ATO Interpretative Decision

ATO ID 2001/536 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

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.

Year of income:  Year ending 30 June 2002

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

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