Tax-free deals to end, says Cullen

By BRIAN FALLOW

WELLINGTON - An actor appears in an advertisement and for further payment agrees not to pop up in ads for a rival brand. Should the extra payment be taxable?

The Government says yes, and plans to make such restrictive covenant payments taxable, along with exit inducement payments.

The move was recommended in 1998 by the committee of experts on tax compliance set up by former Treasurer Winston Peters, but the issue has been brought to the fore by the increase in the top personal tax rate to 39c in the dollar.

A restrictive covenant payment is compensation for a restriction on a person's ability to perform services.

Restrictive covenants are also often given to preserve the goodwill transferred on the sale of a business, with the vendor undertaking to stay out of the same line of business for a specified period.

An exit inducement is the consideration given to a person to give up a particular position or status, by a prospective employer or contractor.

A notable example of both kinds of payment was the case of television current affairs presenter Ian Fraser, who fronted a series of advertisements when the Bank of New Zealand was floated.

Mr Fraser was paid $25,000 as an inducement to enter into the contract and another $140,000 over three years to restrain him from advertising or endorsing any other product during the contract's term.

The Court of Appeal upheld the capital, non-taxable status of these payments.

The Inland Revenue says such arrangements have become more common and are likely to increase as result of the new 39c top tax rate.

Revenue Minister Michael Cullen said these payments could be millions of dollars. "It is clearly unfair that these large payments related to employment are tax free, while salaries and wages are taxed."