ATO Interpretative Decision

ATO ID 2001/536 (Withdrawn)

Income Tax

Superannuation, retirement and employment termination: Payment for restraint of trade
FOI status: may be released
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is a payment received as consideration for the entry into a restraint of trade excluded from the definition of an eligible termination payment (ETP)?

Decision

Yes. The payment is not an ETP to the extent to which the Commissioner considers the amount reasonable having regard to the nature and extent of the restraint.

Facts

The taxpayer has been made redundant from his position. The employer has agreed to pay him an amount for restraint of trade.

Reasons for Decision

The definition of eligible termination payment is contained in subsection 27A(1) of the Income Tax Assessment Act 1936. The definition states in part:

' eligible termination payment , in relation to a taxpayer, means:
...
but does not include:
...

(m)
consideration of a capital nature for, or in respect of, a legally enforceable contract in restraint of trade by the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature and extent of the restraint;'

A payment for restraint of trade must be examined to determine whether it meets the above definition.

The Commissioner will consider whether:

(a)
the consideration is of a capital nature;
(b)
the consideration is for or in respect of restraint of trade;
(c)
the contract in restraint of trade is legally enforceable; and
(d)
the payment is reasonable having regard to the nature and extent of the restraint.

The Commissioner has no published guidelines on determining whether a payment is reasonable under this paragraph. Each case must be considered on its own merits.

Where the Commissioner decides that an amount is not an ETP, the payment (or part of it) may be assessable as a capital gain.

Date of decision:  26 September 2001

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   subsection 27A(1)

Trade Practices Act 1974
   The Act

Restraint of Trade Act 1976
   the Act

Keywords
Eligible termination payments
Superannuation case reports
ETP exemptions and exclusions
ETP commissioner's discretion

Business Line:  Superannuation

Date of publication:  26 October 2001

ISSN: 1445-2782

history
  Date: Version:
  26 September 2001 Original statement
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