Australian taxation law

Engineering Solutions Pty Ltd (ES) has operated a small to medium-sized business of manufacturing custom-built safety devices and safety equipment for commercial use. Most of ESs clients are in the building industry, but some are in the medical sector. ES is approached by the Department of Health in March 2020. The department asks ES to switch its operations to exclusively focus on manufacturing personal protective equipment (PPE) for frontline health workers in the fight against COVID-19. In addition, the department wants to build up a stockpile of PPE for future pandemics After considerable negotiations, the directors of ES agree that the company will change direction and focus exclusively on the manufacture of PPE for at least the next 12-months. To do so, ES must make substantial adjustments to its manufacturing plant, and indeed, make extensions to that plant. ES is paid a set amount for each item of PPE it manufactures and sells to the department of health. Sales to 30 June 2020 came to $1.2m.

Which of the following statements is most correct in respect to ES?

1. The $1.2m is not income (and therefore not included in assessable income) because this is not a receipt(s) in the ordinary course of ESs business.
2. The $1.2m is not income (and therefore not included in assessable income) because it is compensation to ES for having to give up its ordinary business of manufacturing custom-built safety devices, etc.
3. The $1.2m is income (and therefore included in assessable income) as it is the proceeds of the companys business, and this is not undermined by the fact that ES has never carried on operations like this before.
4. The $1.2m is income because it is caught by CGT event A1 (and therefore included in assessable income under s 6-5).