When a partner enters into an equitable assignment of their partnership interest to an individual or other entity (the assignee), it is usually an entity related to the partner (the assignor). Such an assignment is commonly known as an Everett assignment, after the case Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 (“Everett”).
In Everett, the taxpayer practised in partnership with three other solicitors and held a 13% interest in the capital and income of the partnership. Mr Everett executed a Deed of Assignment to assign 6/13ths of his share of the firm to his wife. The Commissioner assessed both the taxpayer and his wife on the assigned portion. The High Court found that the assignment was effective for tax purposes. Income payable to the taxpayer’s spouse was trust income which was assessable in her hands only.
The principles established by the High Court in Everett’s case may be summarised as follows:
- A partner’s interest in a partnership is a chose in action, which is assignable in whole or in part by way of equitable assignment.
- The effect of such an assignment is that the assignor holds that assigned partnership interest on trust for the assignee.
- The assignment does not make the assignee a partner in the partnership nor give the assignee any entitlement to the assets, management or administration of the partnership or the right to inspection of books and accounts.
- A partner’s partnership interest is an entire chose in action; a partner's entitlement to participate in profits is not separate and severable from the interest of the partner.
- A partner’s income is not ‘income from personal exertion’ but ‘income from property’, the relevant property being the partner’s fractional interest in the partnership.
When will Part IVA apply to an Everett assignment?
In Taxation Ruling IT 2330: Income Tax: Income Splitting (IT 2330) and IT 2501: Income Tax: Assignment of Partnership Interests (IT 2501) the ATO had previously taken the view that Part IVA does not apply to an Everett assignment, provided it constitutes a ‘no strings attached’ disposition. However, the ATO has revisited this position and now considers that Part IVA is capable of application to such assignments in appropriate cases.
The disposal of an interest in a partnership is not considered to represent the mere disposition of an income-producing asset. In form, a partner may be entitled to such a share, regardless of how much effort is devoted to the practice. However, in substance, the continued existence of this entitlement will ordinarily be conditional upon the partner's personal involvement in the partnership. In a practical sense, the income attributable to such an asset is a product of the partner continuing to devote personal time and attention to the business. This is the case, whether or not any the income of the partnership can be directly attributed to the partner's ‘personal exertion’.
An Everett assignment produces a result whereby income which is only capable of being produced by the personal efforts of the partner is derived by other persons or entities. This is a factor pointing towards the potential application of Part IVA. However, our approach to assessing the risk associated with these arrangements will be determined in accordance with the risk assessment factors set out in the guidelines Assessing the risk: allocation of profits within professional firms.
The application of Part IVA to the entering into of an Everett assignment will be considered in relation to assignments that have been entered into in the 2015-16 income tax year and later years. This means that from 1 July 2015, if a partner has entered into an Everett assignment, one of the benchmarks in the guidelines needs to be met in order for the assignment to be rated as low risk.
The ATO may consider the application of Part IVA to a pre-1 July 2015 assignment where, after 30 June 2015:
- a further assignment occurs, or
- a power of appointment or other discretion is exercised, and
- as a result, the partner does not satisfy any of the benchmarks in the guidelines.
Where this occurs the ATO will only consider the application of Part IVA in the 2015-16 and later income years but will provide an opportunity for the IPP to self-correct their arrangement in the following income tax year.
Find out more
See Assessing the risk: allocation of profits within professional firms
For the purposes of the following examples, we have made the following assumptions:
- the profit and net/taxable income of the firm are equal
- the firm’s constituent documents do not restrict the practitioners from undertaking Everett assignments
- each of the other practitioners within the firm are notified that the assignment has been completed, in accordance with the constituent documents.
This page explains what an Everett assignment is and the ATO’s view on when the general anti-avoidance provisions within Part IVA of the Income Tax Assessment Act 1936 can apply to them
A Professional Practice has 3 partners who share equally in the profits of the firm. It generated $2m in annual profit. The firm does not operate a service entity and has no plans to commence a service entity arrangement.
On 15 July 2015 the partners decide that it would be acceptable for each of them to undertake Everett assignments. On that date the following transactions take place:
Partner 1 assigns 50% of their interest to their family trust.
Partner 2 makes 2 assignments, being 20% to their spouse and then 30% of the remainder of their interest to their family trust.
Partner 3 assigns 70% of their interest to their family trust. The trustee of the family trust then exercises its discretion to distribute all of the income to a corporate beneficiary with a discretionary trust shareholder. A dividend is declared and the trustee distributes it equally to the partner’s spouse and another corporate entity with $300,000 carried forward losses.
In this example, Partners 1 and 2 would be considered low risk. Partner 1 will comply with the 50% distribution benchmark, as would Partner 2.
Partner 3 does not comply with the 50% entitlement benchmark and, assuming that he does not comply with either of the other two benchmarks he will be considered higher risk. The ATO will review the arrangement and consider the application of Part IVA to the Everett assignment transaction itself, as well as the appointment of the income flowing from the Everett assignment to beneficiaries other than Partner 3.
A large professional firm has 100 partners and maintains a service entity to provide support services at commercial rates. The service entity complies with the ‘Your service entity arrangement’ guidelines. The firm generates $90m per year in profit, with the service entity generating an additional $10m. Each partner has an equal interest in profits of the firm and, indirectly through their family trusts, the service entity.
Robert, an individual partner of the firm, decides to enter into an Everett assignment with regards to his interest in the firm on 25 June 2015. Robert assigns 40% of his interest in the firm to his family trust. Robert still derives 60% of his share of the firm profits. Robert is entitled to at least 54% of the $1,000,000 distribution entitled to be received as a partner of the firm, made up of the $900,000 profit distribution and $100,000 from the service entity received indirectly through his family trust. This means that he will satisfy benchmark 2.
Christine, another individual partner within the same firm decides to enter into a similar arrangement on 25 July 2015. She assigns 50% of her interest in the firm to her family trust. As Christine receives less than 50% of the ‘overall’ profit she will be considered high risk unless:
She satisfies either benchmark 1 or benchmark 3; or
the trustee exercises its discretion to distribute the income flowing from the assignment in such a way that results in Christine being able to satisfy one of the guidelines
In the event that she is rated as high risk and the ATO will review and consider the application of Part IVA to the Everett assignment transaction itself, as well as the appointment of the income flowing from the Everett assignment.
Tony and John have carried on their legal practice in partnership since 20 August 1983. On 30 June 1985 both partners entered into an Everett assignment. Tony assigned 60% of his partnership interest to his spouse and John assigned 60% to a family discretionary trust established by John for the benefit of his family and related entities.
Although the assignment was entered into prior to 1 July 2015, Tony’s and John’s arrangements will still be assessed against the guidelines to be regarded as low risk. In Tony’s circumstances, the assignee (his wife) is the ultimate taxpayer and there is no discretion to be exercised when the assignee receives the income attributable to the assigned partnership interest. Although Tony may ordinarily be considered higher risk under the guidelines, as the assignment was entered into prior to 1 July 2015 and there is no subsequent discretion to be exercised regarding the distribution of income from the firm, the ATO undertakes not to review the assignment.
However, as John assigned 60% of his partnership interest to a family discretionary trust, unless he satisfies benchmark 1, whether he is rated as low or high risk in the 2015-16 income year and onwards will depend on how the trustee exercises its discretion to distribute the income attributable to the assigned partnership interest. If that is done in a way that enables John to comply with one of the benchmarks then he will be considered low risk for that year, However, if the trustee exercises their discretion to distribute the income flowing from the assignment in such a way that results in John not being able to satisfy any of the benchmarks, he will be rated as high risk and the ATO will review and consider the application of Part IVA to the appointment of the income flowing from the Everett assignment in the 2015-16 income year (or any subsequent year where none of the guidelines have been satisfied).
A Professional Firm has 3 IPPs, and operates as a partnership of natural persons. The practice generates a profit of $3m per year.
On 1 August 2015, one of the IPPs assigns 30% of their interest to their family trust on 1 July. The IPP remains in compliance with the guidelines as they meet benchmark 2, so they will be considered low risk.
On 1 August 2016, the IPP assigns 40% of their remaining interest to the same family trust. This effectively results in the IPP transferring a total of 58% of their interest to the trust over the two assignments. Prima facie, this will cause the IPP to fail the 50% benchmark in years where the family trust does not make a distribution to the IPP.
In these circumstances, the ATO will consider whether the IPP meets either of the other two benchmarks. If not, the ATO will consider all preceding transactions to be relevant for a review and the potential application of Part IVA.
End of example