We now have Exposure Draft legislation that proposes to prevent the small business CGT concessions from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.
Since the 1980 High Court decision in Everett, partners can make an assignment of some of their interest in the partnership. Such an assignment does not make the assignee a partner but means that the partner holds the partnership interest on trust for the assignee and the income is taxed to the assignee. These assignments result in a CGT event and the small business CGT concessions can be used to reduce any resulting capital gain.
Under these new rules, the small business CGT concessions remain available for genuine disposals and transactions that affect the substance of the operation of the partnership.
However, they are not available for assignments and other rights or interests that merely result in the transfer of income or capital that a partner receives from the partnership to other entities without making the other entity a partner.
Laura, a partner in a partnership, makes an equitable assignment of half her partnership interest to Dominic, her spouse. This entitles Dominic to half of any amounts Laura receives as a partner, but does not make Dominic a partner.
The assignment results in Laura having a CGT event. The CGT event involves both the variation of Laura’s partnership interest and the creation of a right in the hands of Dominic.
Both interests entitle the entity holding the interest – Laura for the partnership interest, and Dominic for the right to income – to an amount of the income and capital of the partnership. As a result, both interests must satisfy the additional basic condition for the small business CGT concessions to be available for the CGT event.
The partnership interest held by Laura is a membership interest of Laura’s in the partnership and satisfies the condition. The equitable interest held by Dominic is not a membership interest of Dominic’s and cannot satisfy the condition.
As Dominic’s interest does not satisfy the new additional basic condition, the small business CGT concessions are not available to Laura in relation to the CGT event.