Proposed tax changes to restraint of trade payments

transfer pricing 102Author: Douglas Gaul, tax manager, Grant Thornton Johannesburg

Paragraph (cA) of the definition of gross income was introduced into the Income Tax Act with the intention of preventing avoidance schemes whereby payment due to an employee was disguised as a capital payment for the so-called restraint of trade compensation. This inclusion has however had an impact on legitimate restraint of trade payments and is therefore being reconsidered again.

Prior to the introduction of this paragraph, it may have been possible for an employee to avoid paying normal tax on such payments (at the maximum marginal rate of 40%), despite possibly paying capital gains tax at the significantly lower rate of 13.3%.

Treasury however recently recognised that the wording of this paragraph adds restraint of trade payments to the gross income of natural persons, labour brokers and personal service providers, regardless of whether such payments arose by virtue of an employer/employee relationship. Thus, for example, a sole proprietor who receives an amount in respect of a genuine restriant of trade by a person, so as to prevent him/her competing with that person, would be required to include the amount in his/her gross income in terms of this paragraph. It disregards the fact that he/she was providing the services to that person as an independent contractor, and that result was not the intention of the legislator.

Treasury has since proposed an amendment to paragraph (cA) in the Taxation Laws Amendment bill (2014) that was issued on 17 July 2014.

The intended changes will mean that any amounts received by, or accrued to, a natural person as a restraint of trade compensation, will only be included in his/her gross income in these instances:

  • in respect or by virtue of employment or the holding of any office or
  • in respect of any past or future employment or the holding of any office


The intended amendment will not affect the inclusion in gross income of restraint of trade payments to any person that is, or was a labour broker or a personal services provider, as they fall within the definition of an employee.

It is proposed that the amendment will be effective from the promulgation date of the Taxation Laws Amendment Act, applying to any restraint of trade imposed on years of assessment ending on, or after that date.