PwC bans partners using income splitting tax strategy
PwC Australia has banned partners from entering into a structure that reduces their tax bill which is used by almost one in three of its partners.
The embattled big four consulting firm has followed Deloitte’s long-standing ban on the use of “Everett assignments” and means that only KPMG and EY continue to allow their partners to use the legal technique to lower their taxable income.
The ban is part of a push to improve PwC’s “practices, processes and culture” after its tax leaks scandal. It was announced at a Senate inquiry hearing into consulting on Friday. Senators warned PwC that its reform processwas being derailed by the refusal of PwC’s global leadership to identify the so-called “dirty six” international partners punished over the matter.
Senator Barbara Pocock speaking to PwC Australia chief executive Kevin Burrowes during a hearing on February 9. Alex Ellinghausen
The policy change was raised during the inquiry when Greens senator Barbara Pocock asked: “Deloitte has reported that they’ve prohibited the use of ‘Everett assignments’ because ‘they’re not viewed favourably’ by the ATO. Why have you not prohibited them?”
PwC Australia chief risk officer Jan McCahey replied: “We have now made that decision, Senator ... we have always ensured that the structure of the assignments entered into by our partners qualify into the characteristics of the low risk or the green zone in all of the ATO published guidance.”
PwC Australia chief executive Kevin Burrowes had earlier said that about 230 out of the firm’s partnership of between 750 and 780, or about 30 per cent, use the Everett assignment.
The firm’s leadership had been discussing the ban for six months or so, the committee was told, and the change would not be applied to those partners already using the assignment.
The consulting inquiry was triggered by PwC’s tax leaks scandal, an ongoing matter which has rocked the firm’s operations and led to unprecedented scrutiny of the consulting sector.
PwC Australia CEO Kevin Burrowes and chief risk officer Jan McCahey at the Senate inquiry into consulting last Friday. Alex Ellinghausen
Legal tax reduction strategy
“Everett assignments” are a tax reduction strategy in which partners assign a portion of their stake in the partnership and its future income to others, usually a spouse, to cut their own overall tax bill. It is available to the firm’s partners because they are part-owners of PwC as opposed to salaried employees.
The Tax Office changed its rules around the technique in 2020 as part of a crackdown on its use by professional services partners. The ATO then warned it was “concerned about high-risk arrangements in all professional firms” and foreshadowed “increased enforcement action” ahead of new guidelines set to govern “Everett assignments” that have been issued but do not come into effect until July.
That move has come as Treasury flagged intensified scrutiny of another income splitting method used by partners, discretionary trusts, which have grown in popularity as a tax minimisation method.
“We assist and help [partners] ensure that their tax returns are accurate and complete, Senator,” Mr Burrowes said.
“So we’re a complicated organisation, and we want to make sure that our partners get their tax returns right and correct. I [have] no doubt we’re going to come on to Everett ... and what historically we’ve done ... [is] ensured as a firm that if our partners enter into an Everett assignment that it meets the ATO criteria.”
Partners at KPMG paid the highest average rate of tax – 40 per cent – among the big four accounting firms last financial year, while PwC’s partners paid the equal lowest average tax rate of 37 per cent, alongside Deloitte.
EY’s Oceania partners paid an average 39 per cent tax rate. A spokesman for KPMG said “less than 20 per cent” of their roughly 700 partners used the assignment and that the firm had “controls in place to ensure that partner tax return filings are correct”. An EY spokesman said the “Everett assignment “is a completely legal tax position when used appropriately” and about 30 per cent of the firm’s 760-odd partners use the structure.
A partner earning $500,000 would pay 41 per cent tax on their income. That tax rate would fall to 35 per cent if the partner split 40 per cent of that income with a non-working family member.
KPMG, EY still allow the structure
Deloitte banned the use of Everett assignments by its partners about a decade ago, saying at the time “we are aware they are not viewed favourably by the ATO”, while partners at KPMG and EY can continue to enter into the schemes.
Ms McCahey said no PwC partners had entered into a new Everett assignment for at least the past two years.
“It was an approach that a number of partners took many years ago now,” she said.
“It is not something that’s been commonplace for partners in our firm to do over the last four or five years and I don’t think any partner in the firm has entered into one of these assignments in the last two years.“
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Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.Connect with Edmund on Twitter. Email Edmund at edmundtadros@afr.com.au
