Salmon Co manufactured custom-made fishing boats that were guaranteed to withstand the harsh open seas. They manufactured only 1 boat at a time, and each boat took 18 months each to build. An 18-month contract with one of Salmon Cos clients was canceled in December 2018 with 14-months to run. Salmon Co received $400,000 as compensation for the loss of the contract. Salmon Co had no other income and no orders to manufacture another custom-made fishing boat. They were anticipating winding up their company and filing for bankruptcy if they received no orders to commence manufacturing a custom-made fishing boat by June 2019.

REQUIRED

Advise Salmon Co whether the $400,000 compensation is taxable.

NOTE: You must justify your answers by referring to relevant case law and legislation.

Salmon Co manufactured custom-made fishing boats that were guaranteed to withstand the harsh open seas. They manufactured only 1 boat at a time, and each boat took 18 months each to build. An 18-month contract with one of Salmon Cos clients was cancelled in December 2018 with 14-months to run. Salmon Co received $400,000 as compensation for the loss of the contract. Salmon Co had no other income and no orders to manufacture another custom-made fishing boat. They were anticipating winding up their company and filing for bankruptcy if they received no orders to commence manufacturing a custom-made fishing boat by June 2019.

REQUIRED

Advise Salmon Co whether the $400,000 compensation is taxable.

NOTE: You must justify your answers by referring to relevant case law and legislation.