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Income Tax Act 2007

Income - Employee or contractor income - Definitions

CE 9: Restrictive covenants

You could also call this:

“Rules about payments for agreeing not to do certain work in the future”

When you agree not to do certain work in the future, this is called a restrictive covenant. If you or someone else gets money for this agreement, it’s usually counted as your income.

However, there’s an exception to this rule. If you’re selling a business, and you agree not to compete with the new owner, the money you get for this agreement isn’t counted as income. For this exception to apply, you need to have a written agreement that says you’re selling a business. Also, you can’t keep working for the new owner after the sale, except for a short time to help with the handover.

This rule also applies when you’re selling all the shares in a company that runs a business. In this case, the company that runs the business is treated as the new owner.

If you’re only selling part of a business, this exception can still apply as long as that part can run on its own.

There’s another rule (Section GB 30) that might change how this works if someone is trying to avoid paying tax on these payments.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1512805.

Topics:
Money and consumer rights > Taxes
Business > Starting a business
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Part C Income
Employee or contractor income: Definitions

CE 9Restrictive covenants

  1. This section applies when—

  2. a person (person A) gives an undertaking that restricts, or is intended to restrict, their ability to perform services as an employee, office holder, or independent contractor, whether or not the undertaking is legally enforceable; and
    1. a person, whether or not person A, derives an amount for the undertaking.

      1. The amount is income of person A.

      2. Subsection (2) does not apply if—

      3. person A derives the amount because person A or an associated person sells a business to another person (person B); and
        1. person A or the associated person and person B agree in writing that the transaction is the sale of a business; and
          1. person A derives the amount as consideration for an undertaking by person A not to provide goods or services in competition with the goods or services that person B provides from the business; and
            1. person A does not provide services to person B after the sale of the business, other than temporarily providing services incidental to the sale.

              1. For the purposes of subsection (3),—

              2. the sale of a business includes the sale of shares in a company, but only if the sale is of all the shares in the company and the company—
                1. carries on a business; or
                  1. directly or indirectly wholly owns another company that carries on a business; and
                  2. in that case, the words person B in subsection (3)(c) and (d) mean the company that carries on the business, whether the company referred to in paragraph (a)(i) or the company referred to in paragraph (a)(ii).

                    1. For the purposes of subsection (3), the sale of a business includes the sale of part of a business, if the part can be operated separately.

                    2. Section GB 30 (Arrangements to avoid taxation of restrictive covenant payments) may apply to treat an amount as income under this section.

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