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Question 1

Our Earth Pty Ltd, an Australian owned company, are the manufacturers of a specially designed bio-degradable, disposable coffee cup made from sustainable materials.  They are currently the sole supplier to coffee shops in Australia.  During the year Our Earth Pty Ltd discovered that Coffee Bean Pty Ltd, the owner of a chain of coffee shops Australia wide, had been contracting an overseas company to manufacture a similar cup based on their design, for a cheaper price.  Coffee Bean Pty Ltd hadn’t informed its customers that it was not the original Australian made Our Earth product that they were using.  

As Our Earth Pty Ltd has a design patent over the cup they decided to take legal action against Coffee Bean Pty Ltd.  As a result of the action, the following amounts were payable by Coffee Bean Pty Ltd to Our Earth Pty Ltd in the year ended 30 June 2019:

$300,000 damages for design patent infringement$200,000 for expected lost revenue over the 12 month period that Coffee Bean Pty Ltd had been using the other product$15,000 interest received on the damages payout$40,000 reimbursement of legal fees incurred by Our Earth Pty Ltd

Required:

Advise Our Earth Pty Ltd of the taxation consequences of the above transactions .

Question 2

Sam purchased 80 acres of farmland in May 1984 for $270,000 on which he conducted a beef cattle breeding operation.  In February 1995 he purchased an additional 20 acres of adjoining farmland for $110,000 in order to expand his operation.  There was no house on the farmland so Sam lived in the nearby township. Due to ongoing drought conditions and Sam’s advancing age, he decided in 2017 to sell and retire from farming.  A local real estate agent valued the property at $440,000.  Given the time and effort Sam had put into the farm over the years he didn’t feel this was enough of a return on his investment. As the property was located close to town, the real estate suggested that Sam consider selling the land as a sub-division.  This would likely generate a higher return per acre than selling the property as farmland.

Sam re-zoned and received council approval for the sub-division in May 2017. Over the period from July 2017 to January 2018 Sam spent $450,000 on sub-division costs such as surveyor fees, electricity and water connections and main road access.  In April 2018 a local construction company agreed to buy the entire sub-division for $1,100,000.  Although the contract for sale was dated in April, settlement didn’t take place until July 2018.  Agent’s commission and legal fees payable by Sam amounted to $45,000.

Required:

Advise Sam of the taxation consequences of the above transactions .

Answer 1

Answer (1) (A) With regards to the receipt of the above-mentioned compensation, the compensation of $200,000 received for revenue loss and the interest of $15,000 received for the interest on the damages payout would be taxed as ordinary income.

The damages for design patent infringement of $300,000 and $40,000 for legal fees would be tax-exempt to the extent of actual damage assessed and fees incurred. Any portion above the assessed damage and over the actual legal fees incurred would be subject to taxation.

(B) The amounts were payable by coffee bean PVT LTD to one earth PVT LTD in the year anded 30 june 2019: $ 300,000 damages for revenue over the 12 month period that coffee bean PVT LTD had been using the other product $15,000 interested received on the damage $ 40,000 with regards to the receipt of the above-mentioned compensation of $200,000 received for the interest on the damages payout would be taxed as ordinary income The damages for design patent intringement

of $300,000 and $40,000 for legal fees would be tax-to the extent of actual changes assessed and fees income any option above the assessed damage and over the actual legal fees income would be sunject to taxation .