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While the big end of town has copped the brunt of the ATO’s enforcement efforts on the income-splitting arrangements, smaller firms are not immune.
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Everett assignments ‘dropping like flies’ as ATO cracks down
20 February 2024
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Everett assignments continue to be a favourite tax-saving mechanism among partners but recent moves by the ATO suggest the legal basis might be flimsier than once thought, according to Legal Consolidated partner, adjunct professor, Brett Davies.
“The High Court has not said that all Everett assignments are Kosher. It merely said the Everett assignment in that particular court case back in 1980 is acceptable on that particular set of facts,” he said.
The case, Federal Commissioner of Taxation v Everett [1980] HCA 6, established a precedent that the ATO has been narrowing for years.
“No two sets of facts can ever exist, there’s always some microscopic difference,” said Dr Davies.
It’s these microscopic differences the ATO has been relying on in its recent enforcement actions, said Dr Davies.
While, to date, the ATO has mostly targeted the use of Everett assignments among larger companies, the agency has demonstrated an increasing willingness to take action against smaller firms, he said.
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Dr Davies gave the example of a small engineering practice in Victoria that crossed the ATO’s radar.
“They did something the ATO didn’t like. It was found to be compliant but [the ATO] kept hunting and hounding this poor engineering company and they got them on the Everett assignment.”
“Very few people are saints,” he added, “and the ATO, when they’re so minded, will continue to look at the behaviour of taxpayers they don’t like until they find a blemish. And a common blemish is the Everett assignment.”
An Everett assignment is a kind of legal income-splitting in which a partner in a firm assigns part of their stake in the firm to a third party, usually a spouse or family member, to save on taxes.
Professional service income (PSI) rules make it difficult for lawyers, accountants, doctors and other professionals to share their personal income. Everett assignments are a way for professionals to take advantage of the low marginal tax rates of other family members.
The problem is, Everett assignments are “high risk,” said Dr Davies. “They’re artificial and therefore at risk of attack … in recent years the ATO has attacked them with gay abandon.”
Recently, PwC announced it would no longer allow its partners to use the assignments despite maintaining that their use of the assignments had been within ATO guidelines. Deloitte banned its partners from using the assignments “about a decade ago” in response to increasing scrutiny from the ATO.
The ATO has published a risk assessment framework to guide the use of Everett assignments. The framework applies only to assignments that are “commercially sound and [that] do not exhibit high-risk features.”
While the ATO has laid out certain circumstances under which an assignment might be “high-risk” and therefore not protected by legal precedent, Dr Davies said the conditions are largely unclear.
As many as one-third of PwC’s partners make use of Everett assignments. The company said that the ban would not affect those already taking advantage of the income-splitting strategy, it would simply prohibit others from joining in.
The ATO changed its approach to the assignments in 2020, claiming it was “concerned about high-risk arrangements in all professional firms.” The agency said it anticipated “increased enforcement action.”
According to Dr Davies, since the ATO changed course, Everett assignments have been “dropping like flies.”
The ATO’s approach is not punitive, said Dr Davies. They are not punishing individuals for using Everett assignments, instead they are ordering repayments for any avoided tax payments.
“We’ve seen the ATO ask for every dollar saved under the Everett assignment going back several years,” he said.
“I’m seeing less and less professional services businesses setting up the assignments, and I’m seeing more attacks on the ones that are still left in play.”
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