When a partner assigns their partnership interest to an individual or other entity (the assignee), it is usually an entity related to the partner (the assignor). These assignments are commonly known as Everett assignments, after the case Federal Commissioner of Taxation v Everett  HCA 6 (Everett).
In the Everett case, Mr Everett practised in partnership with three other solicitors and held a 13% interest in the capital and income of the partnership. He executed a Deed of Assignment to assign 6/13ths of his share of the firm to his wife. The Commissioner assessed both Mr Everett and his wife on the assigned portion. The High Court found that the assignment was effective for tax purposes. Income payable to Mr Everett’s spouse was trust income, which was assessable in her hands only.
A similar type of assignment was undertaken in Commissioner of Taxation v Galland  HCA 83 (Galland) where Mr Galland, a solicitor in a partnership assigned 49% of his share in the partnership to a related family trust.
The principles established by the High Court in Everett and Galland 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 this type of 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 or give the assignee any entitlement to the assets, management or administration of the partnership or the right to inspection of books and accounts.
- As 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, with the property being the partner's fractional interest in the partnership.
Practical Compliance Guideline PCG 2021/4 Allocation of professional firm profits – ATO compliance approach clarifies how we assess the risk and our compliance approach relating to the allocation of profits within professional firms.
The PCG applies from 1 July 2022 and outlines that the risk assessment framework is only available to taxpayers if their arrangements are commercially sound and do not exhibit high-risk features.
Your arrangement would be materially different in principle to Everett and Galland and may be high risk where:
- it purports to admit an individual who is not an owner or equity holder in the partnership as a partner of the partnership
- a partner's relationship with the partnership has characteristics indicating that relationship is akin to a contractor or employee of the partnership.
We also consider a partner undertaking an Everett assignment as high risk if they:
- do not have rights to full participation in management and the benefits of partnership
- receive a fixed draw or salary when they have limited or no exposure to the risks and benefits associated with the performance of the partnership to that draw or salary
- are indemnified by partners for any professional liability in respect of actions against the partnership.
Example: high risk assignment by non-equity partner
Jamie is made a non-equity partner in Design Partnership, an engineering firm and:
- is not required to make a capital contribution
- has a fixed salary of $130,000
- has no right to vote or participate in the management of the firm.
She undertakes an Everett assignment of a portion of her interest in the partnership to her family discretionary trust. This assignment is considered high risk because it is materially different in principle to Everett and Galland such that Jamie does not have the full rights, entitlements and obligations of a partner.End of example
If your Everett assignment has high risk features, the Commissioner is likely to give closer attention to the individual facts and circumstances of the arrangement. This includes a deeper consideration of whether anti-avoidance provisions, such as Part IVA, apply.
Our approach to assessing the risk associated with Everett assignments that do not exhibit high risk factors will be determined in accordance with the risk assessment framework set out in the PCG 2021/4. For information on how we risk assess the profit allocation in professional firms, refer to Assessing the risk: allocation of profits within professional firms.
If you are unsure whether your arrangement has high-risk features and whether it would be considered high risk, email ProfessionalPdts@ato.gov.au
Since 8 May 2018, law changes limit access to the small business capital gains tax (CGT) concessions relating to Everett assignments.
Under these changes, the assignment of a partnership interest must meet an additional basic condition to access the concessions.
The changes ensure that the CGT concessions are only available for capital gains arising from CGT events that relate to rights or interests that entitle an entity to income or capital of a partnership by making that entity a partner of the partnership.How to assess the risk rating of your Everett assignment arrangements and our compliance approach.