Question

Sophie Jones, an Australian resident, owns and operates a beauty clinic specialising in laser cosmetic procedures. She has a reputation as being competent and trustworthy and obtains much of her business by word-of-mouth. In August 2018 she ordered a new laser machine from FracPro Pty Ltd which had just come on to the market. The company sales representative assured Sophie that it was the latest technology in laser treatment and would result in very little downtime to the client. After attending a one-day training session by the supplier in Sydney, she undertook her first procedure using the new machine in September. Whilst Sophie followed the instructions and applied the technique she had learned, her first client Kate suffered severe blistering which later led to some permanent scarring. Sophie ceased using the machine immediately and contacted FracPro. Following investigation by the manufacturer, it was discovered that the settings had not been calibrated correctly in the factory, resulting in excessive heat distribution on the skin. Sophie and Kate both sued FracPro for compensation and the matter was settled out of court in January 2019. The following amounts were received: Sophie Lump sum damages for potential loss of reputation $100,000 Compensation for loss of income whilst the machine was being replaced $20,000 Reimbursement of legal fees $7,000 Kate A lump sum payment for pain and suffering $120,000 Payment of ongoing medical and cosmetic surgery costs $50,000 Interest on the lump sum payment $8,000 Required: Advise both Kate and Sophie of the taxation consequences of receiving the above amounts (20 marks).

Answer 1