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Taxability of Everett Assignment
The term Everett assignment refers to the transfer of partnership interest by a partner to another person for with or without consideration. This mode of the assignment is commonly used by the professional to reduce his tax liability. Under this arrangement partner of the firm usually, transfer i.e. assigns whole or part of his share in profit and asset of a partnership firm to the beneficiary. This is done with the intention to shift the tax burden on the share of profit so transferred upon the beneficiary.
However, the tax consequences of the aforesaid arrangement are now considered an arrangement for tax avoidance and hence regarded as a void in context with the recent judicial pronouncement.
The recent judicial verdict has created tax liability of transferor i.e. assignor in respect of profit share transferred to the assignee. Thus, assignor of the share is liable to pay tax on the whole of a share of profit of partnership.
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In Hadlee v Commissioner of taxation, the court held that Everett assignment arraignment is a transfer of future property and is in contravention of section 99. Following are notable points in relation to this judgment:
- The first aspect court has considered is nature of property under the arrangement. According to court the nature of property under Everett assignment is future property. This is because the property transferred is right to receive a share of profit of the firm and right to share asset which is, at the time of transfer, not certain. This is because it depends upon the will of the assignor to work, level of skill and due diligence exercise, mental and health status and continuation of the firm. The availability of profit in the hands to assignor depends upon aforesaid elements. It also depends upon the possibility of profit in given year. In case if assignor discontinues partnership or dissolution of a firm or nonavailability of profit, the assignee will get nothing. Thus, the property i.e. amount to be received is not certain at the time of execution of assignment deed. Thus, it can be said that it is nothing but the mere expectancy. It is right to receive a profit when it is available.
- The second aspect that court has considered as a liability of a person to discharge tax obligation. The court held that in the given arraignment the assignor of the share will be considered as a relevant taxpayer. This is because the share of profit is first available to assignor in the capacity of partner and not because he is a trustee of assignment trust. As pointed out above that the property under transfer if future property and hence it vests in the assignee only when it comes into existence. It comes into existence as when assignor derives profit from the partnership firm. The court further pointed out that the existence or nonexistence of consideration will make no difference. If the property is the first vest to the assignor and then to the assignee, then, in that case, the tax liability is of the assignor and consequently, the whole share of profit will be taxed in the hand of the assignor in the capacity of partner and not in the capacity of trustee.
- The next aspect considered by the court is the legality of the agreement. The court pointed out the difference between tax mitigation agreement and tax avoidance agreement. The tax mitigation agreement is an arrangement under which the taxpayer can reduce his tax liability by permitted means. On the other hand when taxpayer tries to reduce his tax liability by means not permitted by law then such arrangement is considered as tax avoidance agreement. According to court, there are certain parameters which judiciary needs to consider before deciding the legality of arrangement. This includes the existence of arrangement, its purpose and In case Everett assignment there exits written a contract between assignor and assignee. The effect of arrangement must be tax avoidance. In this context it is important to note that the purpose for which arrangement is made is irrelevant; what is relevant is its effect. In the case where arrangement consists more than one purposes; the tax avoidance must be the dominant purpose. This will depend upon the level of commonality existing in the parties under the arrangement. Court further pointed out that consideration is also one of the important elements to be taken into account. The inadequacy of consideration highlights the purpose for which arrangement was made. In Everett assignment, the valuation of right is done by taking into account present valuation. It nowhere considers the value of future efforts. To remove doubt, justice had made it clear that the answer will same even in case of full consideration. This is because of the illogical aspect of the arrangement under which assignor agrees to receive lesser communication for his full effort. In this case, the court has also rejected the argument of taxpayer highlighting the risk diversion as the main purpose of the arrangement.
The analysis of Hadlee case indicates that the taxability of income from any arrangement depends upon the nature of property; if the property under the arrangement is present property, the relevant taxpayer is assignee; on the other hand, if the property under the arrangement is future property, the relevant taxpayer is assignor. As Everett assignment includes the transfer of future property, the relevant taxpayer is assignor. In Booth case, the Australian High Court has supported this judgment.
However, it is important to note that the reasoning is inconsistent with principles of equity. The court in Holroyd case held that consideration must be given to the fact that even if property under the arrangement is future property; assignor holds the property in the capacity o trustee only when it comes into existence. He has no right to enjoy the property as per his wish, and thus the relevant taxpayer is an assignee.
Thus, we can conclude that the legal position seems unclear in this regard due to the availability of contradictory views.
 Income Tax Act, 1976 (NZ)
 Hedlee v Commissioner of Tax
 Booth v FCT
 Holroyd v Marshall