As a general rule, amounts received as compensation with the cancellation or variation of trade or other commercial contracts made in the course of carrying on business are in the nature of income. Referring to Heavy Minerals Pty Ltd V FCT (1996) , where compensation for loss of anticipated profits as a result of cancellation of a distribution contract was held to be income. The taxpayer was in the rutile mining business and entered a number of long-term supply contracts when the price of rutile was high. The price of rutile collapsed and as a result the buyers cancelled the contracts and paid taxpayer significant compensation. The market for rutile was so depressed that the taxpayer ceased operating after cancellation of contracts but the court held the compensation payments were assessable income because the taxpayer even after the cancellation of contracts, the taxpayer still had mines to be used for mining despite the fact that at that time rutile mining was unprofitable.
Similarly, the compensation received by Bill & Ben Reticulation will be treated as an assessable ordinary income as the company was not parting with the substantial part of the business or totally ceasing to carry on the business due to the cancellation of the contract. The contract entered into was for the normal business activity, i.e. to replace the drainage system on the playing surface of the club's sporting ground. The contract cancelled was profit yielding contract and was not a part of the fixed frame work designed to provide the means of making profit. The payment of $6000 was simply compensated for the loss of the profit and therefore, is taxable.