Exploring Tax Strategies of Australian Equity Partners: Insights from the 'Big Four' Accounting Firms

Australian equity partners at the prominent 'big four' accounting firms have been found to extensively employ income splitting tactics, accounting for 44% of their profit in the 2022 fiscal year, as disclosed during an inquiry by the Australian Senate. The investigation unveiled that these partners collectively distributed A$1.2 billion out of their total A$2.7 billion profit during the specified period. This revelation has sparked discussions regarding the efficacy and fairness of such tax minimization strategies.

The Australian Taxation Office (ATO) underscored that income routed through various forms of trusts likely benefitted from lower tax rates compared to direct payouts to equity partners. Despite acknowledging the prevalence of income splitting, the ATO expressed challenges in accurately assessing the tax implications of partner distributions due to the complexities involved in identifying the ultimate beneficiaries. Nonetheless, the ATO approximated an effective tax rate of around 36% for partners across the big four firms, shedding light on the potential tax advantages accrued through these practices.

Reports indicate that Australian equity partners at these firms command substantial incomes, with an average of at least A$700,000. This places them in a favorable position to exploit tax-saving opportunities, especially considering the progressive tax system in Australia, where the highest tax rate reaches 45% for earnings exceeding A$180,000. These partners leverage various income-splitting mechanisms, such as utilizing service trusts under their control to render services to the partnership at inflated prices, consequently reducing taxable partnership income. Moreover, profits derived from these trusts can be channeled to family entities or spouses, further optimizing tax efficiency.

Another method widely employed by partners, known as the Everett assignment, allows them to legally divert future income by assigning a portion of their business assets to a spouse. This strategy, inspired by a landmark 1980 Australian High Court decision, provides partners with additional avenues for tax optimization while complying with legal frameworks.

Recent developments have seen diverging approaches among the big four firms regarding the regulation of income-splitting practices. While PwC Australia recently implemented a ban on new partners from utilizing the Everett assignment scheme, EY and KPMG have refrained from imposing similar restrictions, distinguishing their policies from their counterparts. This variance in approach underscores the complexity and nuances surrounding tax planning strategies within the accounting profession.

In response to concerns raised by regulatory authorities, the ATO has instituted a transition period allowing partners to adjust their tax arrangements before the implementation of more stringent regulatory measures, slated to take effect on July 1. Partners identified as high-risk entities can expect heightened scrutiny and enforcement actions from the ATO, underscoring the regulatory imperative to curb potential tax avoidance practices and uphold tax integrity within the industry.

By fLEXI tEAM