Taxation Law 3 Assignment: Revenue vs Capital Income, ITAA 1997

This taxation law assignment analyzes whether a lump-sum compensation received by Connect-IT, arising from a contract dissolution, constitutes taxable income under section 6-5 of the ITAA 1997. The assignment examines the nature of the compensation, differentiating between revenue and capital receipts, referencing key legal precedents such as *Allied Mills Industries Pty Ltd v F C of T* and *Californian Oil Products Ltd v F C of T*. It considers whether the compensation represents a payment for services, influencing its classification as either revenue or capital. The analysis concludes that the compensation received by Connect-IT will attract tax liability under section 6-5 of the ITAA 1997 as taxable revenue in terms of ordinary concept, and potentially attract tax liability under section 20-20 (2) as recoupment of loss.

Running head: TAXATION LAW
Taxation Law
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Name of the University
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Table of Contents
Answer to question 1:.................................................................................................................2
Reference List:...........................................................................................................................4

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Answer to question 1:
Issue:
This question takes into the account whether on receiving the lump sum compensation
arising out of the dissolution of contract will be accounted as reckonable taxable income
defined in section 6-5 of the ITAA 1997.
Legislations:
I. Allied Mills industries Pty ltd v F C of T
II. Californian Oil Products Ltd v F C of T
III. Section 20-20 (2)
IV. F C of T v Meeks (1915)
V. Section 6-5 of the ITAA 1997
Application:
As it has been explained in section 6-5 of the ITAA 1997, receiving of $7,500,000
compensation by Connect-IT will be treated as taxable revenue in relation to the ordinary
concepts. As it has been stated in the case of F C of T v Meeks (1915), any type of a
compensation that is received by an individual arising out of the business agreements made at
the time of carrying on of a commercial activity shall be treated as capital (Barkoczy 2016).
In order to understand that the compensation that was received by Connect IT possess the
characteristics of income or capital, it is obligatory to define whether the terminated
agreement has any form of connotation for the purpose of offering service that constituted the
component of profit deriving constituents.
As it has been observed from the present scenario of Connect IT, it is presumed that
the company may find an alternate client. Additionally, an argument can be put forward in

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relation to the present state that the termination of agreement with its client might create a
substantial impact on the business functions of Connect IT. Henceforth, the receipt of
compensation payment would be treated as revenue. However, if the service rendered by its
client constituted an important element than compensation that is received might not be
treated as capital in nature (Woellner et al. 2016).
The verdict of Californian Oil Products Ltd v F C of T has been cited in order to
support the point of view where it was found that a five-year agreement was made by the
assessee with an overseas oil firm and solely granted them the right of selling the oil products
in Australia. However, the international oil company terminated the contract and provided
compensation to the Californian oil firm for cessation of agreement (Blakelock and King
2017). The court concluded that the sum received as termination of business contract was
capital in nature.
In context of Connect-IT, it is assumed that even though it may find an alternate client
but the amount that is received represented revenue in nature. With reference to Allied Mills
industries Pty ltd v F C of T the receipt of $7,500,000 is viewed as lump sum imbursement
for settlement of claims (Robin 2017). Therefore, the sum received by Connect-IT will attract
tax liability in the form of recoupment of loss under section 20-20 (2).
Conclusion:
On arriving at the conclusion, the amount of compensation received by Connect-IT
will attract tax liability under section 6-5 of the ITAA 1997 as taxable revenue in terms of
ordinary concept.

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Reference List:
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), p.18.
ROBIN, H., 2017. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian
Taxation Law Select: Legislation and Commentary 2016. Oxford University Press.