Homely Ltd is a retailer of household fans. It imports these fans from a number of suppliers and sells them under its own Homely brand.

Wemake is one of Homely's suppliers, and supplies products that account for approximately 80% of Homely's sales and profits. This supply contract has 3 more years to run. However, on one occasion, Wemake sold Homely faulty stock, which MLT used as display stock in its store. Due to the faulty product, this caused a fire in one of Homely's stores, resulting in extensive damage to the shop.

Wemake informed Homely that it can no longer guarantee the supply of safe products, and so cancels its supply contract. Wemake pays Homely $4m compensation for its cancellation, as well as $2m compensation for the cost of building a new store. The $4m is calculated in accordance with the amount of profit that Homely would have made under the contract with Wemake had it not been cancelled.

A few months later, Homely finds a new supplier, which supplies similar products to those previously supplied by Wemake, at a similar price that Wemake previously supplied them at.

Discuss whether any part of the $4 million and/or the $2 million constitutes ordinary income

Answer rating: 100% (QA)

In this scenario the 4 million compensation from Wemake for the cancellation of the supply contract ... View the full answer