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Edited version of your written advice
Authorisation Number: 1051437876113
Date of advice: 5 October 2018
Ruling
Subject: Your restraint of trade payment is capital in nature
Question
Is the restraint of trade payment made to you on the cessation of your employment assessable as a capital gain?
Answer
Yes.
Restraint of trade payments can be made on signing an employment contract as well as on the termination of a contract. Payments made on signing a contract have the character of income. Those that are made on termination have the character of capital.
This is outlined in paragraphs 128-130 of Taxation Ruling TR 95/3 Income tax and capital gains: application of subsections 160M(6) and 160M(7) to restrictive covenants and trade ties.
Your restraint of trade payment will therefore be assessed as a capital gain event.
This ruling applies for the following period:
1 October 2017 – 30 June 2018
The scheme commences on:
1 October 2017
Relevant facts and circumstances
During the period ended 30 X 20XX your former employer paid you an amount of $X. This was in respect of a nine month non-compete restraint of trade.
Tax was withheld from this payment.
It was one time restraint of trade payment.
In order to enforce the restraint of trade the payment was made monthly. The former employer would have ceased any subsequent payments had you breached the terms.
You received a letter from your former employer stating termination arrangements. You were paid the following:
● an amount of $X in respect of X months’ payment in lieu of notice, payable on the first day after X X 20XX
● an amount of $X in respect of a X month non-compete restraint of trade, to be paid in equal instalments from X X 20XX to X X 20XX
● an amount of $X by way of an ex gratia payment, payable on the first day after X X 20XX; and
● an amount of $X in respect of any accrued but untaken annual leave, payable on the first pay day after X X 20X.
The restraint of trade period is now over.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5