Following on from the ATO’s guide to professional services firms’ allocation of profits in PCG 2021/4, the ATO has now further tightened its compliance scrutiny of individual professionals’ ability to assign or stream income away from themselves to family members by releasing its compliance approach to so-called Everett assignments.
An Everett assignment refers to a High Court decision (Federal Commissioner of Taxation v Everett (1980) 143 CLR 440) which upheld as legally effective a lawyer’s assignment of rights to receive income to their spouse, thus effectively achieving “income splitting”.
The ATO has long frowned upon such assignments and has attempted (unsuccessfully) a number of times to challenge or narrow the scope of these assignments in Court.
In the absence of any change in law or Court decisions, the ATO now seeks to discourage professionals (particularly non-equity partners) from relying on such techniques by threatening to scrutinise more closely and potentially applying Part IVA anti avoidance measures to Everett assignments that display certain high-risk features such as:
- The assignment purports to admit an individual who is not an owner or equity holder in the partnership as a partner in the partnership.
- A partner’s relation with the partnership is characterised by contractor or employee attributes.
- The assignor does not have full rights to participate in management and benefits of the partnership.
- The assignor receives a fixed draw or salary and has limited or no exposure to the risks and benefits associated with the performance of the partnership to that draw or salary.
- The assignor is indemnified by partners for any professional liability in respect of actions against the partnership
If you are a “non-equity” partner or someone for whom these features may apply and are seeking to undertake or have undertaken such assignments, you should consult with your taxation adviser on this matter.
Please contact Grant Thornton if you wish to explore the ATO’s approach further.