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Income Tax Act 2007

Income - Employee or contractor income - Definitions

CE 9: Restrictive covenants

You could also call this:

"Money you get for agreeing not to work in a certain way is considered income."

Illustration for Income Tax Act 2007

When you give an undertaking that restricts your ability to work, and someone gets an amount for that undertaking, the amount is your income. You get this income because you agreed not to work in a certain way. This rule does not apply if you sell a business and agree not to compete with the new owner. If you sell your business, the new owner is called person B. You must agree in writing that you are selling your business, and you must not work for person B after the sale. There are some exceptions to this rule, such as when you sell all the shares in a company that carries on a business. The sale of a business can include selling part of a business if that part can be operated separately. There is another rule, section GB 30, that may apply to treat an amount as income under this rule.

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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.

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Part CIncome
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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