Issue
Can the assigned income of the taxpayer in a partnership be included in the calculation of the taxpayer's Highest Average Salary (HAS) for transitional RBL purposes?
Decision
No. As the assigned income does not form part of the 'net business income' of the assignor/taxpayer, it cannot be included as 'salary' in the calculation of the taxpayer's HAS under the Income Tax Regulations (the Regulations).
Facts
The taxpayer had assigned a large percentage of personal interest and rights in a partnership business to the trustee of the taxpayer's family trust.
Reasons for Decision
Division 2 of Part 5A of the Regulations prescribes the rules for the calculation of a transitional RBL. The determination of the transitional RBL is based on the person's HAS as defined in subregulation 47(1) of Division 1 of Part 5A of the Regulations. 'Salary" is essentially income from personal exertion from all sources in a financial year. A person's salary is increased by their share of 'net business income', or reduced by their share of 'net business losses' from a business carried on either alone or in partnership (paragraph 47(3)(b) of Division 1 of Part 5A of the Regulations).
The taxpayer had assigned a large percentage of personal interest and rights in a partnership business to the trustee of the taxpayer's family trust.
When a partner assigns their interest in a partnership, the assignor has effectively forgone the right to receive some or all of their share of the partnership income. Tax on the assigned income is paid by the assignee, as the assigned income is not included in the net partnership income of the assignor. This is consistent with the findings of the High Court in FCT v Everett (1980) CLR 440.