Contract Cancellations Trigger Taxes

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Contract Cancellations Trigger Taxes

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Contract Cancellations Trigger Taxes

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Question:
Discuss about the Contract Cancellations Trigger Taxes.

Answer:
Introduction:

In order to ascertain the taxability of an individual, it is essential to determine his source of income so that it can be decided whether such income is associated with a business affair or not. Besides, if such income source is associated with a business affair, it must have been carried out for making profits (Barcokzy, 2010).
After evaluating the given case, it can be summarized that Anna Wanderlust being a tax lawyer have indulged in online blogging activities wherein she can share her experiences about traveling. For such purpose, she has also posted about her accommodation at various hotels and has reviewed them as well based on their hospitality and other services. However, in relation to various tax rules and regulations, for an activity to be regarded as a business affair, several points must be taken into account. Furthermore, in the Evans case law, it was pointed out that one particular point could not solely determine the truthfulness of a business affair. Since the major business of Anna was performing lawyer services and not blogging, the profits attained from such affair must be carefully evaluated (Nethercott et. al, 2013). In relation to this, the following perspectives can play a vital role:
Even though the business affair has not interrelation with any economic activity, yet it can be regarded the same because it is carried out on a regular basis. This means that payment for the same is also received consistently that makes it an economic activity. Further, it may be presumed that a company that pays a prescribed amount for advertising different places has hired the blogger. This means that payments to the blogger for advertisement are primarily promotion expenses incurred by such company. Besides, it must also be taken into consideration that the blogger has been consistent in providing reviews and thereafter, received economic benefits for the same (Fullerton et. al, 2017). Thus, such income relates to an economic activity and is taxable in the bloggers’ hand. Besides, if the provision of online reviews through blogs has been done for any other motive apart from earning a significant amount of profits, it will be disregarded from the computation of taxable income.
In relation to the determination of economical affair, it must be evaluated whether the business has been conducted for earning profits or not. Besides, in the given case, Anna being a tax lawyer has earned a significant amount of profits from her blogging work that is a hobby for her. However, when it comes to determination of an economical affair, it cannot be disregarded that such significant profit figures obtained by Anna cannot be included in computing her total income (Sadiq et.al, 2017). On a whole, it is very clear that any business affair that provides significant profits to the individual must be considered a taxable activity.
Recurrence of the affair
Any affair can be regarded as an economic or business affair if there is recurrence in it. Moreover, it can be clearly seen in the case of Anna that being a tax lawyer by profession, she started blogging about various accommodations where she visited. Besides, such blogging activity occurred on a repetitive basis and that had assisted Anna in attaining a significant amount of profits. Hence, this is clear that such activity was incurring on a regular basis and it fetched huge profits to Anna. Further, by offering reviews about various places, Anna obtained an opportunity wherein she could not only earn advertising fees but also obtain other advantages in kind such as free leisure accommodation, etc. Nevertheless, by considering all these situations into consideration, it can be concluded that the activity undertaken by Anna is primarily a business activity that has been undertaken for the sole purpose of attaining profits ((Renton, 2005). Besides, carrying of such activity has been recurring in nature that sheds light on the fact that the income earned by Anna from her blogging activities is taxable. As per the case law of Stone (2005) an old policewoman was an athlete and received many payments in terms of cash prizes, sponsorships, grants, etc. When it came to the point of return she included only the police salary and not the receipts from the sporting business. The High court held that all the receipts were assessable because it is of a continuous nature.
‘La Leche’ had offered a contract to Anna under a condition that Anna would take relevant steps to advertise its baby product. Nevertheless, in this agreement, it can be seen that there are no fraudulent intentions of both parties as it purely looks like a valid and simple contract. However, in the upcoming tenure, the product manufactured by ‘La Leche’ had to be terminated, as it comprised of restricted contents. As a result, the company did not pay the amount that was agreed to be paid to Anna and instead, she was provided with a mere compensation of $7200 owing to the contract’s termination. Therefore, in relation to the given case, the prime consideration will be the amount of $7200 attained by Anna owing to the termination of the agreement. Moreover, it is important to know that the service provider is under an obligation to deduct some amount after the termination of the agreement and that is taxable because it constitutes a business income (Kobestky, 2005). In other words, from the arrival of terms of the agreement to its termination, all occurred during the normal course of business and therefore, it must be regarded as a business activity. Similar incident was noted in the case of Allied Mills (1989) where the compensation for the cancellation was income in nature and assessable.

As per the agreement, Anna was offered to be provided $600 every month for her services and it is a doubt whether the termination amount of $7200 attained by her must be taxable in her hands or not. If the product had not been terminated, Anna would have received such $600 every month, and that would have been taxable in her hands. Moreover, the lump sum amount received by her also contains the attribute of taxable income in her hands. In simple words, such amount has a direct bearing on the business affair and therefore, it must be regarded as an income (Hopewell, 2012). The reason behind this can be attributed to the fact that such termination amount had been provided owing to the failure of the agreement, else it would continue as was agreed. Thus, even though there was no performance of work on the part of Anna for fulfilling her services, yet the termination amount attained must be regarded as a contract income and must be taxable as business income in her hands. Hence, it can be concluded that the lump sum amount attained by Anna owing to the contract’s termination is a normal business affair, and must be taxable in her hands (Kenny et. al, 2017). Similar instance was observed in the case of heavy minerals (1996) where the compensation payment was considered to be an income and hence taxable.
However, there is dubiousness as to whether such amount attained on 01/08/2016 must be taxable in 30/06/2018 or not. In relation to this, Anna had to take legal advice from the court for recovering the contract amount in March 2018. Moreover, she had to encounter a loss of contract wherein the amount was equivalent to her terminated contract amount. Nevertheless, after ample negotiations betwixt the company and Anna, it was decided that the company would pay the entire sum of money as agreed in the contract. In this case, it is notable that such negotiations were conducted in the year-end 30/06/2018 while the amount was paid on 01/08/2016. Hence, there remains no doubt, whether such amount was accrued in the same year as well. In other words, the lump sum amount was delayed until 01/08/16 but was contracted in the same year. On a whole, the amount attained by Anna owing to cancellation of the contract must also be considered as income in her hands and must be taxable in the year 30/06/18 (Wood, 2012).
The case law of ‘Sports-R-Us Ltd And Investment Holdings Limited’ can be taken into consideration in this scenario. It was agreed in this case that Sports-R-Us Ltd would offer various services associated with selection of commentators and announcers for various events that were supposed to be conducted in the place of Investment Holdings Limited for five years. However, the service was unable to be performed by Sports-R-Us Ltd and was terminated after one year owing to severe competition. In this case, the service provider offered to pay twenty thousand dollars to the receiver for non-fulfillment of the contract (Pratt & Kulsrud, 2013). Moreover, the taxation authorities decided that such termination amount attained by Investment Holdings Limited must be taxable in their hands, as it arose as a normal course of business.
Therefore, after analyzing the above case law, it must be clear that the lump sum figure obtained by Anna because of termination of the agreement must be considered as a normal business activity, and the income must be taxable in her hands as business income.

References
Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd
Fullerton,I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax Handbook Tax Return Edition 2017, Thomson Reuters: Australia
Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 24 August 2017, www.zdnet.com.au.
Kenny, P, Blissenden, M, & Villios, S 2016, Australian Tax 2017, Thomson Reuters: Australia
Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press
Nethercott, L, Richardson, G.,& Devos,K. 2013, Australian Taxation Study Manual, Sydney.
Pratt, J. W & Kulsrud, W N 2013, Federal Taxation, Oxford university press.
Renton N.E 2005, Income Tax and Investment, 2nd edition, Sydney
adiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting, A 2017, Principles of Taxation Law 2017, Law book Australia
Wood, R.W 2012, Contract Cancellations Trigger Taxes, viewed 24 August 2017, https://www.forbes.com/sites/robertwood/2012/02/08/contract-cancellations-trigger-taxes/#528b21b8278c

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