Private ruling: Capital gains tax
Published: October 2013
Ruling period: Year ending 30 June 2006 | Year ending 30 June 2013
Date scheme commenced: 1 July 2005

Ruling: Questions and answers | 1. Was a CGT event triggered when you entered into the employment contract in year 1? | Yes. | 2. Was a CGT event triggered when you received the restraint of trade payment in year 2? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You entered into an employment contract with your employer a number of years ago. The contract had a restraint of trade clause. Your employment was terminated and you were paid an amount in relation to the restraint of trade clause.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Summary: Section 104-35 of the ITAA 1997 states that CGT event D1 happens if there is a transaction involving an amount being received for entering into a restrictive covenant. The time of CGT event D1 is when the taxpayer enters into the contract. A taxpayer makes a capital gain from CGT event D1 if the capital proceeds from creating the right are more than the incidental costs incurred in creating it. If the capital proceeds are less than the incidental costs, a capital loss is made. A capital gain from CGT event D1 cannot be a discount capital gain. In your case, CGT event D1 happened when you entered into the agreement with your former employer. This agreement created rights for you to receive payments in the future. These rights are intangible assets. The cost base in this instance includes the costs incurred in entering into the agreement. The capital proceeds are the value of the assets, that is, the market value of the payment of x months salary you will receive for giving up the right to compete with your former employer after your employment has been terminated. Any Capital Gain made on entering into the restrictive covenant with your former employer would be assessable in the xxxx financial year. | Detailed Reasoning - CGT event C2: Section 104-25 of the ITAA 1997 states that CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. A capital gain is made if the capital proceeds from the ending are more than the asset's cost base. A capital loss is made if those capital proceeds are less than the asset's reduced cost base. The capital gain or loss is the difference between the amounts. The time of the event (and so the time when a capital gain or loss is made) is: · when the taxpayer enters into the contract that results in the asset ending, or · If there is no contract - when the asset ends. CGT event C2 happened when you received the payment from your former employer, because the receipt of that payment means that your right to receive it (i.e. the asset) has been extinguished. CGT event C2 happened when you received the restraint of trade payment of x months salary from your former employer, because the receipt of that payment means that your right to receive it (i.e. the asset) has been extinguished. When CGT event C2 occurred the cost base includes the value of the asset, and the capital proceeds will be the x months salary received. In your case both D1 and C2 CGT events have occurred. CGT event D1 occurred when you entered into the contract in early year 1 and CGT event C2 occurred when you received the restraint of trade payment in year 2. Any capital gain which arises from the C2 event should be declared in your year 2 tax return. Sections 170 and 170A of the Income Tax Assessment Act 1936 sets out the period in which the Commissioner has the power to amend an assessment. The standard period in which the Commissioner can amend an assessment for most individual taxpayers is two years from the day on which the Commissioner gives notice of the assessment. Your original notice of assessment for the year ending 30 June xxxx was issued to you on dd/mm/yyyy and the amended notice of assessment was issued on dd/mm/yyyy . This is outside the Commissioners amendment period of 2 years from the date of the amended assessment for the year ending 30 June xxxx and the Commissioner cannot amend your assessment to include any capital gain arising from the D1 event in January xxxx.