Taxation Law: Analysis of Connect-IT Scenario and Tax Implications

This report provides an analysis of a taxation law case study involving Connect-IT, focusing on the tax implications of a business contract termination. The report delves into the key issue of whether the compensation received by Connect-IT for the cessation of a business contract is considered assessable income under Section 6-5 of the ITAA 1997. It references relevant legal precedents, including Allied Mills Pty Ltd v FC of T, F C of T v Meeks, and Californian oil products ltd v FC of T, to support its arguments. The analysis examines the nature of the compensation, determining whether it constitutes revenue or capital, and considers the relationship between the compensation and the services provided. The report concludes that Connect-IT is liable to pay tax on the received amount, as it is considered revenue under the ordinary concept of income, and includes a list of references for further reading.

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 Scenario 1:................................................................................................................2
Issue:..........................................................................................................................................2
Laws:..........................................................................................................................................2
Applications:..............................................................................................................................2
Conclusion:................................................................................................................................4
References..................................................................................................................................5

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Answer to Scenario 1:
Issue:
The existent circumstances of Connect-IT brings forward the matter that whether
revering of large amount as the compensation for cessation of the business contract will be
counted as assessable income in conformity with the Section 6-5 of the ITAA 1997.
Laws:
a. Allied Mills Pty Ltd v FC of T
b. Section 20-20 (2)
c. F C of T v Meeks (1915)
d. Californian oil products ltd v FC of T
e. Section 6-5- of ITAA 1997
Applications:
Taking account of the guidelines laid down under section 6-5 of the ITAA 1997 the
amount of 7,500,000 by Connect-IT from its client will be accounted as revenue that is
assessable since it is associated to ordinary concepts. Citing the evidence from FC of T v
Meeks (1915), compensation that is received from the business agreement that is made in
process of carrying business functions of commercial type then it will be treated as capital1. It
is noteworthy to denote that the compensation that is received from its client for Connect-IT,
the amount carry the feature of income. It is vital in context of connect –IT to outline whether
the amount that is received from the cessation of contract has any kind of relation with the
service offered and this forms the major element of profit yielding aspect.
1 Kenny P, Australian Tax 2013 (LexisNexis Butterworths 2013)

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It is evidently understood that Connect-IT might alternatively find a client and an
argument that can be introduced here is that termination of contract may not substantially
lead to an impact on the business. Nevertheless, if the service that is rendered was the
substantial element than the receipt of compensation would not have been treated as capital2.
As clearly stated in the case of Californian oil products ltd v FC of T to support the
situation it was noticed that a five year deal was fixed with the international oil company to
supply the product throughout Australia3. Conversely, the international company abruptly
ended the contract and paid Californian Company with the compensation. The federal court
passed its judgement that the amount carried the nature of capital.
As evident in the existent situation of Connect-IT, it is presumed that the company
might discover a new client however; the compensation carried the nature of revenue.
Considering the decision of Allied Mills Pty Ltd v FC of T the amount that is received by
Connect-IT is regarded as compensation for end of contract4. It is worth mentioning that the
Connect-IT would be held liable to pay tax for the sum received relating to the recovery of
loss under section 20-20 (2).
2 Krever R, Australian Taxation Law Cases 2013 (Thomson Reuters 2013)
3 Morgan A, Mortimer C and Pinto D, A Practical Introduction To Australian Taxation
Law (CCH Australia 2013)
4 Woellner R, Australian Taxation Law 2012 (CCH Australia 2013)

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Conclusion:
It can be concluded that the Connect-IT would be accountable to pay tax since the
amount that was received by it carried the nature of revenue and falls under the ordinary
concept of income.

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References
Kenny P, Australian Tax 2013 (LexisNexis Butterworths 2013)
Krever R, Australian Taxation Law Cases 2013 (Thomson Reuters 2013)
Morgan A, Mortimer C and Pinto D, A Practical Introduction To Australian Taxation
Law (CCH Australia 2013)
Woellner R, Australian Taxation Law 2012 (CCH Australia 2013)