Edited version of your written advice

Authorisation Number: 1051471799442

Date of advice: 10 January 2019

Ruling

Subject: Lump sum payment received under a deed of settlement

Question 1

Is the lump sum payment you received under a deed of settlement assessable under the Capital Gains Tax (CGT) provisions?

Answer

Yes.

The lump sum payment was made to you for the loss of your right to a shareholding in a proposed new company. This right was granted in recognition of the use of your intellectual property and business plan by the directors of the investor company. The surrender of your right to seek payment for the proposed shareholding as part of the deed is considered CGT event C2 as per section 104-25 of Income Tax Assessment Act 1997 (ITAA1997).

Question 2

Is the lump sum payment you received under the deed assessable under any provision other than the CGT provisions?

Answer

No.

The right to the shareholding is not considered an employee share scheme interest as the proposed new company to which the shares relate did not employ you. The payment is not considered an employment termination payment as your employment with the company is considered continuous. The payment is also not statutory income assessable under section 15-2 of the ITAA 1997 as the underlying reason for the granting of the right and the payment of the amount is in recognition of your intellectual property and business plan which can be considered as distinct and separate to the remuneration and bonuses you received as a reward for services from your employment relationship with the company. The lump sum payment is also not considered to be ordinary income.

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You took your intellectual property and a business proposal to investors. The investors provided the capital to start up a business, which was run through their company (X Pty Ltd) with you engaged as an employee.

Your initial offer of appointment was signed in 20XX.

You later signed a variation to this offer to include bonuses to your other remuneration.

You signed a further variation to your employment offer to include an entitlement to hold a percentage of the issued share capital in a proposed new company which would be created to house the business. It was stated this new company would be created at some point in the future when the existing company had recovered its capital contributions to the business. This right was granted in recognition of the use of your intellectual property and business plan by the directors of the investor company.

Recently X Pty Ltd was acquired by a new company, the directors of which also took over as directors of X Pty Ltd. You stayed on with the business in the same capacity and your new contract recognised your original start date thus creating a continuity of service.

You were presented with, and entered, a deed of release between yourself and the former directors of X Pty Ltd.

The operative provisions of the deed include a payment clause that an amount will be made to you and a release and indemnity clause. The release clause releases the former directors from and indemnifies them against any and all present and future claims in connection with your contract of employment and the variation in relation to the share entitlement.

The deed contains a warranty clause which states that both parties agree that once the payment has been affected you acknowledge that the former directors and the company have been discharged from all obligations that arose from the variation in relation to the share entitlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 83A-10(2)

Income Tax Assessment Act 1997 Section 104-25