ATO Interpretative Decision

ATO ID 2003/474 (Withdrawn)

Income Tax

Capital allowances: payment to release from restraint of trade
FOI status: may be released

This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed. New section 40-880 provides deductions for a greater range of business related costs where the expenditure is incurred after 30 June 2005. Expenditure incurred after that date is deducted under new subsection 40-880(2).
Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of expenditure incurred before 1 July 2005.

This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does a payment for the release from a restraint of trade clause fall within paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. A payment for the release from a restraint of trade clause is not an expenditure to convert a business structure to a different structure and therefore does not fall within paragraph 40-880(1)(b) of the ITAA 1997.

Facts

The taxpayer entered into an agreement with a company to provide a range of services as a subcontractor for the company's client. The agreement contained a restraint of trade clause which stated:

The Subcontractor must obtain a written undertaking from the Nominated employee that he/she must not for a period of six (6) months from the expiry of the Contract Period or the termination of this Agreement, whichever is later provide services or personnel directly or indirectly to the client or in connection with the Project without the prior written approval of (the company's name).

The company agreed to remove the restraint of trade clause from the agreement for a payment by the taxpayer to the company. This payment would allow the taxpayer to contract directly with the client.

Reasons for Decision

Paragraph 40-880(1)(b) of the ITAA 1997 allows a deduction for capital expenditure incurred by a taxpayer to convert their business structure to a different structure. This paragraph deals with capital expenditure incurred in establishing a different business structure, for example, a company, or expenditure in transferring the business assets of a partnership to a company.

This paragraph also deals with capital expenditure that a transferee (as opposed to the transferor) incurs as a result of the conversion of the business structure.

The taxpayer's expenditure is to arrange a release from a restraint of trade clause which is not a capital expenditure to convert their business structure to a different structure, nor is it considered as an expenditure incurred as a result of the conversion of another's business structure.

Therefore, the taxpayer cannot deduct the amount paid to remove the restraint of trade clause as expenditure to convert their business structure under paragraph 40-880(1)(b) of the ITAA 1997.

Date of decision: 6 June 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
Section 40-880
Paragraph 40-880(1)(b)

Keywords
Blackhole expenditure
Capital Allowances CoE
Uniform capital allowances system

Business Line: Effective Life and Capital Allowances Centre of Expertise

Date of publication: 20 June 2003

ISSN: 1445-2782

history

	Date:	Version:
	6 June 2003	Original statement
You are here	9 June 2006	Archived

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