Everett Assignment

What is an assignment?

An assignment involves an entity or individual (the assignor) transferring contractual rights and benefits to another entity or individual (the assignee).

For example, assume John enters into a contract with David. Under the contract, John must perform services for David and is then entitled to a payment of $10,000. However, John assigns his right to receive payment to Jared. Therefore, Jared is entitled to be paid the $10,000 fee for services performed by John.

Although the assignment transfers the contractual benefits to the assignee, generally, the assignor is not permitted to transfer obligations under the contract to the assignee.

What is an Everett assignment?

An Everett assignment is a reference to the type of assignment that the High Court considered in the Everett case of 1980. The case involved a taxpayer who was a partner in a legal firm that operated through a partnership structure. The taxpayer assigned part of his interest in the partnership to his spouse. The taxpayer claimed that the partial assignment of his interest was effective to shift the burden of tax to the assignee (his spouse) in respect of that part of his interest assigned. The Commissioner of Taxation argued to the contrary. The court agreed with the taxpayer and confirmed that if a partner assigns their interest in the partnership to another, the net income of the partnership attributable to that assigned interest is considered to have been derived by the assignee (not the assignor). That is, the assignee is the relevant party assessed in respect of that assigned partnership interest.

It was confirmed that a partner’s interest in a partnership is a chose in action which may be effectively assigned at law. This is because the partnership interest itself inherently carries a right to a proportion of partnership profits, subject to the terms of the partnership agreement. The assignment of that partnership interest itself confers on the assignee the right to receive profits on the interest. The assignee should therefore be assessed.

Note that an assignment does not pass on rights to the assignee to be involved in the business affairs of the partnership in the same ways as the assignor. Therefore, the assignment of the partner’s interest can occur without the concern of the assignee being issued with partnership rights.

What is the tax advantage of an Everett assignment?

The endorsement of Everett assignments is significant. The primary tax advantage is that a partner can effectively organise for partnership profits to be assessed to someone else (the assignee) who has a lower marginal tax rate. Commonly, this would be a spouse or relative of the assignor partner. Because the assignee has a lower personal tax rate, the profits attributable to the partnership interest are subjected to a lower rate of tax.

As an example, take James who is a partner in a partnership and who has taxable income (not including partnership income) of $180,000. In 2023-24, the applicable tax outcome (assuming no deductions or offsets) is $51,667. Any further taxable income will be subject to tax at 45c for each $1. However, James’ spouse, Ella, has taxable income of $45,000. In 2023-24, the applicable tax outcome (assuming no deductions or offsets) is $5,092. Any further taxable income from will be subject to tax at 32.5c for each $1 up to $120,000 and then 37c per for each $1 up to $180,000, etc.

In this scenario, it is preferrable for Ella to receive any further assessable income (that will increase her taxable income) as that assessable income would be subject to lower rates of tax.

For instance, if James derived assessable partnership income of $10,000, he would have a tax liability of $4,500. However, if Ella derived the same amount, she would only have a tax liability of $3,250. Therefore, the overall tax result is $1,250 saved.

The Everett principle allows this to occur by enabling James to assign his partnership interest to Ella. Although Ella is taxed on the assigned partnership interest she does not obtain partnership rights e.g. the right to participate in business decisions. James continues to hold full rights associated with the assigned partnership interest.

CGT on the assignment of a partnership interest

The ATO view expressed in IT 2540 is that the assignment of the partnership interest or part of a partners interest triggers CGT event A1 for the assignor and as it is treated as the disposal or partial disposal of a CGT asset, being the partnership interest. Although note that technically the partnership interest is not disposed. Instead, there is an equitable interest created in respect of the partnership interest.

A capital gain is calculated as capital proceeds less the cost base of the CGT asset.

The capital proceeds from the CGT event will usually be based on the market value of the partnership interest assigned. This is because the market value substitution rule applies where the CGT event does not involve an arm’s length dealing.

The cost base of the CGT asset will include the amount the assignor partner paid to acquire the partnership interest.

The 50% CGT discount may be available if the partnership interest is held by the partner assignor for at least 12 months before the date of assignment (and other criteria are met).

Small business CGT concessions

The small business CGT concessions may be available to a partner assignor in respect of the assignment of a partnership interest.

There are a number of complex criteria for the partner to be eligible. These criteria are not addressed in this article.

Business accountant or banker, businessman calculate and analysis with stock financial.

What about assignments dissimilar to Everett type assignments?

Galland type assignments

After the Everett decision, there was some uncertainty about whether a share in a partnership interest could be effectively assigned (and taxed) to a discretionary trust, particularly where the assignor was also a beneficiary or appointor of the trust and/or a trustee or a director of a corporate trustee.

The court in the Galland case addressed this uncertainty and confirmed:

That an assignment to a discretionary trust was effective to pass assessment to the trustee assignee, even where the assignor was a beneficiary, appointor, trustee of the trust, or a director of the corporate trustee.
That an assignment made part way through an income year would be effective to vest the partner’s share of partnership profits in the assignee for the entirety of that income year (not just the portion of the income year following the date of the assignment). For example, if a partnership interest were assigned on 29 June, the assignment would be effective to have the assignee assessed for the entire income year (1 July – 30 June) and not merely the part of the income year following 29 June.

Assigned partnership Interest of retiring partner

The assignment of a partnership interest by a retiring or resigning partner may not be effective. This is because the retiring / resigning partner only has a right to a share in partnership profits whilst they remain in the partnership. That is, the retirement / resignation of the partner marks the end of their partnership interest. Therefore, any partnership interest assignment on foot will end once the relevant assignor partner exits the partnership.

The application of the general anti avoidance rules

Importantly, the Everett case and the Galland case did not consider the operation of the general anti avoidance provisions (Part IVA) or the equivalent provisions operating at the time.

Therefore, it is entirely possible that tax benefits achieved under arrangements similar to those described in Everett and Galland may be cancelled if the ATO chose to exercise its powers under Part IVA.

The ATO approach thus far seems to steer away from scrutinising arrangements which are materially similar to Everett and Galland. However, there appears to be increasing appetite for threatening the application of Part IVA for other types of assignments or arrangements designed to allocate profits in such a way to achieve favourable tax outcomes. This is seen in the recent release of the ATO’s Practical Compliance Guideline 2021/4.

PCG 2021/4 addresses the allocation of profits amongst individual professional practitioners within professional firms (e.g. accounting firms, legal firms etc.) The PCG has limited scope. For example, the PCG will not apply to an assignment where the assignment is:

Commercial driven, and
Not materially different from Everett and Galland, and
Demonstrates no high risk features as defined in the PCG.

However, if applicable, it provides a framework for defining the risk that certain profit allocation arrangements will be reviewed by the ATO. Obviously, the higher the review risk, the more likely it is that the ATO would consider applying Part IVA.

The following profit allocations arrangements are considered materially different from those in Everett and Galland:

Where non owners or non equity holders are indemnified by owners or equity partners in respect of professional liability against the partnership.
Admitting an individual as partner where that individual does not have equity or ownership in the partnership.
Where an IPP is a dressed up contractor or employee rather than a genuine partner.
Where an IPP has a fixed right to a salary or to draw profits without bearing risks (or sharing in benefits) related to the partnership.
Where an IPP does not have rights, or has limited rights, to involvement in decision making and benefits under the partnership compared with other partners.

Allowable deductions for expenses related to assigned partnership interests

If a partner assigns their partnership interest, they may not claim a deduction for partnership interest related expenses incurred. This could include interest payments in respect of a borrowing to acquire the partnership interest.

However, outgoings which are not directly related to the partner’s interest itself may continue to be deductible. This could include general expenses such as the cost of self education that improves the ability of the partner to perform their services as a partner.

If the partner assigns only part of their partnership interest, they can claim a deduction for the relevant outgoings that reflects the proportion of their total partnership interest which has not been assigned. For example, if a partner assigns half of their interest in the partnership, the partner can claim a deduction for half of expenses related to their partnership interest.

Assigning a prospective interest in a partnership

If a partner assigns a prospective interest in a partnership (referred to as a pre admission Everett assignment), as opposed to an subsisting partnership interest (similar to a basic Everett assignment), it is likely that CGT event D1 or E9 will occur.

A pre admission Everett assignment involves a person who is yet to be admitted as partner agreeing to assign their future partnership interest. In this situation, on admission of the partner to the partnership, a trust is established of which the assignor partner is the trustee. The trust property is the assigned partnership interest over which the assignee obtains a beneficial interest.

If the assignment is made to a person other than the partner, CGT event D1 will likely occur at the time of contract.

A capital gain under CGT event D1 is calculated as the capital proceeds from creating the right (generally the market value of the right) less incidental costs.

If the assignment is made to the partner themselves (e.g. through a discretionary trust), CGT event E9 will likely occur at the time of agreement. Note that CGT event E9 deals with a situation where a taxpayer makes an agreement to hold future property on trust.

A capital gain under CGT event E9 is calculated as the market value of the trust property (i.e. the assigned partnership interest) less incidental costs. The market value of the assigned interest is determined at the time the agreement is made

Assignments causing dissolution of the partnership