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Does a payment for the release from a restraint of trade clause fall within paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A payment for the release from a restraint of trade clause is not an expenditure to convert a business structure to a different structure and therefore does not fall within paragraph 40-880(1)(b) of the ITAA 1997.

The taxpayer entered into an agreement with a company to provide a range of services as a subcontractor for the company's client. The agreement contained a restraint of trade clause which stated:

The Subcontractor must obtain a written undertaking from the Nominated employee that he/she must not for a period of six (6) months from the expiry of the Contract Period or the termination of this Agreement, whichever is later provide services or personnel directly or indirectly to the client or in connection with the Project without the prior written approval of (the company's name).

The company agreed to remove the restraint of trade clause from the agreement for a payment by the taxpayer to the company. This payment would allow the taxpayer to contract directly with the client.

Paragraph 40-880(1)(b) of the ITAA 1997 allows a deduction for capital expenditure incurred by a taxpayer to convert their business structure to a different structure. This paragraph deals with capital expenditure incurred in establishing a different business structure, for example, a company, or expenditure in transferring the business assets of a partnership to a company.

This paragraph also deals with capital expenditure that a transferee (as opposed to the transferor) incurs as a result of the conversion of the business structure.

The taxpayer's expenditure is to arrange a release from a restraint of trade clause which is not a capital expenditure to convert their business structure to a different structure, nor is it considered as an expenditure incurred as a result of the conversion of another's business structure.

Therefore, the taxpayer cannot deduct the amount paid to remove the restraint of trade clause as expenditure to convert their business structure under paragraph 40-880(1)(b) of the ITAA 1997.