Budget Measure – limiting CGT Concessions to partners of ‘small’ partnerships, resulting in many ‘Everett’ assignments of partnership interests being subject to prohibitive CGT again

In the 2018 Federal Budget, the Government announced a change to the Small Business CGT Concessions (in Div 152 of the ITAA97) that would adversely affect many partners who ‘alienate’ their partnership income assigning their interest in the professional partnership, to a related entity (and thus ‘split’ what would otherwise be, their income).

Such assignments were held to be effective in Everett’s case [1980] HCA 6 and have been known as ‘Everett assignments’ ever since. In the cases, where this has held to be effective, they have assigned just less than half of their interest. It is not clear whether assigning more than half would fall foul of the General Anti-Avoidance Provisions (in Part IVA of the ITAA36) but the expressed rationale would make that unlikely.

These assignments were very popular until capital gains tax (CGT) was introduced (in 1985), when the assignment typically resulted in the assignor/partner having an assessable capital gain. But in 1999, small business CGT Concessions were introduced, and they gave relief, from tax, on the assessable gain, that typically arose from the assignment.

This relief was available to partners, even in very big partnerships, because of the way eligibility for the relief was drawn. There was a $5m ‘net assets test’ and later, a $2m turnover test, also. These were defined as including the assets or turnover of both ‘connected entities’ and ‘affiliates’ (s152-15(1) & s328-115(3)). However, one partner’s assets were not aggregated with the others and each partner was, therefore, an ‘island’ for the purposes of access to these concessions. This arose by expressly precluding one partner being an ‘affiliate’ of another (the former s152-25(2) and the current s328-130(2)). Access depended, on the assets of the partner, alone, and his/her ‘affiliates’ and ‘connected entities’ as defined.

On Budget night, Treasury described this ‘inappropriate’, in aid of the Government trying to cast this an ‘integrity’ measure. The extent of the change was described as follows.

The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including partners in large partnerships, are currently able to use these concessions, including, particularly, in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership [the classic description of the effect of such an assignment].

There are no changes to the small business CGT concessions themselves [meaning the style and amount of relief set out in subdues 152-B, 152-C, 152D & 152-E].  The concessions will continue to be available to eligible small businesses with an aggregated annual turnover of less than $2 million or net assets less than $6 million.