Assessment for Taxation Law - Assignment Example

A lump sum is subjected to tax on the extent to which it is quantifiable and identifiable as representing reimbursement of income loss. In this case, we shall analyze cases related to this scenario, and try to relate the extent to which the damage that was paid to Nutra Tech Pty Ltd is assessable for tax purpose. Cases and judgments In McLaurin v FCT, the court resolved a case that involved payment of lump sum amount, paid as damages caused by a bush fire on the taxpayers grazing property. 1 This lump sum was a collection of particular items of damage, which were not clearly disclosed to the taxpayer.

The court ruled that the distribution was in order after analyzing the details of the case. The decision in this case supported dissection of a payment into several heads and classify some as income and others as non-income, given that the payments is in relation to separate claims, some of which must be liquidated (Nethercott, Devos, & Richardson, 2010). In Van den Berghs Ltd v Clark,2 the judge distinguished capital from income through two tests. One test aimed at establishing whether the contract was part of a fixed framework, that the capital belonged.

The other test was to establish whether the contract was purely supplementary to profit-making or a crucial part of the process itself. In this case, the taxpayer entered a contract with a Dutch company, but the contract was terminated and Van den Berghs paid ?450,000 as damages for cancellation of the agreement. The judges held that this amount was capital in nature, since Van den Berghs gave up its right under the agreement. In addition, it was argued that the agreement which was canceled was not commercial in nature, but only affected the manner in which profit-making activities were run.

Furthermore, examination of the company’s circumstances exposed that the contract stood for the permanent framework that Van den Berghs run its trade (Nethercott, Devos, & Richardson, 2010). The case of Californian Oil Products (In Lia) v FC is also related to capital and revenue income. The case was concerned with a taxpayer, who entered into an agreement with a foreign company, which accorded it rights to dispense its oil products in Australia. 3As a result, the oil company terminated the contract and compensated California Oil for the termination.

The court ruled that the amount paid as damages for termination of the contract involved ditching a fundamental sole business; hence, the compensation was of a capital nature. In FC of T v CSR, it was decided that capital gain tax provisions, were applicable if the taxpayer obtained a lump sum in exchange of damages for breach of contract. In regard to Income Tax Assessment Act, 118-20, which is related to CGT taxing powers relationships to the rest of the provisions, the capital gain would be reduced if the amount was assessable income, as stipulated in sections 20-25(4) (CCH Australia Limited, 2009).

Application of the cases To establish whether the damage received by Nutra Tech Pty Ltd is of capital or income nature, it is important to consider whether the terminated agreement, which was related to consultancy services, was associated to its profit-making activities. If Nutra Tech Pty Ltd could be able to obtain another contract to replace the terminated one, then it can be held that the agreement did not obstruct Nutra Tech Pty Ltd’s profit-making act