Tax Treatment of Lump Sum Payments: Accounting Principles and Analysis

This assignment explores the tax treatment of a lump sum payment received by Connect IT, analyzing whether it constitutes taxable income under Section 6-5 of the ITAA 1997. The analysis considers relevant case law, including F C of T v Meeks (1915), Californian Oil Products Ltd v. FC of T (1934), and Allied Mills Industries Pty Ltd v. FC of T (1989), to determine the nature of the payment. The assignment evaluates the context of the agreement's cessation, the impact on Connect IT's business operations, and the potential for alternative business clients. It concludes that, based on the provided information and the application of relevant legal precedents, the compensation received by Connect-IT is considered income and is therefore taxable. The assignment provides a comprehensive overview of the issues, legislations and application of the law.

Running head: BACHELORS OF ACCOUNTING
Bachelors of Accounting
Name of the Student
Name of the University
Authors Note
Course ID

1BACHELORS OF ACCOUNTING
Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.........................................................................................................................................2
Legislations:...............................................................................................................................2
Conclusion:................................................................................................................................3
Reference List:...........................................................................................................................4

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Answer to question 1:
Issues:
The issue is associated for the ascertainment of tax treatment for the receipt lump sum
amount upon the cessation of deal or agreement is chargeable income in respect of Section 6-
5 of the ITAA 1997 (Coleman and Sadiq 2013).
Legislations:
a. Section 6-5 of the ITAA 1997
b. section 20-20 (2)
c. F C of T v Meeks (1915)
d. Allied Mills Industries Pty Ltd v. FC of T (1989)
e. Californian Oil Products Ltd v. FC of T (1934)
Application:
As defined under Section 6-5 of the ITAA 1997 amount that has been received by Vic
Invest of $7,500,000 for Connect IT will be regarded as income and will be taxable (Kenny
2013). Citing the reference of F C of T (NSW) v Meeks (1915), sum that is derived or
received for the termination of trade or commercial deals that has been prepared at the time of
performing of the business activities will be considered as income. To ascertain whether the
receipt of compensation by Connect-IT is possessing the nature of income or capital it is
necessary to understand whether the ceased agreement is having an association for rendering
service and formed the portion of revenue deriving arrangement.
As evident from the contemporary state of affairs, Connect-IT will be able to find out
an alternative business clients and an assertion can be bought forward that the contract will

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not be considerably produce an influence on the profitability of the company. The contract do
not influence based on the fixed framework in terms of which Connect-IT performed its
corporate activities and the receiving of reimbursement would be accounted as revenue.
However, of the service rendered by Vic Invest constituted a serious share of their corporate
functions, it can be contended that the receiving of payment would constitute capital in
nature. Citing the reference of Californian Oil Products Ltd v. FC of T (1934) the judgement
passed in this case supported the viewpoint (Krever 2013). From the case study, it is
understood that the taxpayer entered in a five-year agreement with an intercontinental oil
firm, which allocated them with the solitary right of distributing the products in Australia.
Afterwards, the international firm wanted to cease the contract and paid Californian oil firm
with a sum as the compensation for the cessation of agreement. The court judgement stated
that the amount received as compensation for termination of contract was capital in nature.
As a result of this, it is necessary to ascertain the vitality of the agreement for
Connect-IT. Even if it is supposed that Connect-IT would be able to find alternative
appointments with another client however, it can be regarded that the sum received was of
revenue account. As held in the case of Allied Mills Industries Pty Ltd v. Federal
Commissioner of Taxation (1989) receipt of $7,500,000 represents un-dissected lump sum
payment for the settling the claims (Morgan, Mortimer and Pinto 2013). Concerning the
judgement, these sums would be assessable for Connect-IT as recoupment of loss under
section 20-20 (2).
Conclusion:
In compliance with the Section 6-5 of the ITAA 1997, compensation received by
Connect-IT is regarded as income and will be held taxable in terms of the ordinary concepts.

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Reference List:
Coleman, C. and Sadiq, K. (n.d.). 2013 Principles of taxation law.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. and Pinto, D. (2013). A practical introduction to Australian
taxation law. North Ryde [N.S.W.]: CCH Australia.