NQZG and Commissioner of Taxation (Taxation)

This matter concerned an appeal by the Applicant against a decision of the Commissioner of Taxation regarding the character of a "founders retention amount" (FRA) received by the Applicant. The dispute centred on whether this payment was of an income or capital nature, and specifically whether it represented consideration for the sale of shares or was a product of services rendered. The case was heard by L Hespe SM in the Administrative Appeals Tribunal.

The primary legal issue before the Tribunal was to determine the character of the FRA received by the Applicant. This required the Tribunal to consider whether the payment was income, arising from the Applicant's employment or services, or capital, arising from the sale of his shares in UPL. The Tribunal had to interpret the terms of the Share Purchase Agreement (SPA) and the surrounding circumstances to ascertain the true nature of the payment.

The Tribunal reasoned that the FRA was intrinsically linked to the Applicant's continued employment within the acquiring group. This conclusion was based on several provisions within the SPA, including the requirement for the Applicant to remain employed by UPL or an associated entity to receive the FRA in instalments, and the forfeiture of entitlement upon resignation or termination for cause. Furthermore, the FRA was explicitly stated to be in consideration for the Applicant's compliance with restrictive covenants, such as non-competition and non-solicitation provisions, which are typically associated with employment arrangements. While the FRA was not to be considered "salary" for certain purposes, the Tribunal found it was nonetheless a product of the Applicant's employment, drawing an analogy to the principles established in *McLean v Federal Commissioner of Taxation*. The Tribunal distinguished the present case from *Miley and the Commissioner of Taxation*, noting that in *Miley*, the payment was not explicitly for restrictive covenants, and the taxpayer sought to reallocate value. In contrast, here, the SPA clearly indicated the FRA was paid in respect of the continuation of employment and the Founders' agreement to provide services.

The Tribunal affirmed the objection decision of the Commissioner of Taxation.