On 12 October 2018, Treasury released exposure draft legislation concerning the latest changes to the small business capital gains tax (CGT) concessions (the concessions).
Announced in the 2018-19 Federal Budget, the Government is introducing additional requirements for partners of a partnership to access the concessions when dealing with their partnership interest. The measures will apply retrospectively from 8 May 2018.
These measures are primarily in response to the use of so-called “Everett” assignments. Broadly an Everett assignment is the assignment of some or all of a partner’s interest in a partnership but which neither makes the assignee a partner nor entitles them to any influence or control over the partnership. The effect of such an assignment is that the partner (the assignor) holds the partnership interest on trust for the assignee. In its decision in Federal Commissioner of Taxation v Everett  HCA 6, the High Court held the income from the assigned partnership interest in that case was not taxable in the hands of the partner. Instead it was taxable in the hands of the assignee.
Assigning some or all of a partner’s interest in a partnership triggers a CGT event as it is a part disposal of the partner’s interest in the partnership assets. Often, the partners were able to access the concessions to either reduce or even disregard capital gains arising from such an assignment. Under the proposed changes, the intention is that partners in partnerships who alienate their income by creating, assigning, or otherwise dealing in rights to the future income of a partnership will no longer be able to access the concessions in relation to those rights.
Exposure draft legislation
The proposed measures will apply in two circumstances.
The first circumstance involves Everett-like assignments, where the CGT event must now involve the creation, transfer, variation, or cessation of a right or interest that entitles an entity to:
an amount of the income or capital of a partnership; or
to an amount calculated by reference to a partner’s entitlement to an amount of income or capital of a partnership.
The second circumstance is designed to capture a variation on the Everett assignment where the assignment of rights or interest is not to the income or capital of the partnership, but to a particular amount or percentage of the income or capital a partner receives or is entitled to receive from the partnership.
Where one of the two noted circumstances apply, the integrity measure will only allow the concessions to apply where the right or interest to which the CGT event relates is a membership interest of the entity in the partnership (rather than a right to part of the income or capital from a partnership interest).
Practically, the new measures only make the concessions available for CGT events directly involving a partner’s share in the partnership itself. An assignee’s entitlement to a partner’s share in the income or capital of the partnership would not be a ‘membership interest’ in the partnership. Therefore, capital gains resulting from the assignment of a partner’s entitlement to a share of the income or capital of a partnership will not attract the concessions under the new measures.
Importantly, the proposed measures are still at exposure draft stage which means the proposed legislation is not yet current law and may still be subject to change.
If you have any queries in relation to the issues above or require any assistance in the application of the concessions, please contact us.
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