Connect-IT on the tax treatment of the payments received from VicInvest for the year ending 30 June 2018, applying legislation and case law to support your answer.
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.
- Allied Mills industries Pty ltd v F C of T
- Californian Oil Products Ltd v F C of T
- F C of T v Meeks (1915)
- Section 6-5 of the ITAA 1997
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 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).
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.
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.