Private ruling: Tax treatment of lump sum payment
Published: August 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the lump sum payment a receipt of a capital nature and eligible for the small business capital gains tax concessions? | A1: No.

Relevant facts and circumstances: The company entered into a Services and Licence Agreement (Agreement) with the medical centre operator (M) to contract the services of Doctor Y (doctor). In consideration for the company entering into the Agreement with M for the services for a fixed term of Z years, the doctor received, via the company, a lump sum payment from M. If the Agreement is terminated early, the company must repay the payment to M in accordance with the agreement. If that occurs the company must pay to M as agreed and assessed damages under the agreement, a payment equal to $X,XXX (plus GST) for each whole month remaining until the term of the expiry of the agreement at the time of the breach. Interest may be payable on unpaid amounts. The doctor will also agree that they will not within X kilometres of the centre, during the term and for a period of X months after the agreement terminates, do any of the following: ● Be directly or indirectly engaged, concerned or interested whether on their own account or as a member, shareholder, consultant, agent, beneficiary, trustee or otherwise, in any enterprise, corporation, firm, trust, joint venture or syndicate, in the practice of general practice medicine or in carrying on any business the same as or substantially similar to or in competition with the business as conducted by M at the Centre; ● On their own account or any other person, enterprise, firm, trust, joint venture or syndicate entice away from M any patient, customer, supplier or employee of the business of the Centre; or ● Personally or by their employees or agents or by circulars, letters or advertisements whether on their own account or for any other person, enterprise, firm, trust, joint venture or syndicate interfere with the business, disparage the Centre or M or indulge to any person any confidential or sensitive information concerning the Centre or M. A service fee of XX% (plus GST) will be charged to the company. All incentives paid by the Government to M are distributed amongst all doctors on a pro-rata basis, depending on their billings. In this situation, on average XX% of the pro-rata share of this income would be paid to the company and the remaining XX% would remain with M. There are additional terms which relate to the amount of expected billings during the term which shall be at least $XXX,XXX per annum. There are also additional terms in relation to an extension of the term and what is to occur if the doctor suffers a permanent disability.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 102-5(1), | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Division 152

Reasons for decision: Summary: To determine the correct tax treatment of the lump sum payment, it must first be considered whether the payment is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income (i.e. income according to ordinary concepts) the resident derived directly or indirectly from all sources, whether in or out of Australia, during the income year. The legislation does not define what is meant by income according to ordinary concepts, however there is a substantial body of case law that provides guidance on relevant factors to be considered. In Scott v. Commissioner of Taxation (NSW) (1935) 3 ATD 142, Jordan CJ stated (at pages 144-145): The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of receipts. Furthermore, Windeyer J in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 noted that whether or not a particular receipt is income depends upon its quality in the hands of the recipient (at page 526). He further stated that whether a receipt is income must always depend on a consideration of the whole of the circumstances (at page 527). In Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179, Gray J held at page 184: Although the parties are free, as a matter of law, to choose the nature of the contract which they will make between themselves, their own characterisation of that contract will not be conclusive. A court will always look at all of the terms of the contract, to determine its true essence, and will not be bound by the express choice of the parties as to the label to be attached to it. As Mr Black put it in the present case, the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck. The profits of an isolated transaction, even if received as a lump sum, may be income ( Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; [1987] HCA 18). It is therefore necessary to consider whether the lump sum payment made under the Services and Licence Agreement (the Agreement) the company and the doctor signed with M has the character of income. In Allied Mills Industries Pty Ltd v. Commissioner of Taxation (1989) 20 FCR 288; 89 ATC 4365, the taxpayer received a lump sum payment for giving up the right to manufacture and distribute certain biscuits. The Full Federal Court held that the lump sum payment was revenue - the taxpayer did not part with a substantial part of its business or cease to carry on business, nor did it dispose of the fixed framework of the business. The lump sum was found to be compensation for the termination of the arrangements between the parties, which was properly characterised as a payment for the loss of profits cause by the termination. The Court stated: In characterising payments made under an agreement, the terms of the agreement must, of course, be examined; but so must the whole of the circumstances surrounding its execution, its operation and the receipt of the money in question: Federal Coke Co. Pty. Limited v. F.C. of T. 77 ATC 4255; (1977) 34 F.L.R. 375 per Bowen C.J. at ATC p. 4262; F.L.R. p. 385. Contracts are made to be performed, not terminated … What is important in characterising the payment is … the nature of the contract which generated the payment, and the way in which that contract related to the structure and business of the taxpayer. It may also be the case that the lump sum consists of elements of both capital and revenue nature. For example, in McLaurin v. Federal Commissioner of Taxation (1960-1961) 104 CLR 381 a farmer received an undissected lump sum payment in relation to damage caused to his grazing property. The High Court held, at page 391: It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst its several heads to which it relates and an income or non-income nature attributed to portions of it accordingly … But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated… or are otherwise ascertainable by calculation … it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole. (emphasis added) | Detailed Reasoning - Incentive/inducement payments: Courts have often held that incentive payments or inducements can be assessable income. For example, in McLean and Anor v. Federal Commissioner of Taxation 96 ATC 4443 the Federal Court held that lump sum payments made to a taxpayer to remain in the employment of their employer were held to be assessable income. Northrop J held, at page 4447: The nature of the payments is made clear by a reference to the contents of the letters written to them by Elders Resources. The payment was made as an inducement to each taxpayer to continue in his employment for a period of at least one year. If the taxpayer left his employment, the amount of the payment was reduced but otherwise the payment was for the specified sum. The continual employment was at the very heart of the receipt of the payment. (emphasis added) In Pickford v. Federal Commissioner of Taxation 98 ATC 2268, the taxpayer was an employee who had been granted options to purchase shares in his employer's parent company under an employee share scheme. However the options would lapse immediately if they ceased to be employed by the employer. Another company made an offer of employment to the taxpayer, which included a payment of $20,000 said to be compensation for the potential capital gain that may have been available to the taxpayer in relation to the shares they would have been entitled to if they had remained with the original employer. The AAT held the $20,000 lump sum payment was assessable income: A consideration of all the material including the letter containing the offer (T3) leads the Tribunal to the conclusion that, irrespective of the description furnished to the amount in contention, it represented a straightforward inducement for the applicant to enter the employment of W Ltd. Furthermore, the Tribunal is satisfied that the source of the payment is to be found in the service to be rendered by the applicant to W Ltd and that it was in the nature of a benefit for future service. ATO ID 2003/373 Retention bonus payments paid to Bougainville Peace Monitoring group also outlines the ATO view that lump sum retention bonuses paid by the Australian Defence Forces in order to encourage serving members to remain for a fixed period are assessable as ordinary income. In this ATO ID, where the members failed to complete the required period of service, they were contractually obliged to repay part of the retention bonus based on the incomplete part of the service. Courts have also held, in a number of cases, that lease incentive payments received by the taxpayers were ordinary assessable income. | Detailed Reasoning - Isolated transactions: As mentioned above, the profits of an isolated transaction, even if received as a lump sum, may still be income. Following on from the High Court decision in Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; [1987] HCA 18, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income. It states: 6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. 7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. 8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In Commissioner of Taxation v. Cooling (1990) 22 FCR 42; (1990) 94 ALR 121, a lump sum payment received by a firm of solicitors as an incentive to relocate to new premises was held by the Full Federal Court to be income according to ordinary concepts. As described in paragraph 50 of TR 92/3: At the relevant time in the city where the firm practised, it was an ordinary incident of leasing premises of the type in question to receive incentive payments. Hill J (with whom the other judges agreed on the subsection 25(1) issue) said that where a taxpayer operates from leased premises, the move from one premises to another and the leasing of premises occupied are acts of the taxpayer in the course of its business activity. At 90 ATC 4484; 21 ATR 27 Hill J concluded: 'In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment.' | Detailed Reasoning - Restrictive covenants: A number of principles in relation to restrictive covenants have been highlighted through the cases below. In Higgs v. Olivier [1952] 1 Ch 311 ( Higgs ), the taxpayer was contracted to perform services in relation to a movie. The taxpayer then entered into another agreement with the film company covenanting that for 18 months he would not appear in, produce or direct any film for any other company. It was held that this was a separate agreement that could not be read with the original service agreement and the lump sum was a capital receipt. Sir Raymond Evershed MR stated at page 318: …if a trader, or professional man, for a money consideration covenanted to give up his trade or profession for the rest of his life, then it would be difficult to say that the money received was 'profits or gains accruing or arising from his trade or profession'. On the other hand it is not difficult to see that a restriction of a very limited or partial character might less easily be taken out of the ambit of the taxing provision. One example in the argument was that of an actor who covenanted for a limited period not to act for one particular company out of a large number. I myself gave the example of an actor who covenanted for a limited period not to act under his own or well-known stage name. But between the two extremes there is a large area, and for myself I am disposed to think that within that area it may well be a matter of degree. (emphasis added) In Dickenson v. Federal Commissioner of Taxation (1958) 98 CLR 460; [1958] HCA 62 (Dickenson ), the taxpayer was an owner of a garage and received two lump sum payments in entering into an exclusivity agreement with Shell for a period of 10 years. The High Court held that the two payments were capital receipts. Kitto J referred to the quote above from Higgs v. Olivier and went on to say (at 98 CLR 492): Much the same may be said, I think, in relation to the Commonwealth Act, though its conceptions are by no means the same as those of the United Kingdom Act and it is possible that such a case as Higgs v Olivier might have to be decided against the taxpayer if it arose under the Commonwealth Act …. But a lump sum payment for a restriction of a garage and its proprietor to one brand of petroleum products for a period of ten years, effectuated by means of a lease and sublease of the premises as well as by personal covenants, seems in the nature of a sale price for a substantial and enduring detraction from pre-existing rights. The restriction does not strike my mind as an obligation undertaken incidentally to the carrying on of a business . Rather does it take a substantial piece out of the ordinary scope of the business activities to which otherwise the appellant might apply himself and for which he might use his premises. (emphasis added) In Hepples v. Federal Commissioner of Taxation 91 ATC 4808 ( Hepples ) a taxpayer received a lump sum on termination of his employment in consideration for the taxpayer not divulging trade secrets or 'special processes' of the former employer, not competing with the former employer in Australia and assigning to the former employer any patent protection in any invention made by the taxpayer from the use of the 'special processes', for a period of two years. Deane J stated at page 4819: Traditionally, a genuine payment to an individual employee as consideration for covenants in restraint of his or her freedom to compete or to use or divulge certain information during a specified number of years after the termination of employment has not been seen as income in the ordinary sense for the purposes of s. 25(1) of the Act … Whilst Hepples is authority for the principle that restrictive covenants relating to the period after termination of a contract/employment are not generally seen as income, Taxation Ruling TR 95/3 Income tax and capital gains: application of subsections 160M(6) and 160M(7) to restrictive covenants and trade ties expresses the ATO view that restrictive covenants relating to the period of employment is assessable income. In Federal Commissioner of Taxation v. Woite 82 ATC 4578 a professional footballer received a lump sum payment from the North Melbourne Football Club for signing a 'Form 4', the effect of which meant he was not to play for any Victorian club other than North Melbourne. Although holding that the lump sum in that case was not income, Mitchell J noted at page 4582: Had the signing of Form 4 by the respondent been followed by a contract with the North Melbourne Club to play football for that club it may well have been difficult, if not impossible, for the respondent to discharge the onus of establishing that the $10,000 was not income. In Case A14 69 ATC 80 the Board of Review considered a restrictive covenant under which the taxpayer, a footballer or international standard, entered into a contract with the Metropolitan Rugby League Football Club to play football for that club for three years and covenanted not to play football with any other club in the metropolitan area for a further period of three years. The majority of the Board held that the payment for the restrictive covenant represented the rewards of professional football as much as did the signing-on fee and match payments in that the amount was paid in consideration of his services as a footballer being available to the club and as such amounted to income. His Honour then went on to refer to Dickenson as providing a useful analogy, citing with approval Kitto J's suggestion in that case that Higgs might have been decided against the taxpayer if it arose under the Australian provisions. He went on to say that in the present case 'the restriction was not an obligation undertaken incidentally to the playing of football for reward by the taxpayer'. In Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; 71 ATC 4195 (Brent), the taxpayer sold the exclusive right to publish her life story throughout the world. As part of the agreement, the taxpayer agreed not to communicate about the subject matter to anyone else or give any press, radio or television interviews about any subject for a period of 60 days from the date of signing the manuscript for her life story. The taxpayer ultimately received two lump sum payments. The High Court held that the lump sums received by the taxpayer were for services rendered by the taxpayer to the company and were ordinary income. The Court noted, at 71 ATC 4198: Clause 8 contained an undertaking by the appellant not to communicate with or make statements to others relative to the subject matter of the agreement and, in particular, not to give press, radio or television interviews on any subject within sixty days from the signing of the manuscript. This negative covenant was no doubt of real value to the company, but it was ancillary to the main purposes of the agreement [which was for the provision of services]. (emphasis added) | Detailed Reasoning - Application in your case: Incentive/inducement payments Whilst Additional Term 1 (AT1) in Appendix B of the Agreement states that the lump sum 'payment' is in consideration for both entering into the fixed term agreement as well as specified restraints, as outlined above, a consideration of the whole of the circumstance is required in order to determine the nature of the lump sum payment. Additional Term 2 (AT2) in Appendix B of the Agreement is referred to as a 'repayment' and, given its location as the immediately subsequent clause to AT1, it is reasonable to infer that it is a reference to the repayment of the lump sum amount. AT2 of the Agreement operates such that no value can be attributed to the restrictive covenant post termination of the Agreement. The lump sum is clearly an inducement payment. Discussions between the ATO and M have identified that M regularly makes lump sum payments to new health care practitioners entering into a services and licence agreement, such that it is considered normal business practice for M. ATO enquiries have also identified that other medical centre owners also make lump sum payments to new health care practitioners joining their medical centres, which indicates these lump sum payments are a prevalent industry practice. As referred to above, the Full Federal Court in Allied Mills Industries Pty Ltd v. Commissioner of Taxation reinforced that contracts are to be performed, not terminated. The nature of the contract here is for the performance of medical services by the doctor at a clinic operated by M for a fixed term period, and the lump sum payment (and its repayment on early termination) clearly link to this income-generating purpose. The above factors indicate that, despite the description contained in AT1 of the Agreement, the true nature of the lump sum payment is that of an inducement for the company to provide the doctor's medical services at a M medical centre for the fixed term period. As such, the whole of the lump sum payment is assessable as ordinary income under section 6-5 of the ITAA 1997. Isolated transactions It is also arguable that the lump sum payment is assessable as a profit or gain from an isolated transaction. As referred to above, TR 92/3 requires two elements to be satisfied: (a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. An objective assessment of the taxpayer's intention is required, and the profit-making intention need not be the sole or dominant purpose for entering into the agreement, it need only be a significant purpose. Consideration of all the circumstances indicates that an intention to make a profit from entering the agreement was a significant purpose. The Agreement directly states that the lump sum payment is for entering into the Agreement to provide the doctor's medical services as a general practitioner for a period. It is also considered that the transaction was entered into, and the profit made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. Although a general practitioner may not enter into many arrangements to provide their medical services, it is part of their business to provide such medical services. Furthermore, the company, the doctor and M were clearly contracting on a commercial basis under a business relationship. Incentive/inducement payments are also common in the health care industry. As such, the lump sum payment could also be assessable under section 6-5 of the ITAA 1997 as a profit or gain made from an isolated transaction. Restrictive covenants Even if part of the payment was found to be legitimately referable to the restraints in Additional Term 3 (AT3) in Appendix B of the Agreement, it is still considered that the entire lump sum payment is assessable as income under section 6-5 of the ITAA 1997: ● The restraints are ancillary in nature to the main purpose of the contract, which is to engage the doctor to work in a M medical centre for a fixed period (following Brent ). ● The restraints are of a 'very limited or partial character' and do not 'take a substantial piece out of the ordinary scope of the business activities' for the company, such that they are not taken out of section 6-5 of the ITAA 1997. The restraints relate to a very small area for only a short period of time, which can be distinguished from Higgs , Dickenson and Hepples . Those cases involved substantial giving up of rights, covered extensive geographical areas and/or applied for significant periods of time. Furthermore, whilst McLaurin v. Federal Commissioner of Taxation is authority for the principle that an undissected lump sum must generally be considered as a whole, the High Court acknowledged that apportionment may be appropriate where at least some of the claims are 'liquidated … or are otherwise ascertainable by calculation ' (emphasis added). The provisions of the Agreement, in particular AT2, do provide a method of calculating the appropriate apportionment across the various elements. Under this view, there would be three elements to the payment: ● an inducement for entering into the three year fixed term agreement ● restraints during the fixed term period of the Agreement ● restraints for the X months after the termination of the Agreement. The inducement for entering into the fixed term agreement would be assessable income. It is also considered that, following the principle in Dickenson , the restraints during the fixed term period would be 'an obligation undertaken incidentally to the carrying on of a business'. Under the terms of the Agreement, the doctor has positive obligations to: ● work a standard XX hours per week at M's medical centre for a minimum of XX weeks per year ● use all reasonable endeavours to grow and promote the medical practice ● use their best endeavours to achieve at least $XXX,XXX in billings per year by committing themselves to the agreed hours, building their practice at the centre and working with M to ensure such income levels are achieved and maintained. It therefore follows that the restraints relating to the period of the fixed term agreement are merely a natural consequence of, and an obligation incidental to, these positive obligations under the Agreement. As such, they are income in nature. In relation to the restraints during the X month period after the termination of the Agreement, it is considered that, due to the operation of AT2 of the Agreement, no amount of the lump sum can be attributed to this aspect of the restraints. Accordingly, the entire lump sum amount is attributable to the first two elements: 1. an inducement for entering into the fixed term agreement 2. restraints during the fixed term period of the Agreement which are considered to be assessable income under section 6-5 of the ITAA 1997. Based on the arrangement and the contractual documentation, there is no amount attributable to the restrictive covenant post the termination/expiration of the Agreement. | Detailed Reasoning - Capital gains tax implications: Under subsection 102-5(1) of the ITAA 1997, a taxpayer's assessable income includes their net capital gain (if any) for the income year. A net capital gain is worked out in accordance with the method statement in that subsection. A capital gain or loss can only be made if a CGT event happens (section 102-20 of the ITAA 1997). The full list of CGT events is contained in section 104-5 of the ITAA 1997. CGT event D1 occurs, under section 104-35 of the ITAA 1997, if an entity creates a contractual right or other legal or equitable right in another entity. The section includes an example of the entering into a contract with the purchaser of the entity's business not to operate a similar business in the same town. Taxation Ruling TR 95/3 outlines the ATO view on the taxation treatment of consideration received for entering into a restrictive covenant. Although the Ruling relates to former subsections 160M(6) (now section 104-35 of the ITAA 1997) and 160M(7) (now section 104-155 of the ITAA 1997) of the Income Tax Assessment Act 1936 , the principles still apply to the rewritten provisions. Paragraphs 17-19 of TR 95/3 provide as follows: 17. Again, if a restrictive covenant relates both to a current period of employment and to a period after the end of that employment, the portion of the consideration received that relates to the period of employment is assessable under subsection 25(1) or paragraph 26(e). That portion also comes within the new subsection 160M(6) (with the new subsection 160M(7) as a backup) if the restrictive covenant was entered into on or after 26 June 1992. However, the application of the new subsection 160M(7) requires that there is an existing asset at the time of entry into the covenant - e.g. trade secrets, trade connections or goodwill of value. Subsection 160ZA(4) applies to reduce any capital gain to the extent that the amount is assessable as ordinary income. 18. The portion of the consideration that relates to the period after the end of the employment is assessable under the new subsection 160M(6). 19. If the contract does not apportion the payment, the amount reasonably attributable to the period of employment needs to be estimated by the parties to the contract, according to the terms of the contract and any other relevant facts. If it is not possible to make any reasonable apportionment, the whole amount is assessable under the new subsection 160M(6) if the restrictive covenant was entered into on or after 26 June 1992. A capital gain from a CGT event is reduced to nil under section 118-20 of the ITAA 1997 if, because of the event, the amount is included in your assessable income under another provision. As stated above, it is considered that the true nature of the lump sum payment in this case is that of an inducement to enter into the fixed term agreement, and the payment is not actually referable to the restraints in AT3 of the Agreement. As such, there is no CGT event D1 and therefore no capital gain. Even if part of the payment was found to be in respect of the restraints after the termination/expiry of the Agreement, pursuant to the argument contained above it is considered that no amount of the lump sum payment could be attributed to that part of the restraints. Further, if any or all of the lump sum payment was considered to be assessable as a capital gain arising from a CGT event D1 under section 104-35 of the ITAA 1997, the capital gain would be reduced to nil by virtue of the operation of section 118-20 of the ITAA 1997 as the payment is also assessable under section 6-5 of the ITAA 1997. Therefore, the entire lump sum payment received is assessable income under section 6-5 of the ITAA 1997. We consider that the entire lump sum is an inducement payment, and there is no amount attributable to the restrictive covenants. Furthermore, even if an amount was considered to be attributable to the restrictive covenants, we are of the view that the restrictive covenants are ancillary in nature to the main purpose of the contract and/or are of a very limited character such that they are not taken out of section 6-5 of the ITAA 1997. It is considered that there was no capital gain made. However, even if it was found that a capital gain had been made under CGT event D1, the capital gain would be reduced to nil as the entire lump sum payment is assessable under section 6-5 of the ITAA 1997. As there are no capital gains in relation to the payment the relief provided under Division 152 of the ITAA 1997 (the small business CGT concesssions) is not applicable in this case. | Detailed Reasoning - Additional information: As discussed above, the payment is assessable as ordinary income. It is assessable when it is derived. It is considered that the income was derived when it was received. Therefore, the payment is included in assessable income in the income year it was received. In similar cases, submissions have been to the Commissioner that the lump sum incentive/inducement payment should be assessed over the period of the agreement. These submissions have relied on the decision in Arthur Murray (NSW) PTY Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314 ( Arthur Murray ). However, unlike in Arthur Murray , the lump sum payment in this situation is not a pre-payment for services to be rendered, rather it is an inducement to enter into the agreement. Therefore, we consider that Arthur Murray is clearly distinguishable. If part of the lump sum is required to be repaid in a later income year, section 59-30 of the ITAA 1997 will apply to make the repaid amount non-assessable non-exempt income, and the income tax assessment for the income year in which the lump sum payment was originally received can be amended at any time to reduce the assessable income by the repaid amount (under item 22 in the table in subsection 170(10AA) of the ITAA 1936).