the property that was bought by Sam was not bought with the
purpose of resale for profit and the for land development purpose. The objective of making
profit arise in the late phase.
Talking about the decision that was made in “FCT v Scottish Australian Mining Co
Ltd (1950)” in the situation of Sam it is understood that taxpayer made a significant amount
of profit from the disposal of the sub-divided allotments (Sakurai & Braithwaite, 2019).
Consequently, Sam will be considered taxable relating to the capital gains that are made from
the 20 acres land. The gains will be taxable under the “section 25 (1) of ITAA 1936”, as the
income from performing the business of land development or under the “section 26 (a)” as
the profit from performing the profit-deriving scheme.
By referring to the “section 25 (1)” the profits that is made by Sam from selling the
20 acres’ land attracts tax liability and the will be considered as taxable capital gains. More
specifically the sale of subdivided land by Sam is necessarily not more than the mere
realisation of the asset simply because it is an enterprising manner of realizing the capital
asset for gaining the best advantage (Freudenberg et al., 2017). Citing the case of “FCT v
Whitfords Beach Pty Ltd (1982)” the profits that is made by Sam is assessable under the
legislation of “section 25 (1)” depending upon the fact that the taxpayer conducted business
that went beyond the mere realisation of the asset.

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Conclusion:
To conclude the above stated analysis it should be noted that the sale of 80-acre land
is give rise to the CGT event. However, the 80-acre land is a pre-CGT asset since the land
was bought by the taxpayer before the introduction of the CGT regimes. Therefore, no capital
gains tax will be implemented on the sale of land. Whereas, the sale of 20 acres is a post-
CGT asset because Sam purchased the land and indulged in the extensive development for
the purpose of deriving profit. The capital gains that are made by Sam upon subdividing the
land gives rise to the capital gains tax which will be considered taxable within the legislative
measures of “section 25 (1) of the ITAA 1936” as gains from the business of extensive land
development.

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