Reference no: EM133062501

Principles of Compensation

Question 1. David disturbed two prison escapees who were attempting to break into his car. He suffered serious head injuries as a result of being bashed by the men and spent three months recuperating in hospital. The escapees were later recaptured, found guilty of the assault and sentenced to an additional two years in jail. David applied for and was awarded $30,000 compensation under the Victims Compensation Act 1987 (NSW) for his pain and suffering resulting from the assault. Marina, David's wife, also received $20,000 compensation under this Act. She was able to establish that the fear she now had of driving a car alone was attributable to the assault on her husband and she was therefore entitled to compensation for the loss of enjoyment of life. What are the tax consequences of the compensation receipts?

Question 2. While cycling home from work Mark is hit by a car and seriously injured. He spends the next three months in hospital. Due to the severity of his injuries, at the end of the three months Mark is declared unable to work again. After protracted legal proceedings Mark receives the following sums of money:

• $500,000 from the insurer of the driver who hit Mark;
• $15,000 in lost wages through a workers' compensation payment; and
• $100,000 for the permanent loss of the sight in one eye. How is each of these amounts assessed?

Question 3. Alice, an employee of Acme Co, is sexually harassed by a workmate. Alice complains to the company and seeks compensation for the humiliation and indignity she has suffered. In return for signing an agreement in which she surrenders any rights she may have against the company, Alice receives from the company an amount of $35,000 and resigns from the company. The payment is calculated on the basis of six months' salary, including long service and annual leave entitlements. What are the tax consequences of the compensation receipt?

Question 4. Jenny and Mark have their own business producing furniture for both wholesale and retail clients. Unfortunately, their factory was burned to the ground because of an electrical fault. Jenny and Mark lost everything. They had various insurance policies which provided for the following amounts of compensation:
• $1 million for the loss of the factory;
• $500,000 for the loss of machinery and other depreciable assets;
• $200,000 for loss of trading stock; and
• $50,000 each to Jenny and Mark for loss of income while the business was not operating. What are the tax consequences of each of these amounts?

Question 5. At the start of the current tax year Colin installs a water tank at his rental property for $3,000. Colin claims a deduction for the decline in value of the water tank under Div 40 of ITAA97 using the prime cost method and an effective life of 10 years. Colin also applies for and receives a Queensland State Government rebate of $1,000 as a recoupment of his expenditure on the water tank. Is the $1,000 assessable in the hands of Colin?

Question 6. Hospitality Pty Ltd ('Hospitality') carries on a business of providing catering services for corporate events where their major client is an Australian airline. Hospitality is contracted to run the airline's airport premium customer lounges across Australia, providing the food and beverage and service staff in each lounge. The duration of the contract is five years for an annual charge of $5 million payable in

monthly instalments. This represents approximately 80% of Hospitality's annual revenue. Recently, the airline reviewed its operations and decided to terminate the contract early at the end of the fourth year. The airline agreed to pay Hospitality the balance of the contract of $5 million, but sought to mitigate the amount payable by claiming that the work performed by Hospitality was of a poor standard. After lengthy negotiations, Hospitality and the airline agreed to settle their claims for a final amount of $4.7 million. Is the $4.7 million ordinary income in the hands of Hospitality?