Taxation Laws For The Modern Industries: Case Study Analysis

Part A

Describe about the Taxation Laws for The Modern Industries .

The modern industries are dependent on each organisation for its external and internal market forces. This enables the manufacturer to produce goods and services in order to generate profit for economic development of a nation. Industries are in need of auxiliary and subsidiary firms to procure raw materials in order to produce their final product in the market. It is worth mentioning that the organisations work with the external and internal subsidiaries based on verbal and written contract by abiding with the rules and regulations of the company. Each organisations dealing in goods and services abide by the legal contract as on the event of any problems parties to the contract can negotiate with the terms and conditions in the court of law[1].

The current case study falls under the Taxation ruling TR 95/35 for treatment of compensatory receipts, as the parties to the contract Fast water Ltd and Neptune Ltd are the manufacturing companies. Fast water Ltd is the manufacturer of the speedboats whereas; Neptune is the supplier and manufacturer of engine and boat parts. Both companies entered into the contract for a term of ten years to supply the engine and boat parts. However, after few years of contract, Fast water Ltd cancelled the contract due to poor economic and market conditions. This lead Neptune Ltd to suffer monetary loss for non-performance of contract and subsequently filed a case against Fast water Ltd in the court of law[2].

Fast water Ltd formed a contract with the Neptune Ltd for supply of boat parts and engine with for a period of ten years. It was assumed with Neptune Ltd that it would account for 30% of sales to Fast water Ltd. However, with the change in the market environment and increased competitions Fast water decided lower the cost of manufacture of engine supplies thus, this lead to reduction in cost of production. The company incurred an expense of $1,500,000 so that it can invest in wide range of smooth and efficient running engines particularly one being Aqua blast. Inventing in such type of engines would be cost effective and also account for 40% of the sales.

As stated under “Section 5 of the Contract Law” that any parties involved in any such agreement of supply of goods and service may enter the contract with the objective of performing trading activities within the geographical boundaries of country, which is enforceable in the court of laws [3]. If an amount of compensation is received by taxpayer is in accordance with the disposal of business contract than the amount received for would not  be considered for any tax consequences.

Part B

The companies in this case study entered into the contract with the contractual intentions to manifest their intentions in conformity with the legal relations to form an agreement under the “expressed terms”. Such terms are legally enforceable in the court of law forming a part of agreement under the contract law in order to abide by the rules of the contract law. If the amount of compensation received in regard to the permanent damages suffered, such amount represents recoupment of all parts of total acquisition cost of assets. Section 160 ZB (1) provides that compensation received from any wrong doing by an individual for his profession and business is exempted under the capital gains tax.

Fast water Ltd when discovered that that they no longer need engines and boat parts from Neptune Ltd decided to prematurely end the contract leading to monetary loss for Neptune Ltd. Fast water premature end to “Non-performance of Specific Contract” is “Breach of Statutory duties”. In addition to this, Fast water did not notify Neptune Ltd regarding the termination of contract, which led Neptune Ltd to bring lawsuit against the company for non-performance of contract, which led to monetary loss. The court ruled Fast water guilty for non-performance of contract under the “Law of Tort” for its tortuous act leading to civil wrongdoing for causing someone to suffer monetary loss and harm. The court penalised Neptune for tortuous act and order to pay the compensatory loss of $800,000 to Neptune Ltd. The court ruled such “claims for damages on non-performance of specific contract” would be paid in two instalments[4].  

Fast water Ltd on the other hand in the accounting year of 2016-17 also incurred expenses of 1,500,000 in the form of capital expenditure for the development of fuel-efficient engines to reduce the cost of manufacturing. However, the expenses incurred will not be included in the tax schedule of the company as because such an investment does not constitute any income or gains for the company. However, income derived because of sale of such components will constitute as an income under the sale of goods and service tax from the revenue derived. The company was anticipating that the new product would represent 40% of the sales and thus considerable amount invested by the company can be realised on sale of engines and parts of boat. Hence, it must be noted that 40% of the $1,500,000 will be considered for tax if the anticipation about sales comes true. However, the organisation prematurely ended the contract with Neptune Ltd leading to monetary loss. “Section 766 of the Federal Laws” states the Price water was negligent in discharge of their duties which lead Fast water to file the lawsuit for their negligent act under article “101 and 102 of the Law of Tort”.

Taxes on personal injury awards

As it was held in case of “Derry v Peek (1889) that the action of the parties to the contract were of tortuous intentions and it is enforceable in the court of law”. Thus, Fast water had to pay the compensatory amount within the stipulated period. Fast water also incurred an expense of $75,000 in the form of legal fees to fight for the lawsuit brought against them. The total amount of expenses incurred by the Fast water Ltd amounted to 875,000 and this amount is liable to be taxed under “ITAA 1997”. To be more precise, Fast water Ltd has to face the legal consequences for “Breach of Contract” with Neptune Ltd as both the companies are governed under the contract law and such law is administered by the common law for consumer protection. The contract consists of the contractual agreement formed with the objective of performing commercial trade under the “expressed terms” of mutual agreement. The case study however highlights the fraudulent “representations and misrepresentations” for damages arising out of economic loss. The scope and content of the contract is mentioned in the legal agreement of the contract formed by both the parties where time and other specifications is clearly stated.

The “tort of deceit” for inducement under the contract is similar to the “Misrepresentation Act 1967”[5]. Any non-performance of obligations will attract legal proceedings and any such actions are purported to be settled either through court or outside the court. The performance involved in this contract need to be sufficiently monitored from time after time and prior to the termination of contract in order to ensure that all the specifications are properly met. However, it should be noted that the contract law also provides remedies for breach of contract amid two parties and declares awards and settlements to protect the interest of the parties involved or affected. As stated under the “Stiles v. White (1946)” claim for damages can be claimed by employing majority rule for out of the pocket damages”. “Under the ITAA 1997” any compensation received or paid shall be liable to be exempted and compensation paid by Fastwater Ltd will be treated as exemptions from “net taxable income” under “ITAA 1936”

Tax consequences:

Particulars	Principle Value
Capital expenditure	1500000
Compensation received	800000
Add: Legal fees cost	75000
	700000
Net capital loss	625000

Note:

The loss suffered will be not be carried forward and hence such loss cannot be set off from any ordinary income.

The loss suffered is exempted under the ITAA 1997 since such losses arise from the personal injury.

Under the case study Neptune Ltd who is the supplier of the engines and boat parts to Fastwater anticipated that the contract formed with the Fastwater Ltd would account for 30% of its engine sales. However, on the event of premature end of end to the contract the Neptune Ltd had to suffer loss for its “Tortuous Act” since it manufactured its product in accordance with the demand from Fastwater Ltd [6]. The extra amount of produce would remain idle resulting in damage because of premature end to contract constituting “breach of contract”. As stated under “Misrepresentation Act 1967” the contract formed had a binding period of ten years and abruptly ending of contract would affect the profitability scenario of Neptune Ltd [7].

The nominal value of compensation to be paid to Neptune is computed over the original period of the contract. The compensatory amount received from Fast water to Neptune Ltd on the orders received from the court would be considered as an ordinary income for the company. Under the given study, Neptune sued Fast water for causing personal injury and the damages received in the form of compensatory claim because of business loss is not included in the income. The money received from Fast water Ltd will not be taxed. It should be noted that the money received as a compensatory claim is not taxable irrespective of the amount received whether in lump sum or in instalments.

As stated under “Rule 2 of the ITAA 1997” if the defendant’s wrongful acts does not create an impact on the incidence of tax which is subjected to remoteness, the altered incidence of taxation is important in the assessment of damages. The rule states that such incidents may provide a ground of reduction, as the lost income would have been taxed for the Neptune Ltd however damages received would not be taxed under the rule. For instance, when an award made for damages includes compensation because of loss, which could have been taxable however, the damages received is not taxable. Such damages should be calculated because of net loss of income after an allowance for tax has been made which could have been paid. As it was stated in the case of “Cullen v Trappell” under “ITAA 1997” reflects the incidence of income tax which the plaintiff would have earned was pertinent on the event of assessment of damages on account of loss earning capacity and had the effect of plummeting those damages arising from loss [8]. As mentioned in this case study, even though the loss was compensated on the ground of loss of income for Neptune Ltd however, it was treated as loss earning capacity.

“Rule 3 of the ITAA 1997” states that in order to assess whether the conduct of Fast water Ltd had the effect on the plaintiff liability of tax, it is compulsory to work out what the tax plaintiff would have paid but for defendant conduct what amount of damages should be paid on account of non-performance of contract. As the complexity involved in the provision of tax is difficult to operate on the tax environment in which they operate.

The current case study involves certain number of concessions and numerous advantages pertaining to the value of capital gains rather than treating it as an ordinary income. Under the current case study Neptune Ltd is small business with active assets, the capital gains arising out of any business losses is reduced by substantial discount at the time of working out net capital gains. Alternatively it should be noted that tax court have suggested that different rule may apply to during the settlement of acquired legal claim. As stated in the “Nahey v. Comm’r 196 F.3d 866” the taxpayer in this case acquired all the assets of the corporation on account of breach of contract relating to the installation of the new computer machine [9].

Hence, the damages or compensation received from Fastwater Ltd may arguably constitute, as an income because it involves periodic payments and does not comprises of payment in lump sum. Compensation because of loss of earning capacity may constitute as an income if the payment is considered as periodic and it is subjected to be a supplement to the payee’s income. Where the receipt is lump sum consisting of non-liquidated damages it can be advantageous for the Neptune Ltd to determine the tax considerations while making a payment for the accounting year of 2016-17[10]. Thus, the compensatory amount received by Neptune Ltd does not constitute any tax liability as it is a compensatory gains suffered on account of non-performance of contract. 

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