Consultancy giants EY and KPMG will not follow other “big four” firms and ban the use of controversial tax minimisation scheme, which allows partners to legally divert some of their income to family members.
The scheme – known as an Everrett assignment – allows a partner to allocate a portion of their financial stake in a firm’s assets to a spouse. This could reduce their overall tax burden, especially if the spouse has no other income and is within a lower tax band.
While the scheme is legal, the Australian Tax Office (ATO) is concerned some partners may potentially have aggressively used it to reduce their tax. Other critics, including Centre for International Corporate Tax Accountability and Research (Cictar), claim the arrangement does not pass the pub test and should be phased out.
On Friday, PwC Australia joined rival Deloitte in banning new partners from using the scheme.
The decision came after criticism from senators and the ATO, which has flagged a tougher regulatory approach. About 230 PwC partners use Everetts.
“Our partners have not been entering into them and we have made the decision to prohibit such [arrangements] going forward,” PwC Australia’s chief executive, Kevin Burrowes, told a Senate inquiry into the consulting industry on Friday.
Both KPMG and EY confirmed they would not follow their rival’s lead and will continue using Everett assignments.
Around 30% of EY partners use the schemes. A KPMG spokesperson said the firm did not promote Everett assignments and fewer than 140 of around 700 partners had used them.
“We will continue to monitor relevant ATO policy and seek to ensure we are in line with community expectations on the matter,” a KPMG spokesperson said.
The ATO became concerned about Everett assignments in 2017 when it found some partners were reporting artificially low remuneration while their spouses benefited. The ATO said that in some of these cases, there was no commercial justification for the income-splitting. They believe this may have led to some partners not being taxed appropriately.
“The ATO does not consider these arrangements appropriate under the existing law,” an ATO spokesperson said. “The revenue forgone from these arrangements is not known.”
In 2018, the rules were tightened to limit access to small business capital gains tax concessions.
The ATO then announced a transition period for partners to adjust their tax arrangements before tougher regulatory action was taken against “high-risk” cases. That transition period expires on 1 July.
“Once the transitional period […] ends, any practitioners remaining in the high-risk ‘red zone’ can expect increased ATO scrutiny and enforcement action,” the ATO spokesperson said.
The ATO declined to reveal how many big four partners were considered “high-risk” before the end of the transition period.
Cictar’s principal analyst, Jason Ward, said Everett assignments were opaque and should be phased out.
“It is virtually impossible to research income-splitting of the partners in the big four accounting firms since it is all private and confidential,” Ward said.
“These types of arrangements are not in line with public expectations, but are no surprise given the broader problems with the big four that have now been well identified.”
Everett assignments are also used by law firms and partners at non-consulting businesses. But the ATO has focused primarily on partners who play “a key role within the Australian tax system”.
Labor senator Deborah O’Neill, who has helped lead a Senate inquiry into consultants, has been a long-term critic of partners who push the limits of Everett assignments.
“Inappropriate tax minimisation behaviour is an affront to the majority of Australians who are doing the right thing and paying their share of tax,” O’Neill said.
“If these firms expect to have an ongoing role as trusted practitioners within the financial and indeed government sectors, I would encourage them to have a very thorough look at the ATO’s advice and then consider whether their personal affairs would stand up to scrutiny, not just from a legal perspective, but also a moral and ethical standpoint.”
