Mirthful Manor Pty. Ltd. is a company which is based in Australia.

It has two forms of business. One of these is it owns several

retail stores where it sells clothing. The other form of business is

it acts as a share broker.

Mirthful Manor imports much of the clothing that it sells in its retail

stores from overseas. It had a contract with an Indian shipping

company. The effect of this contract was that the Indian company

would regularly import clothing to Mirthful Manor. This contract

was entered into on 30 August 1985, and the Indian company

was to ship the clothing to Mindful Manor for a fixed cost for 50

years from the date of the contract.

As a result of the operations of the Indian shipping company

changing, the contract was terminated in January 2023. This left

Mirthful Manor in a predicament. The cost of importing clothes to

Australia had significantly increased since 1985 when the Indian

company had agreed to ship clothing to Mirthful Manor for a fixed

cost. Mirthful Manor had not factored into its projected profit

figures the possible loss of this contract. It estimates it would

have cost $20 million to ship the clothing to Australia under the

agreement with the Indian company, but since this has been

cancelled it will now cost $50 million to ship the same quantity of

clothing to Australia using a different shipping company. Mirthful

Manor cannot afford to pay $50 million as it had not budgeted for

this expense. Therefore, it has to close some of its retail stores

Mirthful Manor negotiated for the Indian shipping company to pay

it compensation for the cancellation of the contract, which is in

the vicinity of the loss of profits from its retail stores. When

determining what amount to ask the Indian company for Mirthful

Manor factored into account that when the contract was in

operation the Indian company shipped about 60% of the clothing

that was sold in the retail stores. The calculations by Mirthful

Manor were not disclosed to the Indian company who accepted

the figure calculated and paid that amount.

Required: What are the income tax consequences of Mirthful

Manor receiving the compensation payment? Please mainly refer

to case law in your answer.

Marking criteria (for Part A)

In marking Part A, your lecturer will place emphasis on whether

you have demonstrated an ability to:

Understand specific areas of income tax law;

Apply legal principles and authorities in providing advice on

tax issues;

Conduct basic tax research and evaluate primary and

secondary sources of tax information;

Express opinions on tax problems using written

communication skills; and

Present the results of research and evaluation with

responsibility and accountability for own learning.

You will be expected to:

Identify and appropriately explain the range of tax issues

connected with the fact scenario posed in the question;

Apply case law, legislation, and tax rulings (where

appropriate) to the fact scenario;

Communicate in clear written English; and

Format your assignment appropriately