TAXATION Law Assignment - Income Tax Analysis and Case Study

This TAXATION law assignment analyzes whether a lump sum received on contract termination is taxable income under Section 6-5 of the ITAA 1997. The assignment examines the issue, relevant legislation (including cases like F C of T (NSW) v Meeks and Californian Oil Products Ltd), and application to the scenario of Connect-IT receiving $7,500,000 in compensation. It considers whether the compensation is revenue or capital in nature, focusing on the contract's impact on Connect-IT's profit-making structure. The analysis concludes that the compensation is likely taxable income, referencing cases like Allied Mills Industries Pty Ltd and Allsop v FC of T. The assignment provides a detailed legal analysis and cites several relevant sources for further study.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Reference List:...........................................................................................................................4

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Answer to question 1:
Issue:
The current is concerned with the determination whether or not lump sum received on
termination of contract is a taxable income under Section 6-5 of the ITAA 1997.
Legislations:
a. Section 6-5 of the ITAA 1997
b. F C of T (NSW) v Meeks (1915) 19 CLR 568
c. Californian Oil Products Ltd (in liq) v. Federal Commissioner of Taxation (1934)
d. Allsop v FC of T (1965)
e. Allied Mills Industries Pty Ltd v. Federal Commissioner of Taxation (1989)
f. section 20-20 (2)
Application:
The amount of $7,500,000 in the form of compensation received by Connect – IT may
constitute as income and will held taxable as income as per the ordinary concepts of Section
6-5 of the ITAA 1997. As a held in the case of F C of T (NSW) v Meeks (1915)1 sum
received in association with the cessation or deviation of deal or other forms of business
contract that is made in the due course of performing on of a trade that are in the nature of
income. As a rule, to decide whether the sum of compensation received by Connect-IT is of
income or capital in nature it is vital to understand whether the annulled contract is linked to
the purpose of providing service and formed the part of the profit making structure.
1 Barkoczy, Stephen. "Foundations of Taxation Law 2016." OUP Catalogue(2016).

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In the present case, Connect-IT may find an alternative service provider and it can be
argued that the agreement would not however substantially affect the Connect-IT income
making composition. The contract did not create an impact on the permanent composition
under which Connect-IT executed its business activities and the amount of compensation
received would be of revenue in nature. However, if the service provided formed the
significant fraction of their commercial operations, an argument can be put forward that the
compensation was capital. As held in the case of Californian Oil Products Ltd (in liq) v.
Federal Commissioner of Taxation (1934) 52 CLR 28; (1934) the decision passed supported
the view2. As evident the assessee entered into the agreement of five-year with international
oil company that provided them only right of distributing the oil merchandise in Australia.
Afterwards, the foreign company sought after to end the agreement and compensated
Californian oil with a sum in the form of compensation for the cessation of deal. The court
passed its verdict by stating that the sum received as reimbursement for rescission of the
contract was capital in nature.
Consequently, it is vital to determine that the vitality of contract was to Connect-IT.
Although it is assumed that Connect-IT would be able to discover an alternative
arrangements with another clients and can be considered that compensation received was of
revenue account3.
2 Woellner, R. H., et al. Australian Taxation Law Select: Legislation and Commentary 2016.
Oxford University Press, 2016.
3 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.

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Citing the reference of Allied Mills Industries Pty Ltd v. Federal Commissioner of
Taxation (1989) the amount of $7,500,000 paid constitute an un-dissected lump sum
payment as an arrangement for the settlement of the claims. Pursuing the decision in Allsop v
FC of T (1965) these amounts therefore be assessable in the form of recoupment of a loss
under section 20-20 (2)4.
Conclusion:
The sum of compensation received by Connect – IT constitute as income and will be
held taxable as an income as per the ordinary concepts of Section 6-5 of the ITAA 1997.
4 ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.

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Reference List:
Barkoczy, Stephen. "Foundations of Taxation Law 2016." OUP Catalogue(2016).
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
ROBIN, H. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press, 2017.
Woellner, R. H., et al. Australian Taxation Law Select: Legislation and Commentary 2016.
Oxford University Press, 2016.