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BLO2206: Tax Law & Practice Assignment Question 1: a) As a result of Joanne receiving $5000 for the cancellation of one of her employment contracts, it is deemed to be ordinary assessable income. The reason that it is ordinary assessable income, is because the payment was for income that Joanne had lost, upon one of her contracts being cancelled. Furthermore, since Joanne also had another employment contract in which she was receiving income, she relied upon those payments to base her lifestyle. In other words, the compensation payment covered the amount that Joanne was going to receive throughout the six month period, even if one of her contracts was not cancelled. The compensation payment of $5000 was convertible into cash, which further emphasizes the fact that the payment is assessable income, under the ordinary usage of the word. The only time that the compensation payment would not be ordinary assessable income, is under Section 26(e) of the 1936 act, as stated by the master tax guide (2001,p.347) . However, the tax commissioner would not accept the compensation payment being ordinary income, where the entitlements are placed into a lump sum which will be described as compensation for lost earning capacity, which is also outlined in the master tax guide (2001, pp.348-349) . In this case, it would be classified as a capital receipt and not ordinary assessable income. According to the Core tax legislation (2001,p.175) , Section 6.5 of the 1997 act, classifies compensation payments as a result of a contract being cancelled, as being ordinary assessable income. However, this particular section does not go into any real detail of defining the term Ordinary Income. Instead, the common law provides grounds as to what falls under the Ordinary Income definition, which is; ‘The word income is not a term of art, and hat forms of receipt are comprehended within it…. must be determined in accordance with the ordinary concepts and usages of mankind’. This definition was generated from Jordan CJ, who presided over the case of Scott v Commissioner of Tax (NSW) (1935) 35 SR 215 at 219, as stated by Kobetsky, Dirkis and O’connell (2001,p.64) . An example of a case which supports the $5000 compensation payment that Joanne received as being ordinary assessable income is Californian Oil Products.ltd v FCT (1934) 52 CLR 28 (3 ATD 10), which is outlined by Kobetsky et.al (2001,p.176). It involved a case where the company was appointed to act as an exclusive agent over a 5 year period for selling a particular brand of petroleum products in NSW. It was agreed that the company would not sell a competitor’s petroleum products. The contract was cancelled during its first year, and as a result, the company received compensation in ten half-yearly installments. Therefore, the commissioner argued that the compensation payments received were ordinary assessable income. The High Court ruled that the payment was a capital receipt on the grounds that the business was terminated. However, Kobetsky et.al (2001,p.176) highlights that their honours rejected this and ruled that the compensation payments as ordinary assessable income, which ultimately agrees with the fact that the compensation payment received by Joanne is indeed ordinary assessable income. b) Given that Peter was a dairy farmer, the distinction between a capital receipt and ordinary assessable income is related to the effect of the structure of the business and that which is part of the product of the structure of the business. According to Sections 70-75 and 70-110 of the 1997 act as discussed in the core tax legislation (2001,p.397 & 400) , this transaction is deemed to be a capital receipt because the bamboo is not part of the trading stock of the business and the bamboo was removed outside the ordinary course of Peter’s dairy farm business. Therefore, since the facts state that Peter accepted $200 for every truckload of bamboo that was removed, it is a capital receipt. This scenario is related to the difference between a fruit tree and the fruit of the tree. The fruit tree is known as the structure of the business, while the fruit of the tree is the product of that business structure. This means that the bamboo is a product of Peter’s dairy farm business structure. Even though the information largely suggests that it is a capital receipt, further information is needed because it must be known as to whether Peter relied upon the bamboo as a source of earning income under Section 70-10 of the 1997 act, despite the definition not including whether a specific part of farmland is trading stock and therefore, being ordinary assessable income. It also must be known that if Peter received the $200 for every truckload of bamboo removed was in the nature of regular and recurrent payments. In other words, if the payments received came on a periodical basis. However, under Section 6-5 of the 1997 act, it states that if Peter had an expectation of payment, then it is likely to be assessable income.
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