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Restrictive covenant and exit inducements taxed

Restrictive covenant and exit inducements to be taxed

The Government plans to make restrictive covenant payments and exit inducement payments taxable.

Revenue Minister Michael Cullen said today legislation was planned for October to attack what was seen as a growing problem.

"The increasing use of these payments poses a major risk to the revenue, since they are not taxed," Dr Cullen said. "Tax from personal services income represents 75 percent of total income tax.

"These payments are already commonplace in some industries, and we foresee even greater use of them to avoid the new 39 percent income tax rate.

"A restrictive covenant payment is a payment for restricting one's ability to perform services. For example, a celebrity might receive such a payment for restricting his or her advertising activities to endorsing a single product.

"An exit inducement payment is a payment made to someone to give up a certain position or activity. For example, someone might be paid to leave one firm and join another.

"There is a strong risk arising from the fact that restrictive covenant payments and exit inducement payments can easily be substituted for taxable salary and wages, thus reducing tax revenue.

"Sometimes these payments can be in the millions of dollars. It is clearly unfair that these large payments related to employment are tax-free, while salary and wages are taxed.

"The Government will be consulting on the proposal over the next few weeks, with a view to introducing legislation in October, to be effective from the date of enactment," Dr Cullen said.

An issues paper on the proposed legislation will be on the web site of the Policy Advice Division of Inland Revenue at www.taxpolicy.ird.govt.nz from 1 pm today. Submissions close on 31 July.
Contact: David Carrigan [tax policy advisor] 471-9728

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