As part of the ATO’s focus on the taxation of professional firms, started with the release of TA2013/3, the ATO has updated their view on the tax effectiveness of Everett assignments.
The term ‘Everett assignment’ is used to describe an agreement where a partner in a partnership assigns their entitlement to some or all of the income of the partnership to another person.
The name comes from a High Court Case – Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440. In the case, Mr Everett held a 13% interest in a partnership and assigned 6/13ths of his interest to his wife. The Commissioner assessed both Mr Everett and his wife on the assigned portion.
The High Court found the assignment to be effective and determined that only Mr Everett’s wife should be assessed on the portion assigned to her. This became an effective way of having some of a professional partnership’s income assessed to a party that was not a partner of the partnership. Note that this case was before Capital Gains Tax was introduced in Australia, and entering an Everett assignment now would likely result in a CGT event.
On 30 June, the ATO revised this view, decided by the High Court 25 years ago, and decided that Part IVA (the anti-tax avoidance provisions) may apply to an Everett assignment. The ATO will apply the three benchmarks identified in TA2013/3 to determine if the agreement has been entered into for the purpose of diverting income from a professional practitioner. If an individual public practitioner does not meet one of the three benchmarks (equivalent remuneration, 50% entitlement or 30% tax rate), the individual will be at a high risk of ATO compliance action being commenced.
This view is applicable for Everett assignments entered into or amended from 1 July 2015, so now even more than ever is it important to receive good professional advice when structuring or re-structuring a professional practice.
Read more details from the ATO website on Everett assignments and assessing the risk: allocation of profits within professional firms.
Note that this updated guidance from the ATO has not been released as a tax ruling, but as an update posted on the ATO website. In my personal opinion, the ATO are being very ambitious in attempting to overturn a 25 year old High Court decision without a tax ruling, including legislative reasoning for their change of view. That having been said, until the legislation has been re-tested by the courts, discretion is the better part of valour.