Tax office takes on professionals over income splitting

ATO update 24 September 2019

The Australian Taxation Office advises that taxpayers who have entered into arrangements prior to 14 December 2017 can continue to rely on the suspended guidelines for the year ended June 30 2019, as long as their arrangement:

• Complies with the suspended guidelines,
• Is commercially driven, and 
• Does not exhibit any of the high risk factors previously identified by the ATO.

The ATO says if individual practitioners are considering new arrangements or have concerns about current arrangements, they should engage with the tax office as soon as possible.

The Australian Taxation Office (ATO) expects to issue new guidance on Everett Assignments by June 2018, giving clarity to professional people who use the arrangements to minimise tax.

In December 2017, the ATO stunned professional firms by announcing it would immediately suspend its guidelines on Everett Assignments and has since told CPA Australia that it acted because of a variety of cases of risky behaviour.

CPA Australia approached the ATO to seek more information and has been told the guidelines were suspended due to concerns with a number of different partnership, company and trust arrangements using a variety of alienation techniques that went beyond the scope of the guidelines.

Professional people and self-managed super funds

Everett Assignments, a form of income splitting, allow a partner in a firm to assign a share in their partnership to a spouse. The spouse gains the right to future income earned from the firm, reducing the partner’s tax bill. The assignments are popular with accountants, lawyers and doctors who can split income with a spouse paying a lower rate of tax.

In suspending the arrangements in December 2017, the ATO said risky behaviour included assigning into self-managed superannuation funds (SMSFs) and related party borrowing.

It told CPA Australia it was also concerned “that firms may not be operating in a manner consistent with their constituent documents and that some changes to arrangements were not implemented correctly”.

Income splitting and partnership arrangements

The ATO had previously flagged it would review Everett Assignments in 2017 and has told CPA Australia that this review identified other high-risk behaviours that caused concern.

“This behaviour included restructuring to access the guidelines with little regard being paid to capital gains tax, structuring to access the small business capital gains tax concessions, as well as a number of ‘add-on’ features to a ‘vanilla’ Everett assignment.”

The ATO is consulting on Everett Assignments and expects to finalise further advice by June 2018.

Anyone considering starting such an arrangement after 14 December 2017 should talk to the ATO, which also advises that people who have entered into assignments before that date “that comply with the guidelines” can rely on the guidelines until an updated view is issued.

Uncertainty around Everett Assignments

CPA Australia has issued a policy bulletin on the ATO’s Everett Assignment move.

Head of policy Paul Drum FCPA believes a taxpayer will take the ATO to court, arguing an Everett Assignment is not in breach of Part IVA of the tax act relating to anti-avoidance.

“Some of these matters might be tested by the courts, particularly as the Everett case itself was decided some years before capital gains tax came into being,” he says.

The High Court case of the tax commissioner versus Everett, a Sydney solicitor, was decided in 1980. Everett had argued that A$11,185 should not have been included in his 1973 tax bill because the income was his wife’s, and the court agreed.

Talk to the tax office

Michael Parker, tax partner with legal firm Hall & Wilcox, says the ATO issued guidelines on Everett Assignments in 2014 but put the professions on notice with publication of more material in 2015, saying it would review the guidelines in 2017.

Parker says tax practitioners should not be surprised that guidelines are treated as a “living document” and reviewed from time to time.

Until 2015 the ATO had ruled that Part IVA of the Income Tax Assessment Act 1936 did not apply to Everett Assignments.

In 2015 it said this only applied when there were “no strings attached” and that for new assignments from July 1 2015, Part IVA could apply, with the now-withdrawn Assessing the risk: allocation of profits within professional firms guidelines issued.

“People have taken the guidelines as being some sort of green light from the ATO, authorising people to go off and restructure without Part IVA applying – that was never the intent,” says Parker.

He urges CPA Australia members to contact the ATO if they or clients have concerns or practical issues.