Inside this month, What the New Div 296 Tax Means for Individuals with Large Super Balances

This month we step through the newly enacted Division 296 superannuation tax—what it means for those with large super balances, how it will operate in practice, and the planning opportunities now available.

We also bring a clear message for business owners and high-wealth individuals: long-standing assumptions are being tested, with the ATO and courts setting new benchmarks for compliance, valuation and planning. 

We look at the SEPL decision and why it’s a timely warning for family businesses relying on informal arrangements that blur the line between ownership and employment. The Full Federal Court’s judgment in Kilgour offers fresh guidance on how the “market value” of assets is really determined in business sale transactions, with important implications for accessing the small business CGT concessions. We also unpack the ATO’s escalating focus on work-vehicle FBT issues, where misunderstood exemptions and poor record-keeping are driving significant audit activity.

What the New Div 296 Tax Means for Individuals with Large Super Balances

The Better Targeted Superannuation Concessions measure (known as the Division 296 tax) is now law and takes effect from 1 July 2026. For those with large super balances, it’s important to understand what the new tax does, why it’s been introduced, and the practical steps you and your financial adviser should consider. 

The Purpose of the Tax 

Division 296 is designed to make superannuation tax concessions fairer and more sustainable. Rather than changing the way super is taxed for everyone, the law targets a small group of people who hold large super balances, ensuring they pay more tax on the portion of investment earnings that relate to those large balances. 

Who it Applies to — Thresholds and Rates 

This new measure, starting 1 July 2026 (first year is 2026-27), applies to an individual with total superannuation balances (TSBs) in excess of the following thresholds: 

•          Large balance threshold: $3.0 million 

•          Very large threshold: $10.0 million. 

Both thresholds will be indexed in future years. 

This will mean that the overall tax imposed on superannuation fund earnings will be as follows:

Certain people will be excluded from having this new tax levied upon them, notwithstanding that their TSB may exceed the threshold. Excluded persons include child recipients of death benefit pensions and individuals who have made structured settlement superannuation contributions for a personal injury compensation payment. 

Further, where a person dies, they will no longer have a TSB. However, other than the first year of operation (ie, 2026-27), there can still be a Division 296 tax assessment in respect of the financial year in which they die, where they had a TSB of more than $3 million at the start of the year. Given superannuation is not an estate asset, this scenario should be considered as part of a review of an individual’s estate plan.

How the Tax Works

From an SMSF perspective, the fund will calculate its Division 296 earnings, which is based on its taxable income with adjustments for assessable contributions; net exempt income attributable to pensions; any non-arm’s length income (which is already taxed at 45%) and income relating to investments in a pooled superannuation trust. There may also be adjustments for any capital gains made from the disposal of fund assets, if the fund has made the relevant small-fund CGT election. 

The calculated Division 296 superannuation earnings is then attributed to fund members using an attribution percentage calculated by an actuary. This information will be used by the ATO to assess the member’s Division 296 tax liability. 

Division 296 tax is levied on the individual, not a superannuation fund. However, the tax can be paid either by the individual or they can elect for the amount to be deducted from their nominated superannuation interest. 

Next Steps

If your total super balance is near—or already above—the thresholds, it is important that you contact your financial adviser to arrange tailored modelling and to discuss whether the small-fund CGT election is suitable. Early planning will help you manage cashflow, reporting and any actuarial requirements efficiently. 

This will also be an opportunity to review the suitability and benefits of holding investment capital in a superannuation structure versus alternatives for amounts in excess of the large threshold.

A Wake-Up Call for Family Businesses on Fringe Benefits Tax

As Fringe Benefits Tax (FBT) lodgement season approaches, family businesses should carefully review the perks they provide to working directors and family members. A high-profile case involving luxury vehicles provided to three brothers who run a large business empire through a discretionary trust highlights the complexities — and potential risks — of informal arrangements. While the case initially appeared to expand FBT exposure, the latest decision handed down by the Full Federal Court offers reassurance that not all benefits provided to working owners will automatically trigger FBT.

What may seem like harmless “owner entitlements” or beneficiary perks can still attract scrutiny from the Australian Taxation Office (ATO). However, the courts have emphasised the importance of substance, documentation, and the capacity in which benefits are provided.

The Background

Three brothers operate a substantial business involving petrol stations, convenience stores, fast food, tobacco outlets, and gift shops. They serve as shareholders, directors, and key decision-makers (with powers as appointors under the trust deed), working long hours in executive-style roles without drawing formal cash salaries or wages. Profits and benefits flow through the family discretionary trust (SFT Trust), of which their corporate trustee (SEPL Pty Ltd) is the trustee. The brothers and family members are beneficiaries.

The business provided them with exclusive access to over 40 luxury and high-performance vehicles (including Bentleys and Ferraris) for both business and personal use. Costs associated with personal use were debited to the matriarch’s beneficiary account and later cleared by trust distributions — a mechanism consistent with beneficiary entitlements rather than employment remuneration.

The ATO assessed FBT on the private use component of these car benefits, arguing they were fringe benefits provided to the brothers as “employees” in respect of their employment.

What the Court Decided

The Administrative Appeals Tribunal (AAT) initially ruled in favour of the taxpayer (Re BQKD and Commissioner of Taxation [2024] AATA 1796). It found that the brothers were not “employees” for FBT purposes and that, even on a hypothetical basis, the vehicle benefits were not provided “in respect of” any employment. The benefits were instead linked to their capacities as beneficiaries, proprietors, and controlling family members.

The Commissioner appealed to a single judge of the Federal Court, who in June 2025 (Commissioner of Taxation v SEPL Pty Ltd as trustee of the SFT Trust [2025] FCA 581) allowed the appeal. Justice O’Sullivan held that the brothers were employees under the broad FBT definitions (including via the hypothetical deeming rule in s 137 of the Fringe Benefits Tax Assessment Act 1986 (Cth) — FBTAA) and that the benefits were provided in respect of their employment.

The taxpayer then appealed to the Full Federal Court. On 27 March 2026, in SEPL Pty Ltd as trustee of the SFT Trust v Commissioner of Taxation [2026] FCAFC 36 (Perry, O’Callaghan and Thawley JJ), the Full Court unanimously allowed the appeal. The Full Federal Court basically restored the AAT’s decision.

Key findings:

• Employee status: It was open to the AAT to conclude the brothers were not “employees” for FBT purposes. The definitions of “employee” and “salary or wages” ultimately draw on common law concepts of employment. The AAT properly considered factors such as the absence of employment contracts, no wages or leave entitlements, the presence of employed managers for operational roles, and the brothers’ control being referable to their proprietorial and governance roles rather than traditional employment. 
• “In respect of” employment: Even assuming (hypothetically) that the brothers were employees, it was open to the AAT to find there was no sufficient material connection between the benefits and any employment relationship. Here, access to the vehicles was not a substitute for salary or wages. The AAT correctly weighed competing explanations and found the benefits arose primarily from family/trust relationships, not employment.

Why This Matters for Your Business

The case underscores the ATO’s ongoing focus on dual-capacity individuals (e.g., directors who are also beneficiaries and active workers in trust structures). However, the Full Court’s reasoning provides important boundaries:

• Informal perks for working family members in discretionary trusts are not automatically subject to FBT.
• Substance and documentation matter: How benefits are provided, funded, and recorded (e.g., via trust distributions vs. remuneration) can help in determining the outcome.
• Common law employment concepts remain relevant in interpreting FBT definitions.
• Blending roles does not inevitably trigger FBT if the dominant characterisation is beneficiary-based.

Family businesses should still exercise caution. The ATO may continue to scrutinise similar arrangements, particularly where benefits appear to represent a substitute for remuneration or lack clear documentation. Superannuation contributions or executive titles can sometimes support employee characterisation, though they were not decisive here.

Practical Steps to Protect Your Business

Don’t wait for an audit—review your arrangements now:

• Document clearly: If a benefit is a trust distribution to a beneficiary, record it via trustee resolutions. If it’s tied to work duties, treat it as a fringe benefit and calculate FBT accordingly. Or confirm why they fall outside the regime.
• Consider FBT properly: Apply statutory formulas or operating cost methods for cars. Employee contributions (e.g., reimbursing personal use) can reduce or eliminate liability.
• Consider exemptions/concessions: Minor benefits under $300, or salary packaging for EVs, might help. 
• Audit overlaps: We also need to check for Division 7A loan issues or deemed dividends if benefits flow through private companies.
• Plan proactively: With ATO focus intensifying (as highlighted in recent compliance updates), model scenarios to minimise tax without losing commercial perks.

Remember that if the ATO discovers some unreported FBT liabilities then the business can also be exposed to penalties and interest.

The SEPL case ultimately favours the taxpayer and reinforces that FBT does not capture every benefit provided to working owners in family trust structures. However, every arrangement turns on its specific facts and evidence.

If your business provides vehicles, phones, travel, or other perks to family members actively involved in operations — especially without formal salaries — now is a good time to review. Our team can help analyse your structures, run FBT calculations or risk assessments, and implement practical fixes to protect profits while maintaining flexibility.

The law in this area is fact-sensitive and continues to evolve. Professional advice tailored to your circumstances is essential.

Key Lessons from the Kilgour Case: Smarter Valuations in Business Sale Transactions

When selling a business—or even a slice of one—how you value the assets involved can have a major impact on the tax bill. A recent Full Federal Court decision, Kilgour v Commissioner of Taxation [2025] FCAFC 183, offers timely guidance on how “market value” is really determined for capital gains tax (CGT) purposes.

When preparing for transactions, restructures or potential exit events, the case is a useful reminder: valuations must reflect real commercial conditions, not just theoretical models. 

What Happened?

In 2016, three family trusts sold 100% of the shares in Punters Paradise Pty Ltd, an online wagering business, to News Corp for approximately $31 million. The ownership split was:

• Pettett Trust – 60%
• Kilgour Family Trust – 20%
• Reuhl Family Trust – 20%

The sale was negotiated at arm’s length, involved extensive due diligence, and included a working-capital adjustment after completion.

The minority beneficiaries (20% holders) sought to use the small business CGT concessions, which in this case required the seller’s net assets to be below $6 million. To fall below the threshold, they argued their 20% minority interests should be heavily discounted in value—because a small holding is usually worth less on a standalone basis.

The ATO disagreed, saying each 20% parcel formed part of a coordinated 100% sale and should simply be valued as 20% of the final $31 million deal price.

The Court agreed with the ATO.

How the Court Approached Market Value

The Court applied the long-standing “willing buyer/willing seller” principles from Spencer v Commonwealth—but with a modern, commercial twist. Two practical messages emerge:

1. Real-world expectations matter more than rigid valuation dates

Although the tax rules in this area require looking at value “just before” signing the sale contract, the Court said you cannot ignore things that were reasonably predictable at that point. Here, the sale was essentially locked in through negotiations, so the final agreed price was the best evidence of market value.

Practical takeaway: If a purchaser is clearly willing to pay a premium—for control, synergies, strategic value or expansion opportunities—those factors will likely shape the valuation for tax purposes.

2. Actual deal terms beat theoretical discounts

The taxpayers tried to argue for a typical “minority discount”. However, the Court said the real commercial context matters more:

• All shareholders intended to sell together.
• The buyer wanted all the shares, not bits and pieces.
• A coordinated, 100% sale typically lifts the value of each parcel.

Because of that, the hypothetical buyer would not insist on a discount. The minority interests effectively rode on the value of the full-stake sale.

Practical takeaway: When shareholders act collectively, the tax valuation of each interest can increase—sometimes significantly.

What This Means for Business Owners

• Don’t undervalue your stake – If the buyer is pursuing synergies or control, your interest might be worth more than a textbook minority valuation suggests. Make sure your advisers consider the wider commercial picture.
• Evidence is everything – Keep thorough records such as negotiations, emails, valuations, buyer motivations. These can be powerful in supporting your tax position and accessing concessions.
• Plan CGT concession eligibility early – If you’re relying on the small business concessions, test different deal scenarios before signing any contracts or other paperwork, including a heads of agreement. Sometimes restructuring ownership or staging a sale can make a material difference, but integrity and anti-avoidance rules in the tax system still need to be considered carefully.
• Align shareholder expectations – In family groups and private companies, minority owners often assume their shares will be valued as a standalone piece. Kilgour shows that courts will often look at the transaction as a whole—not each slice in isolation.

The Bottom Line

Kilgour reinforces that valuations for tax purposes work best when they reflect the real commercial world, not theoretical models. Before you sell, restructure or negotiate with a potential buyer, involve your accountant early. A well-supported valuation can mean the difference between accessing valuable CGT concessions—or missing out.

The ATO Targets FBT on Work Vehicles: Don’t Let Assumptions Cost You

The ATO is turning up the heat on employers who provide work vehicles for private use. Sophisticated data-matching means assumptions and shortcuts can quickly lead to audits, penalties, interest charges—and even reputational damage. You can see the latest ATO FBT audit warning here: Misreporting FBT on personal use of work vehicles | Australian Taxation Office

If you provide vehicles to your team, whether to support fieldwork, boost morale, or offer a valuable perk, now is the time to ensure your FBT reporting is watertight. Here’s what the ATO is focusing on—and how to protect your business.

Don’t Assume Dual-Cab Utes Are Automatically Exempt

Dual-cab utes are popular in trades and construction, but despite popular opinion, they’re not automatically FBT-free. 

Whether an FBT exemption applies can depend on the vehicle’s design and also how it is used across the FBT year. 

Even if a ute is designed to carry a load of at least 1 tonne (ie, it is not classified as a car for FBT purposes) or it isn’t designed mainly to carry passengers (there is a specific formula used for this purpose) FBT could still be triggered if there is some private use of the ute. 

The ATO has identified many cases where employers wrongly claimed full FBT exemptions, leading to back taxes plus interest.

The best way to handle ATO enquiries around the FBT exemption for commercial vehicles is to ensure that appropriate evidence is already in place to support the application of that exemption. While the FBT rules don’t specifically require formal logbooks when looking at this exemption, failing to keep records that are similar to a logbook can make it difficult to navigate ATO review or audit activities. 

Accurately Apportion Private vs Business Use

If a full FBT exemption doesn’t apply then FBT is typically calculated on private use of work vehicles. You need to determine what portion of running costs—fuel, maintenance, depreciation—relates to personal trips. Ignoring this step can seem harmless but can quickly escalate during an audit.

Thorough record-keeping and proper apportioning can sometimes reduce your FBT liability even if the vehicle is used mainly for business purposes.

Remember that if a FBT liability is triggered it is the employer’s problem. 

Lodging FBT Returns 

Even if you think the FBT liability for the year might be small or immaterial, you might find that there is still an obligation to lodge an FBT return. The ATO’s analytics flag non-lodgers automatically. Penalties can reach up to 200% of the tax owed, plus interest.

Tip: Mark your calendar—FBT returns are due May 21 each year. Timely filing keeps your business compliant and avoids cash flow shocks.

Keep Reliable Logbooks and Records

A valid logbook tracks odometer readings, trip purposes, and business-use percentages over a 12-week period (renewable every five years). While not every scenario involving a motor vehicle specifically requires a valid logbook, failing to keep logbooks can sometimes lead to significant FBT liabilities that could otherwise have been avoided. 

Efficiency tip: Digital logbook apps simplify tracking, save time, and reduce errors. Good records can also support deductions.

Why it Matters Commercially

Non-compliance isn’t just a numbers game. ATO audits divert time and energy from running your business, and ATO attention can affect your reputation with clients, partners, or lenders. Conversely, getting FBT right ensures you pay only what’s required, protects cash flow, and may even reveal tax efficiencies.

Next steps: Review your vehicle policies, update records, and ask us if you need help. We help businesses manage FBT with confidence—making compliance straightforward and stress-free.

Remember: assumptions can be costly, but a proactive approach protects your business, your people, and your peace of mind.

Inside this month, A Wake-Up Call for Business Owners on Personal Tax Risks

This month we focus on key developments and practical guidance for business owners, property holders, and SMSF trustees navigating complex tax obligations. We begin with a deep dive into Director Penalty Notices (DPNs), highlighting the Tax Ombudsman’s review in response to a 136% surge in notices and the personal risks directors face if company taxes go unpaid. Next, we clarify the ATO’s updated position on capital gains tax for home-based businesses, emphasising when small business CGT concessions apply—and when they don’t. We also examine the ATO’s draft ruling on inherited homes, exploring how changes to main residence exemptions could affect family estates and estate planning strategies. Finally, we provide practical reminders for SMSF trustees on maintaining compliance, focusing on the sole purpose test and arm’s length requirements for related-party arrangement. 

DPN Review: A Wake-Up Call for Business Owners on Personal Tax Risks

Running a successful business is hard work—and sometimes, despite best intentions, tax obligations slip. If the business is being operated through a company structure, then the ATO can potentially issue a Director Penalty Notice (DPN), holding company directors personally liable for unpaid taxes. 

In 2024–25, DPNs skyrocketed by 136%, reaching over 84,000 notices, affecting directors of around 64,000 companies. The stakes are high, and now the Tax Ombudsman is reviewing how the ATO issues and manages these notices—a development all directors should take seriously.

So, what exactly is a DPN? Put simply, if your company fails to pay certain taxes—like PAYG withholding, GST, or Superannuation Guarantee Charge (SGC)—the ATO can target directors personally. There are two types:

• Non-lockdown DPNs: These apply if the company has lodged its activity statements or SGC statements but hasn’t made the relevant payments. In this case directors have 21 days to take appropriate action, such as arranging for payment of the debt, appointing an administrator, or entering liquidation. Acting promptly may allow the penalty to be remitted.
• Lockdown DPNs: These apply if reporting deadlines are missed as well. In this scenario directors can’t avoid personal liability by putting the company into administration or liquidation. 

The intent is to protect government revenue and employee entitlements—but for directors, the impact can be severe.

Why the Ombudsman is Involved

The review, announced in December 2025 by Tax Ombudsman Ruth Owen, responds to a surge in complaints, with DPNs topping the list. It will examine:

• How effectively the ATO uses DPNs to recover debts ($54.2 billion in collectable amounts by mid-2025)
• The fairness of selecting cases for enforcement
• How directors are notified and communicated with
• Treatment of vulnerable directors, including those coerced into roles or facing financial abuse

The review also aligns with broader government initiatives, including support for gender-based violence survivors and more empathetic engagement with business owners. While timelines are flexible due to resources, the review is part of the 2025–26 work plan, alongside assessments of ATO services for agents, First Nations engagement, and interest charge remissions.

Commercial Takeaways for Directors

DPNs are more than a compliance issue—they’re a real commercial risk. Ignoring a notice can disrupt personal finances, damage credit ratings, and even trigger bankruptcy. At the same time, the Ombudsman review could improve transparency and fairness, giving directors a clearer understanding of options if financial stress arises.

Practical steps to protect yourself now

• Stay on top of obligations: make sure the company lodges returns and pays liabilities on time.
• Lodge statements even if payment isn’t possible: Failing to lodge activity statements just makes things worse.
• Consider using ATO payment plans if cash flow is tight but remember that this won’t necessarily enable directors to escape personal liability if a DPN has been issued already.
• Monitor company cash flow and tax health closely, especially during economic dips.
• Act fast if you receive a DPN: Consult immediately your accountant or lawyer to explore options because strict deadlines might apply.
• Consider director insurance or business structuring to limit personal exposure—but compliance always comes first.

The Ombudsman’s review is a timely reminder: tax is a key business risk, not just paperwork. Being informed, proactive, and prepared can protect both your business and your personal assets. If you’re concerned about DPN exposure, reach out for a tailored review—we can help you stay ahead of risk, so your business thrives rather than just survives.

Navigating CGT on Your Home: New ATO Clarity for Home-Based Businesses

Running a business from home—whether as a sole trader, freelancer, or small operator—has many perks. But when it comes to selling your home and potentially saving on tax, recent guidance from the ATO serves as a reality check. 

The ATO has provided its views on how home-based businesses interact with the small business capital gains tax (CGT) concessions, providing a warning on how the ATO approaches a long-standing area of confusion.

See: Home-based business and CGT implications | Australian Taxation Office

The Key Issue: Active Asset Test

When an individual sells their main residence, they will often enjoy a full CGT exemption. However, if part of the home is used for business purposes, this can potentially impact on the scope of the exemption. 

If a full exemption isn’t available under the main residence rules then we typically look to other CGT concessions, including the CGT discount for assets that have been held for more than 12 months or the small business CGT concessions. 

The small business CGT concessions can potentially reduce or eliminate a capital gain made on sale of a property, but only if certain conditions are passed. One of the key conditions is that the property must pass an active asset test.

In very broad terms, to pass the active asset test you need to show that the property has been actively used in a business activity for at least 7.5 years across the ownership period or for at least half of the ownership period.

The ATO is clear: the active asset test applies to the entire property, not just the business portion. When you are applying the active asset test, an asset either passes this test or fails it. It is not really possible for an asset to partially pass the active asset test. The entire property is either an active asset or it is not.

Simply having a home office, workshop, or even being able to claim home occupancy expenses as a deduction does not necessarily make your home an active asset. Where business use is incidental to the home’s primary residential purpose, the ATO’s view is that the small business CGT concessions generally do not apply.

Rus v FCT

The view that the entire property must qualify as an active asset—and that incidental or minor business use (such as a home office or storage in a largely residential setting) is insufficient—draws support from case law, particularly the Administrative Appeals Tribunal (AAT) decision in Rus and Commissioner of Taxation [2018] AATA 1854 (Rus v FCT).

In that case, a taxpayer sought access to the small business CGT concessions on the sale of a 16-hectare largely vacant rural property, where only a small portion (less than 10% by area) was used for business purposes: a home office, shed for storing tools/equipment/vehicles, and related supplies tied to a plastering and construction business operated through a controlled company. The balance of the land remained vacant or used residentially. 

The AAT upheld the ATO’s ruling that the property as a whole did not satisfy the active asset test, reasoning that the business activities were not sufficiently integral to the asset overall. 

Minor or incidental use did not make the entire property an active asset, especially where the business was primarily conducted off-site. This precedent reinforces the ATO’s strict approach in home-based business scenarios: the property is assessed holistically. This means that limited business use typically fails to tip the scales toward qualifying for the concessions.

Practical Examples

Let’s take a look at how the ATO approaches some common scenarios. 

Minor home-based business: Harriet runs a hairdressing salon in a spare room, using 7% of the total floor space of the property and seeing clients eight hours a week. She claims deductions for occupancy expenses and gets a 93% main residence exemption. However, because her business use is minor, she cannot access small business CGT concessions. The 50% CGT discount can still apply.

Significant business use: Sue and Rob own a two-storey building, with the ground floor operating as a takeaway store (50% of the total floor area of the property) and the top floor as their private residence. The business has been running for decades with employees. Here, the property qualifies as an active asset, potentially giving them access to the small business CGT concessions for the portion of the capital gain that isn’t covered by the main residence exemption. 

What This Means for You

• A partial main residence exemption doesn’t necessarily mean you have access to the small business CGT concessions. Many homeowners mistakenly assume that business deductions or a home office automatically open the door. The ATO clearly doesn’t share this view.
• Seek advice before changing the way your home will be used. Starting to operate a business from home can impact on deductions, CGT calculations and access to CGT concessions. We are here to help you make fully informed decisions.
• Keep thorough records. Floor plans, hours of business use, and detailed deductions can help strengthen your position and may help in any future planning or audits.
• Consult your accountant. If selling your home is on the horizon, professional advice is critical to assess any potential CGT exposure and explore concessions that might be available.

The Bottom Line

The ATO’s updated guidance suggests that many home-based business owners won’t have access to the small business CGT concessions on sale of their home, but this always depends on the facts. Business owners need to plan proactively, rather than assume that tax relief will be available. 

By understanding how your home’s business use is treated, you can make smarter decisions. For example, will the profits generated from a small business operated at home end up being wiped out by a higher CGT liability on sale of the property down the track? 

After all, when it comes to CGT, every dollar you keep counts toward your next venture or your retirement nest egg.

ATO Update on Inherited Homes: What it Means for Your Family’s Wealth

The ATO has issued a Draft Taxation Determination TD 2026/D1 which looks at how inherited family homes are treated for CGT purposes. Some industry commentators have dubbed it a “death tax by stealth”, but it is a bit more complex than this. The draft guidance focuses on a specific aspect of the rules around applying the main residence exemption to inherited properties, potentially exposing deceased estates and beneficiaries to significant tax if not planned correctly.

Here’s what you need to know in practical terms.

Why TD 2026/D1 Matters

Under current law, deceased estates or beneficiaries can potentially sell a deceased individual’s former family home without paying CGT if certain conditions can be met. This exemption is particularly valuable for properties owned long-term, where unrealised gains could be substantial.

In order to access a full exemption you normally need to ensure that the property is sold within 2 years of the date of death (but the ATO can potentially extend this deadline) or that the property has been the main residence of certain qualifying individuals from the date of death until the property is sold.

These qualifying individuals can include the surviving spouse of the deceased individual, the beneficiary selling an interest in the property or someone who has a right to occupy the dwelling under the deceased’s will. 

The draft ATO guidance focuses on this last point. That is, what does it mean for someone to have “a right to occupy the dwelling under the deceased’s will.” In summary, the ATO’s view is that:

• The right to live in the home must be explicitly granted in the will to a named individual.
• Broad discretionary powers given to trustees, separate agreements, or even testamentary trusts (TTs) are not sufficient in the ATO’s view.

For example:

• A will giving an executor discretion to allow a family member to occupy the home does not meet this requirement.
• A trustee of a TT who allows a beneficiary to live in the house is seen as separate from the will and may trigger CGT on sale.

Some legal and real estate experts warn this could force families to sell homes within two years of death to avoid CGT, especially in high-value areas.

Consider this: inheriting a $2 million home with a capital gain of $1.5 million could expose the beneficiaries to $300,000–$600,000 in tax, depending on discounts and tax brackets. 

However, it is important to remember that there are still other ways for the sale of the property to qualify for a full exemption.  

Practical Steps to Protect Your Estate

While we are waiting for the ATO to finalise its guidance in this area, there are steps you can take to protect your family’s assets:

• Review and update your will, especially if you are planning to provide certain individuals with the right to occupy a property. Does the will currently provide this right to specifically named beneficiaries?
• Plan the timing of sales – The two-year exemption window remains, but if you inherit a property and intend to hold it longer than this, weigh any potential CGT exposure against future rental income or family needs. Partial CGT exemptions might still apply, but the rules and calculations can be complex.
• Seek professional advice, especially if your estate plan uses TTs. You will normally need to work closely with tax and legal advisors to structure the plan appropriately. 
• Be market aware – Estate planning can intersect with market timing. Quick sales may preserve CGT exemptions, but this needs to be weighed up against non-tax factors. 

The key takeaway is clear: estate planning is a complex area and needs to be navigated carefully to preserve family wealth and avoid unintended tax implications.

Keeping Your Self-Managed Super Fund Compliant

Self managed superannuation funds (SMSFs) can offer significant flexibility, allowing the members to make investments and enter arrangements that may not be available through retail or industry superannuation funds. However, being an SMSF trustee does come with important responsibilities to ensure that all dealings comply with superannuation law. 

Two critical areas to keep front of mind are:

• The sole purpose test, and
• The arm’s length requirements in both superannuation and taxation law.

The Sole Purpose Test 

The sole purpose test requires that superannuation funds should be managed for the sole purpose of providing retirement benefits to fund members. While some SMSFs may have dealings with or/investments in related entities, these are subject to strict limits and when arrangements are entered into it is important that first and foremost SMSF trustees are considering the retirement benefits of the fund members rather than the needs of any external parties.

The example below illustrates how SMSF trustees should apply the sole purpose test when looking at making a related party investment.

Example: Investing in a Related Business?

Sachin and Deepthi have an SMSF which has a total balance of $1.2m. Their son Hardik commenced a business 3 years ago using a company structure. Hardik has approached his parents to invest $50,000 into his company via their SMSF. 

Although Hardik is passionate about the business it has not grown as he would like, and Sachin and Deepthi are aware that the business has had cashflow issues and profits are not at a point where the business is growing or generating a profit.

Although the proposed investment amount is within the 5% in-house asset limit would Sachin and Deepthi invest member funds in an unrelated business knowing the business was in this same situation? That is, would they be placing their son’s interests ahead of the interests of the fund members?

Based on Sachin and Deepthi’s knowledge of the business, if the SMSF was to go ahead and make this investment they as trustees may have contravened the sole purpose test.

Arm’s Length Requirements

In addition to the sole purpose test there are superannuation and taxation law requirements that SMSF trustees always deal on arm’s length commercial terms. This is again particularly important when arrangements are with fund members and/or related parties.

Where arrangements are not at arm’s length, SMSF trustees can be liable for superannuation law penalties and in some cases fund income may be taxed at a higher rate.

Some common examples and key issues are discussed below.

Example: An SMSF Owns a Commercial Property Which is Leased to a Related Party Business 

The rent should be on commercial terms and this needs to be evidenced by a rental appraisal from a professional such as a real estate agent when a lease is entered into. 

The lease agreement should:

• Be in writing;
• Clearly cover who is responsible for particular outgoings and maintenance; and
• Be prepared by a legal professional.

Example: A Member of the SMSF or a Related Party Completes Work on an SMSF Property 

SMSF trustees should seek professional advice before commencing any work on SMSF properties where the work may be performed by a member or a related party. 

All arrangements with related entities should be commercial, including:

• If a related building company is used, the SMSF must pay market rates (same as the general public) and this should be supported by documentation to satisfy the fund auditor.
• If members (who are also trustees) perform work personally, strict rules apply to whether they can be paid for their services.
• All materials should be purchased directly by the SMSF, not by individual members.

Please contact us to discuss these rules further if you are considering entering into any transactions or projects involving SMSF-owned property and related parties.

From the Government

Division 296

The Government has released exposure draft legislation for consultation on the Better Targeted Super Concessions measure announced in October 2025. 

Schedules 1 and 3 of the draft Bill, together with the draft Imposition Bill, propose the introduction of a new Division 296 tax to reduce superannuation tax concessions for individuals with total superannuation balances (TSB) exceeding $3 million.

From the 2026–27 income year, the measure proposes higher tax rates on superannuation earnings attributable to balances above $3 million, with headline rates of:

• Up to 30% on earnings attributable to the portion of TSB between $3 million and $10 million; and
• Up to 40% on earnings attributable to the portion of TSB above $10 million.

The existing 15% concessional tax rate will continue to apply to earnings attributable to balances of $3 million or less.

The Division 296 tax will be levied directly on individuals, separate from income tax and tax paid by superannuation funds. Individuals may elect to pay their liability either by releasing amounts from superannuation or from funds held outside superannuation. The $3 million and $10 million thresholds will be indexed to CPI, broadly maintaining alignment with the transfer balance cap over time.

Transitional arrangements will apply for CGT assets held prior to commencement. Division 296 fund earnings will be adjusted to recognise accrued gains before commencement, with two adjustment methods proposed:

• A cost base adjustment method for small superannuation funds; and
• A factor method for other complying superannuation funds.

A further transitional rule applies for 2026–27, with Division 296 determined solely by reference to an individual’s TSB on 30 June 2027. As a result, individuals with a TSB of $3 million or less at that date will not be subject to Division 296 tax for that year, even if their balance exceeds $3 million on 30 June 2026.

The exposure draft does not include draft regulations. Treasury has indicated that supporting regulations will address key operational details, including:

• Exclusions from total superannuation earnings for certain interests;
• Attribution of relevant superannuation earnings, including alternative calculation methods;
• Valuation rules for certain superannuation interests; and
• The calculation of transitional CGT adjustments for large superannuation funds.

2025-26 Tax Expenditures and Insights Statement

The annual 2025-26 Tax Expenditures and Insights Statement (TEIS) released by the Treasurer on 17 December 2025 estimates the revenue forgone due to tax exemptions, deductions, concessional rates and offsets. Although the TEIS is not a statement of future policy intent, it can provide insight into areas that may attract scrutiny or focus from policy makers.

Some of the large tax expenditure and deduction items include:

• Main residence exemption
• Concessional taxation of employer superannuation contributions and superannuation earnings
• Rental deductions
• CGT discount for individuals and trusts
• Work related expenses
• Lower tax rate for small companies
• FBT exemptions for public benevolent institutions

Targeted exclusions from the R&D tax incentive

The Government has released exposure draft legislation, Treasury Laws Amendment Bill 2025: Exclusion of tobacco and gambling related activities from the Research and Development Tax Incentive (the draft Bill), and accompanying explanatory material, to exclude research and development activities related to gambling, tobacco and nicotine products (including vaping and emerging alternatives) from eligibility under the Research and Development Tax Incentive (RDTI). 

The exclusions are broad and are designed to capture core and supporting activity that could indirectly promote these activities, with a strict ‘sole purpose’ test for any exceptions. The reform is intended to support innovation while ensuring taxpayers are not funding and subsidising activities that have the potential to cause harmful outcomes to the public.

The sole purpose test preserves eligibility for RDTI for activities conducted solely for harm minimisation purposes, such as preventing problem gambling, reducing addiction, or supporting cessation and therapeutic outcomes. 

Businesses in affected sectors, including technology providers and software developers, should review their R&D portfolios carefully, as the strict ‘sole purpose’ test disqualifies mixed purpose activities. 

If enacted, the measures will apply to income years starting on or after 1 July 2025.

Modernising administration systems for trusts

The Government has released exposure draft legislation for the Treasury Laws Amendment Bill 2025: Modernising trust administration systems. The draft Bill proposes amendments to change how closely held trusts report beneficiary Tax File Numbers (TFN) to the ATO.

The main proposed changes include streamlining TFN reporting so that trustees of closely held trusts report beneficiary TFNs when lodging the trust tax return, rather than on a quarterly basis. This applies where a beneficiary has quoted their TFN and is presently entitled to a share of the trust income.

The draft legislation also proposes that the Commissioner may notify a trustee of a beneficiary’s correct TFN where a quoted TFN is incorrect, cancelled or withdrawn, and it is reasonable to do so.  Where the Commissioner is not satisfied that a correct TFN has been provided, or identifying information does not match, the Commissioner must notify both the trustee and the beneficiary. In these cases, the beneficiary is treated as not having quoted their TFN, and the trustee may be required to withhold tax from the beneficiary’s entitlement.

By aligning TFN reporting with the trust tax return, the ATO aims to improve matching of trust income to beneficiaries, support pre-filling of individual returns, and ensure the correct amount of tax is assessed.

The proposed changes do not alter existing TFN withholding rules for closely held trusts. Trustees will continue to be required to withhold tax where beneficiaries have not quoted their TFN, consistent with current law.

The proposed TFN reporting rules will apply for income years starting on or after 1 July 2026. Quarterly TFN reporting requirements will continue to apply for earlier income years.

Transfer Balance Cap indexation

Following the release of the December 2025 quarterly CPI figures, the general transfer balance cap (TBC) will increase from $2,000,000 to $2,100,000 from 1 July 2026. This could provide tax effective retirement pension and non-concessional contribution opportunities for some of your clients. 

Retirement Income Streams

Individuals who commence a retirement phase income stream for the first time after 1 July 2026 will have access to the full $2,100,000 limit. For some individuals there may be a benefit in deferring the commencement of a retirement income stream until on or after 1 July 2026.

Example 1:

Stephen aged 64 will be retiring in May 2026 and has a superannuation balance of $2,400,000. Should he commence an income stream at retirement he can move $2,000,000 to a tax-free retirement pension and will need to leave the remaining $400,000 in accumulation which is taxed at 15% on the earnings.

If he waits until 1 July 2026 to start his pension, he can move $2,100,000 into a retirement phase pension.

Where the complexity lies with the transfer balance cap system is that clients who have commenced a retirement phase income stream prior to 1 July 2026 will have a personal TBC that is different to the general TBC of $2,100,000. This is because indexation only applies to the individual’s unused TBC.

Example 2:

Mary aged 68 commenced an account based pension on 1 August 2025 with $1,000,000. At that time the general TBC was $2,000,000. Because Mary has used 50% of the general TBC she will be entitled to 50% indexation on 1 July 2026 meaning her personal TBC will only increase by $50,000 and will be $2,050,000.

If Mary had commenced her account based pension with $2,000,000, she would not receive any indexation and her personal TBC would remain at $2,000,000.

Based on the proportional indexation rules we face a situation where clients may have a personal TBC anywhere between $1,600,000 and $2,100,000 (from 1 July 2026). A client’s personal TBC and eligibility for indexation is shown on the ATO Portal and under their My Gov Login and this should be checked before commuting or commencing any retirement phase pensions.

The upper total super balance (TSB) limit to be able to make non-concessional contributions (NCC) will also increase to $2,100,000 from 1 July 2026 which may provide some opportunities for clients. Contribution caps are indexed to the December 2025 average weekly ordinary times earnings (AWOTE) numbers which will be released in late February 2026. 

From the Regulators

Remission requests for interest and penalties

From 22 January 2026, registered tax and BAS agents must lodge requests for the remission of the general interest charge (GIC), shortfall interest charge (SIC) or failure to lodge (FTL) penalties using the relevant remission application form. 

Forms must be submitted via ATO Online services or by mail, with a separate form required for each taxpayer and for each type of interest or penalty. Where an agent does not have access to ATO Online services, they may still contact the registered agent phone line, and the ATO will complete the form on their behalf.

Where the ATO does not fully remit an interest or penalty amount, it will issue a written decision outlining the reasons and advising the taxpayer of their review and objection rights.

Any remission requests submitted before 22 January 2026 will be actioned as normal.

The ATO has also updated its website guidance with the circumstances that it is likely a GIC request for remission will be approved or rejected. 

Pillar Two compliance

The ATO has updated its website guidance in respect of the new lodgment obligations that were introduced as part of the Australian global and domestic minimum tax, consistent with the Global Anti-Base Erosion Model Rules (GloBE Rules).

The four new lodgment obligations include: 

1. GloBE Information Return (GIR)
2. Foreign lodgment notification
3. Australian IIR/UTPR Tax Return (AIUTR)
4. Australian DMT Tax Return (DMTR).

For tax consolidated groups, each group entity, which includes subsidiary members, in Australia needs to lodge either a GIR or foreign lodgment notification (where the GIR is lodged overseas). Each group entity must also lodge an AIUTR or DMTR, unless their circumstances qualify for a lodgment exemption.

Multinational groups can appoint a nominated entity to lodge on behalf of each entity in the group that has a lodgment obligation. 

Super guarantee

The ATO is reminding employers that they must make super guarantee (SG) contributions to their employees’ complying superannuation funds or retirement savings accounts (RSAs) for the December 2025 quarter by 28 January 2026 to avoid penalties and interest.

SG contributions must be paid by the quarterly due dates, being 28 days after the end of each quarter, to avoid the SG charge. While SG is generally quarterly, some super funds require monthly contributions, and by registering with those funds employers agree to comply with monthly payment terms.

The SBSCH will close from 1 July 2026. Existing users may continue to access the service until 11:59 pm AEST on 30 June 2026 and should transition to an alternative payment method before that date.

Employers should also check whether any industrial awards require contributions to be paid to a specific super fund.

Employers may make post-tax personal super contributions on behalf of employees in accordance with employment terms, legal requirements and award conditions. These contributions do not count towards SG obligations.

Employers can use Super Fund Lookup to confirm that a fund is complying. If a fund is not listed, written confirmation from the trustee should be obtained confirming that the fund:

• Is a complying super fund,
• Intends to accept the contributions; and
• Will continue to meet legal requirements.

Written confirmation may protect employers from penalties if a fund later becomes non-complying. Contributions made to a non-complying fund will not satisfy SG obligations, will not be tax deductible, and may give rise to FBT.

Qualifying SG contributions are tax deductible, but only in the income year in which they are paid. Missed or late contributions may attract the SG charge, which is not deductible. Late payments can be applied either to reduce an SG charge or as a pre-payment of future SG contributions for the same employee.

Practitioners should continue to monitor payment timing closely, as delays can affect both SG compliance and the timing of deductions.
 

GST and fuel tax credit entitlements

The ATO is reminding taxpayers that GST credits and fuel tax credits expire if they’re not claimed within the 4-year time limit. The credits expire if they’re not claimed within the 4-year period and the ATO has no discretion or ability to amend assessments to include the credits.

The ATO is reminding taxpayers to: 

• Have good governance frameworks and processes in place to regularly review the correctness of reporting – this should reduce the need to address mistakes in past periods near to the 4-year credit time limit. For Top 100 large corporates, the ATO expects disclosures to be made real-time, including of errors on the BAS.
• Ensure credits are correctly calculated and keep accurate records to support your claims – penalties may apply if you claim credits you’re not entitled to.
• Actively manage the risks of expiry of your credits if you identify a mistake by considering the options available to you.
• Expect additional scrutiny if you seek to change long-standing positions to uplift GST recovery, for instance where an apportionment methodology is changed for periods to increase the rates claimed – this will likely take the ATO longer to review and they may need further information, so you should factor this into timeframes.

The 4-year credit time limit is different to the period of review. The period of review is the period the ATO can amend the assessment, generally 4 years from when the taxpayer lodges the BAS. The ATO can, however, extend the period of review by agreement.

The 4-year credit time limit for GST credits and fuel tax credits applies more strictly. If credits have expired, the ATO is unable to amend assessments to include these credits, even if the period of review is still open. This means there may be situations where the ATO amends for overpaid or underpaid GST or overclaimed credits, but additional credits can’t be included in an amended assessment. So, it’s important to make sure you claim any credit entitlements within the 4-year credit time limit.

Further information on the application of the 4-year credit time limit can be found in MT 2024/1.

Exchange rates

The ATO has updated its website guidance to include the monthly exchanges up to and including December 2025. 

The ATO has also published the foreign currency exchange rates for the calendar year ending 2025. 
 

SERR lodgments

Tax agents can now lodge Sharing Economy Reporting Regime (SERR) reports (v 1.4) on behalf of clients in Online services for agents via file transfer. 

You can submit a test file to ensure it meets validation requirements and lodge the file, receiving confirmation if it passes validation.
 

ATO issuing departure prohibition orders

The ATO is actively using departure prohibition orders (DPOs) as part of a broader strategy to strengthen payment compliance and debt collection. Since July 2025, the ATO has issued 21 DPOs, which is more than the total issued in the entire 2024–25 financial year, signalling a clear shift towards earlier and firmer enforcement action.

A DPO prevents persons with outstanding tax liabilities from leaving Australia until their debt is paid or satisfactory payment arrangements are in place.

The ATO has indicated that taxpayers with significant debts who have the capacity to pay but deliberately avoid doing so, particularly where overseas travel is prioritised over meeting tax or superannuation obligations, can expect travel plans to be disrupted. While the ATO continues to prefer early engagement and voluntary compliance through reminders and tailored support, DPOs will be used where there is concern a taxpayer may leave the jurisdiction or undermine debt recovery.

This approach forms part of the ATO’s focus on reducing its $50 billion collectable debt book, with particular attention on unpaid employee superannuation, PAYG withholding and GST collected but not remitted. DPOs are often applied alongside other firmer actions, including director penalty notices, garnishees, credit reporting referrals and wind-up applications, especially where those actions would be ineffective if the taxpayer were to depart Australia.

The ATO has emphasised that taxpayers can avoid these measures by engaging early, paying debts on time, or entering into appropriate payment arrangements with the assistance of their tax adviser.
 

Commercial deals service resources

The ATO has updated its website guidance with case studies and videos that demonstrate how the ATO can assist with providing certainty on commercial deals. 

Small business CGT concessions

For example, a partnership sold a property and sought to fully reduce the capital gain by applying the small business 50% active asset reduction and the small business rollover. The ATO requested further information to substantiate that the partnership was carrying on a primary production business. After reviewing the information provided and considering TR 97/11, the ATO concluded that there was insufficient evidence of active trading. The partnership tax returns did not show any primary production income or expenses, and the taxpayer was therefore found ineligible for the concessions. The taxpayer accepted the ATO’s position and withdrew its claims.

Market value substitution rule

Another example involved three siblings each holding a one-third interest in a family company. Two siblings sold their interests to a trust controlled by the third sibling. The ATO examined whether the market value substitution rule applied, given the non-arm’s length nature of the transaction. Following internal valuation advice and further enquiries, the ATO concluded the sale price was below market value. The sellers confirmed that the purchaser set the price and that no bargaining occurred to avoid family conflict. A pre-lodgment agreement was reached to substitute market value capital proceeds.

Value shifting in restructures

A company restructure case focused on changes to share classes and rights ahead of a planned transaction. New share classes with preferential rights were issued, followed by a later variation of rights and share split that inflated the value of those shares. The ATO determined that these changes resulted in a direct value shift from individual shareholders to a family trust. Applying the general value shifting regime, the ATO deemed capital gains to arise for the individuals in the 2022 income year, providing tax certainty for the later transaction.

Foreign resident CGT withholding

In a foreign resident CGT case, a non-resident shareholder participated in a scheme involving non-cash consideration. To allow the transaction to proceed ahead of a shareholder vote, the taxpayer provided security equal to the estimated CGT liability. Following discussions, an escrow arrangement was agreed and the foreign resident CGT withholding rate was varied to 0%.

Apportioned CGT discount for non-residents

The ATO also examined the calculation of the CGT discount for a non-resident beneficiary of a trust. The taxpayer had incorrectly used the contract date as the “gain day” rather than 30 June. Correcting this reduced the proportion of the discount available based on periods of Australian tax residency.

Capital versus revenue

Finally, the ATO accepted that the sale of multiple warehouse properties by related trusts was on capital account. Evidence showed the properties were acquired for operational use rather than profit-making, and the later sale was a mere realisation of capital assets, allowing access to the 50% CGT discount.

These case studies demonstrate the ATO’s continued focus on evidence, valuations and technical CGT integrity issues, particularly in related-party and high-value transactions.
 

Rulings, Determinations & Guidance

Personal services businesses and Part IVA

The ATO has issued PCG 2025/5 which sets out the Commissioner’s view on the types of arrangements that are ‘lower’ or ‘higher’ risk of Part IVA applying and the likelihood the Commissioner will apply compliance resources to review those arrangements. 

The PCG focuses on situations where clients use a company or trust to generate personal services income (PSI) and the entity is able to pass the PSI tests so that it is classified as a personal services business (PSB). While the PSI attribution rules don’t apply to automatically cause the individual who performed the work to be taxed on the relevant profits, the ATO’s long-standing view is that Part IVA could potentially apply if profits relating to an individual’s personal services are split with others or retained in a company. 

Indicators of a low risk arrangement include:

• The net PSI is distributed to the individual whose personal efforts or skills generated that income and taxed at their marginal rate.
• The remuneration received by the individual is substantially commensurate with the value of their personal services.
• Remuneration (for example, salary or wages) is paid to an associate for bona fide services related to the earning of the PSI if that amount is reasonable for the services provided by them.
• There is a timing difference between the earning of the PSI and distribution of net PSI to the individual, either for reasons outside the control of the individual and PSE or where the delay is explained by circumstances not attributable to tax. This creates only a temporary deferral of tax to a following income year.
• The PSE makes a superannuation contribution on behalf of the individual, who is an employee of the PSE, for the purpose of providing a superannuation benefit.
• There is an intention to temporarily retain the profits for working capital purposes, such as to fund business operations or acquire an asset for a clear commercial purpose, and that intention is carried out.

Indicators of a higher risk arrangement include:

• The net PSI is distributed to another entity so that it is taxed at an overall lower rate than if the individual had received the income directly.
• The remuneration received by the individual is less than commensurate with the value of their personal services.
• The PSE does not distribute any income to the individual who provided the actual services.
• There is an intention to temporarily retain the profits for working capital purposes, but the intention is not carried out and there are no sound commercial reasons for not carrying that intention out.
• The net PSI (or a part thereof) is split with an associate of the individual, thereby reducing the overall income tax liability.
• Remuneration is paid to an associate (or a service trust) that is not commensurate with the skills exercised or services provided by the associate.
• The net PSI (of a part thereof) retained in the PSE is greater than required for clear commercial purposes, and the retained funds are subsequently made available to the individual for their personal use (for example, via a complying Division 7A loan). However, the mere fact that PSI is retained is a sufficient indicator of high risk.

First year compliance approach for Payday Super 

The ATO has finalised PCG 2026/1 which sets out its compliance approach for the first year of operation of Payday Super. This relates to the possibility of the ATO investigating a superannuation guarantee (SG) shortfall for a qualifying earnings (QE) day for 1 July 2026 to 30 June 2027.

For the first year, the ATO will prioritise the application of compliance resources to the areas of highest risk, to investigate employers who have not paid the minimum amount of SG contributions for their employees. The ATO has indicated it will not have cause to apply compliance resources in respect of employers falling in the low-risk zone.

• Low risk: The employer made on-time contributions intended to fully meet SG obligations, but some contributions were not received by the fund on time. Those contributions are later received and allocated to employees as soon as reasonably practicable, resulting in nil final SG shortfalls for all employees.
• Medium risk: The employer does not meet the low-risk criteria, but all final SG shortfalls are reduced to nil within 28 days after the end of the relevant quarter.
• High risk: The employer does not meet the low- or medium-risk criteria. This includes situations where one or more employees still have an SG shortfall after 28 days following the end of the quarter.

Where an employer attempts to pay the minimum amount of contributions for all employees in line with Payday Super, but issues arise that cause the contributions to be late, the level of risk will depend on whether, and how quickly, the error is corrected. 

The PCG also covers some examples of how the risk zones apply. The ATO also provides that employers can move between the risk zones within the year, for example, if they stop making on-time contributions part way through the year. 
 

Right to occupy under a deceased’s will

The ATO has issued a draft determination TD 2026/D1 which sets out the Commissioner’s view on when an individual has a right to occupy a dwelling under a deceased’s will for the purposes of subsection 118-195(1) of the Income Tax Assessment Act 1997 when seeking to apply the main residence exemption to a property that was previously held by a deceased individual just before they died.

The phrase ‘right to occupy the dwelling under the deceased’s will’ is not defined in the ITAA 1997 and takes its ordinary meaning. In light of the statutory context in which the words ‘under the deceased’s will’ are found in section 118-195, and consistent with the reasoning adopted in case law, the ATO indicates that this item is limited to circumstances where a right to occupy has been expressly granted under the terms of the will to an individual specifically named in the will.

The ATO confirms that an individual will only have a right to occupy a dwelling under the deceased’s will if this right was granted in accordance with the terms of the will itself ‘without the aid or intervention of any subsequent or intermediate transaction’.

Consequently, a right given by an executor or trustee using a broad discretionary power from the will does not qualify. Likewise, a right established by a separate deed or agreement between the beneficiaries and the estate’s representatives is also not considered a right ‘under the deceased’s will’.

The draft determination also contains examples of when a right to occupy arises under a separate agreement, the trustee’s broad discretion, under a court order etc. For example, the ATO indicates that a family provision order made under the relevant legislation takes effect as if it had been made as a codicil to the deceased’s will.

Public country-by-country reporting exemptions

The ATO has issued PS LA 2025/2 which outlines the ATO’s administrative approach to the Commissioner’s discretion to grant full or partial exemptions from Australia’s Public Country-by-Country (CBC) reporting obligations. It provides context on the regime, key considerations for exemptions, and the application process, emphasising case by case assessments.

The Public CBC regime applies to qualifying reporting entities for reporting periods starting on or after 1 July 2024, requiring public disclosure of tax related information to enhance transparency and align with OECD standards. Entities in scope include constitutional corporations, partnerships (where each partner is a constitutional corporation), or trusts (with constitutional corporate trustees) that are members of a CBC reporting group. 

To qualify as a reporting entity, it must have been a ‘CBC reporting parent’ in the prior period, meaning it had annual global income of A$1 billion or more and was not controlled by another group member. Subsidiaries may also qualify independently if not consolidated globally and meet thresholds. 

CBC reporting obligations apply if aggregated turnover includes Australian sourced income of $10 million or more in the reporting period, with reports due within 12 months of period-end and published via the ATO on a government website. 

Exemptions are granted only in exceptional circumstances where disclosure would be inappropriate, balancing transparency goals against potential harms like national security risks, breaches of Australian or foreign laws, or substantial commercial damage. A partial exemption is the ATO’s preferred approach. 

Considerations for the Commissioner to grant an exemption to CBC reporting include the unusual nature of circumstances beyond routine, evidenced magnitude and likelihood of adverse impacts, whether information is already public or disguised by aggregation, retrospectivity, potential to mislead and compliance costs.

Entities are encouraged to register with the ATO for Public CBC reporting before lodging an exemption for administrative efficiency. Entities seeking an exemption from Public CBC reporting should apply by submitting a written request to the ATO with supporting information.

A Public CBC reporting exemption decision is not a ‘reviewable objection decision’. This means entities do not have the right to lodge an objection with the Commissioner or, subsequently, have the exemption decision reviewed by the Administrative Review Tribunal. If an entity is not satisfied with an exemption decision, it may appeal to the Federal Court of Australia for a review of the administrative decision. 
 

Transfer pricing issues related to inbound distribution arrangements

The ATO has issued draft Practical Compliance Guideline PCG 2019/1DC, which is an update to PCG 2019/1 dealing with transfer pricing outcomes for inbound distributors. 

The draft update includes the following proposed changes to PCG 2019/1: 

• Clarification of scope — The update reiterates that it applies to arrangements of any scale except where taxpayers opt into PCG 2017/2 (simplified record-keeping option). It also clarifies when an entity is an inbound distributor, being a business which comprises: 
• Distribution of goods purchased from related foreign entities for resale to third parties where the Australian entity/entities do not significantly contribute to the creation (including manufacture or alteration) of the goods in Australia.
• Sale of digital products/services where the products/services are sold to third parties and the intellectual property is substantially held by related foreign entities, where the Australian entity/entities do not significantly contribute to the creation of the products/services.
• Introduction of a white zone — A new risk zone, the white zone, is proposed. Taxpayers are in the white zone if they have any of the following: 
• A signed Advance Pricing Arrangement (APA); 
• A settlement agreement with the Commissioner; 
• A relevant tribunal/court decision (within 3 income years); or 
• A recent review with a low/high assurance rating

and there has been no material change since the applicable income years. 

Where in the white zone, the ATO will not allocate compliance resources to further review transfer pricing outcomes except to confirm ongoing consistency. 

• Updates to profit markers — Updated profit markers indicating different risk levels. 

   Public comments on PCG 2019/1DC are invited until 13 February 2026.

Deductions for mining and petroleum exploration expenditure

The ATO has published draft Taxation Ruling TR 2017/1DC which is a proposed update to the existing TR 2017/1. 

The proposed changes make clear that, in line with the Full Federal Court’s decision in FCT v Shell Energy Holdings Australia Limited [2022] FCAFC 2, the ordinary meaning of ‘exploration or prospecting’ should be assessed in light of the provision’s context and history. 

The Commissioner remains of the view that, for the purposes of section 40-730(4) of the ITAA 1997, the ordinary meaning of ‘exploration or prospecting’ is confined to activities directed at discovering and identifying the existence, extent and nature of minerals, encompassing both the search to find the resource and the work to determine the size of a find and assess its physical characteristics. 
 

ATO’s focus on related party property development arrangements that defer income and exploit tax losses

The ATO has released Taxpayer Alert TA 2026/1, putting property developers and related entities on notice about certain contrived arrangements involving related party property development management agreements.

These schemes typically involve structures where related parties defer the recognition of taxable income while exploiting tax losses, often in a deliberate and repeated manner. The Commissioner states that “in these arrangements, a special purpose developer entity (developer) is interposed between an entity that owns the land being developed (landowner) and another entity undertaking building and construction works on the land (builder). The interposition of the developer artificially separates the landownership and development activities which are, in substance, a single economic activity of property development.”

The ATO is concerned that such arrangements may constitute a scheme under section 177D of the Income Tax Assessment Act 1936, triggering the general anti-avoidance rules. 

Key risks highlighted include:

• Artificial deferral of income that would otherwise be assessable;
• Exploitation of tax attributes like losses in ways that lack commercial rationale; or
• Potential application of promoter penalties.

The ATO is currently actively reviewing such arrangements and should shortly publish a draft practical compliance guideline for public consultation.
 

Education directions for SMSF trustees

The ATO has issued PS LA 2026/1 which provides guidance on the administration and application of an education direction under section 160 of the Superannuation Industry (Supervision) Act 1993 (SISA).

The statement outlines when and how the ATO will issue education directions to individual trustees or directors of corporate trustees of self-managed superannuation funds (SMSFs) following contraventions of SISA or the Superannuation Industry (Supervision) Regulations 1994 (SISR). 

The statement applies to contraventions occurring on or after 1 July 2014 and emphasises education as a compliance tool to address knowledge gaps in a trustee’s knowledge or understanding of their duties and obligations to prevent contraventions from occurring.
 

ATO proposes zero withholding for remote Indigenous artists

The ATO has released draft Legislative Instrument LI 2025/D25 which proposes to vary the PAYG withholding rate to nil for payments made for artistic work to Indigenous artists who live or work in remote Zone A areas of Australia and do not quote their ABN. 

The measure aims to reduce administrative burdens and support Indigenous artists in remote communities. The payer also does not need to give a payment summary where the amount withheld is varied to nil.
 

ATO proposes zero withholding for certain payments to religious practitioners

The ATO has released draft Legislative Instrument LI 2025/D26 which proposes to vary the PAYG withholding rate to nil for specific payments made by an entity to a religious practitioner.

The variation applies to qualifying payments where the religious practitioner receives remuneration or allowances in connection with their religious duties. Some examples of when a variation is allowed include:

• Payments of certain allowances to a religious practitioner where it can be reasonably expected that the religious practitioner will incur deductible work expenses related to the allowance that are at least equal to the amount of the allowance;
• Payments related to certain locum services performed by a religious practitioner; and
• Payments related to work or services provided by a religious practitioner.
   

Exemptions from requirement to lodge for MNE Groups 

The ATO has issued LI 2025/28 to reduce compliance costs for multinational enterprise groups by exempting global and domestic minimum tax return lodgments which the Commissioner considers to be unnecessary because they could only ever disclose a nil liability. 

Cases

Capitalised interest not deductible

The Full Federal Court has held in favour of the Commissioner that the interest was not deductible under section 8-1, and that it was a capital expense used to honour a guarantee. 

Charles Apartments Pty Ltd (Charles) was a land-holding entity within the Demian property group. In 2002, Charles acquired three adjoining parcels of land (the Astoria properties), funded by a $3 million loan from St George Bank.

In 2003, the Demian group refinanced its broader funding arrangements through a single $27 million facility with Suncorp. Charles was not a borrower under the Suncorp facility but provided security by granting a mortgage over the Astoria properties and guaranteeing the group’s obligations to Suncorp.

To discharge the St George loan, another Demian group entity advanced $3 million to Charles under an intra-group loan. Interest under this arrangement was capitalised and payable only from any surplus realised on the future sale of the Astoria properties.

In 2010, Charles sold the Astoria properties for approximately $5 million. In accordance with Suncorp’s requirements, the net sale proceeds were paid directly to Suncorp, reducing the group’s indebtedness under the Suncorp facility and releasing Suncorp’s mortgage over the properties. Charles claimed a deduction of $1.87 million, representing the interest component of the intra-group loan.

The Federal Court disallowed the deduction, finding that the outgoing was not incurred in gaining or producing Charles’ assessable income, but was instead a capital payment made in satisfaction of its obligations as guarantor.

On appeal, the Full Federal Court upheld the Commissioner’s position. The Court emphasised that Charles was always a “true guarantor” rather than a borrower in respect of the Suncorp facility. While the sale proceeds extinguished amounts that included capitalised interest, the liability being reduced was that of another Demian group entity to Suncorp, not Charles’ own borrowing. Any benefit obtained by Charles was the reduction of its exposure as guarantor and the avoidance of enforcement action by Suncorp, including a mortgagee sale of the Astoria properties.

Accordingly, the Court confirmed that the $1.87 million claimed as interest was capital in nature and non-deductible, reinforcing that payments made to satisfy or reduce guarantee liabilities will not satisfy the nexus required under section 8-1, even where the underlying assets are income-producing.
 

GST on dog breeding enterprise

The Administrative Review Tribunal (ART) has concluded that dog breeding activities carried on by a taxpayer were an ‘enterprise’ under section 9-20 of the GST Act, rather than a hobby. The matter was remitted to the Commissioner to determine the input tax credits (ITCs) allowable in relation to that enterprise.

The taxpayer, an entrepreneurial consultant also engaged in property investment, operated a French bulldog breeding business known as ‘Delish Frenchies’. While relatively small in scale, the Tribunal found the activity had a clear commercial character. Factors supporting this conclusion included formal marketing activities, a dedicated website, 16 sales contracts with unrelated parties, professional licensing, specialised infrastructure and approximately $96,000 in income, demonstrating a genuine profit intention.

However, the taxpayer was unsuccessful in claiming ITCs for entertainment expenses and for property investment activities, which were not accepted as creditable acquisitions.

In relation to penalties, the Commissioner had imposed a 50% shortfall penalty for recklessness, together with a 20% base penalty uplift. The Tribunal set aside penalties relating to the dog breeding enterprise itself but upheld the 50% recklessness penalty for other issues. A significant factor was the taxpayer’s failure to report sales income while simultaneously claiming ITCs in respect of the same enterprise.

The Tribunal also ordered the remission of the 20% uplift, noting that the ATO had incorrectly applied the uplift to every tax period and had miscalculated interest.

Separately from the substantive tax issues, the Tribunal made pointed comments on the use of AI tools in tax research, emphasising the need for care. While it was unclear whether the taxpayer had relied on AI tools, the Tribunal warned that any authorities identified using AI must be independently verified, read in full and confirmed to support the propositions for which they are cited. In this case, several cited authorities did not exist, were irrelevant, or did not say what was claimed, wasting Tribunal resources. The comments serve as a timely warning to practitioners about the risks of uncritical reliance on AI-generated research.

Occupancy expenses and car logbook rejected

The ART has found that a taxpayer who was a senior technical solutions consultant was not entitled to claim deductions for his occupancy expenses and his logbook based travel expenses.

Occupancy Expenses

The ART examined two key questions in deciding whether the taxpayer could claim a deduction for occupancy expenses related to their home office:

• Whether the home office qualified as a place of business (ie, had the essential character of a dedicated business location rather than merely an extension of the employer’s workplace or a personal convenience area).
• Whether the relevant expenditure was actually incurred in the course of producing assessable income.

The ART ultimately found against the taxpayer on these issues. 

The taxpayer claimed occupancy expenses during the period where the entity contracting the taxpayer was phasing in a ‘return to office’ policy after the easing of restrictions during the COVID-19 pandemic. The employer had not required or directed the taxpayer to work from home during this time, but the taxpayer continued to work from home for three days each week. As such, the ART held that the home setup was treated as ancillary to the primary workplace rather than a standalone place of business. 

Further, the room the taxpayer worked from was not solely used as a place of business (for example, the room had a weights bar stored in it and was listed as a bedroom on the floorplan). Such factors contributed to the ART disallowing the full occupancy costs claimed.

Car Expenses

The ART disallowed the taxpayer’s car expenses claimed under the logbook method due to the logbook not being completed contemporaneously. The taxpayer produced different versions of the logbook that were inconsistent with each other and also did not give evidence under oath to the ART about the logbooks. The Commissioner’s allowance of only the $3,600 under the cents per kilometre method was upheld by the ART.

The Tribunal found that the penalties for making false or misleading statements should not be remitted beyond the Commissioner’s remittance of 20%. The original penalty imposed for recklessness was 50%. 

$6 million net asset value test not met

This case focused on the application of the $6m maximum net asset value (MNAV) test under the small business CGT concessions and whether the market value of the shares that were sold was different from the actual sale price.

The Kilgour Trust had sold its minority 20% interest in conjunction with the two other shareholders in Punters Paradise Pty Ltd (Punters) to News Corp Investments Pty Ltd (News Corp). The purchase price of $31,057,722 was apportioned between the vendors in amounts reflecting the number of shares sold by them, the trustees of the minority holdings each receiving $6,211,544 reflecting their 20% holdings.

The taxpayer, Mrs Kilgour, as a beneficiary of the Kilgour Trust was assessed on the capital gain by reference to the distribution which she received. The capital gain was calculated having regard to the ‘market value’ of the shares as CGT assets. Mrs Kilgour contended that she should be assessed on a lower capital gain because she qualified for the small business CGT concessions in Division 152 of the ITAA 1997 by satisfying the MNAV test.

She argued that the market value of the shares was less than $6 million, despite the actual proceeds received being more than this. Her arguments were based on the following points: 

• News Corp paid above the true market value due to factors unrelated to the inherent worth of the minority shareholdings themselves.
• The deal was not conducted at arm’s length, meaning the parties did not negotiate on fully independent commercial terms when agreeing to the Share Sale Agreement. Under section 116-30, this would require substituting the actual sale proceeds with a lower market value of the shares. 

The taxpayer argued that for CGT purposes, the market value should be determined by viewing each 20% parcel in isolation, as if it were a standalone transaction, rather than considering the collective sale of 100% of the shares in the company to News Corp at the same time.

The Full Federal Court dismissed the taxpayer’s arguments and decided that: 

• The parties to the Share Sale Agreement dealt with each other at arm’s length; and
• The market value substitution rule did not apply and the capital proceeds received were an accurate representation of the market value of the transaction

Therefore, the beneficiaries of the Kilgour Trust were not entitled to apply the small business CGT concessions as the MNAV test was failed.

Legislation

Treasury Laws Amendment (Strengthening Financial Systems and Other Measures) Bill 2025

The Bill that introduces the small business instant asset write-off extension and other tax measures received Royal assent on 4 December 2025 and is now law. 

Schedule 7 extends the $20,000 instant asset write-off for eligible small business entities (aggregated turnover under $10 million) by 12 months to 30 June 2026. The measure applies to eligible depreciating assets first used or installed ready for use between 1 July 2025 and 30 June 2026. 

The Act also amends the ITAA 1997 to allow an income tax deduction for reverse-charged GST where the GST paid exceeds available input tax credits, provided the general deduction rules are satisfied. This applies from income years including 1 July 2023.

Combatting Antisemitism, Hate and Extremism (Firearms and Customs Laws) Bill 2026

A Bill has been introduced which contains consequential amendments to the ITAA 1997 to amend the definition of ‘firearms surrender arrangements’ to include the national firearms program as defined in the Bill. 

The amendments provide that amounts received as compensation under the national gun buyback scheme which would otherwise be assessable income are treated as non-assessable non-exempt income under section 59-10.

Under the legislation, a capital gain made from compensation received under the national gun buyback scheme is disregarded under section 118-37(3). Further, where compensation received under the national gun buyback scheme exceeds the adjustable value of a surrendered firearm, no amount will be included in assessable income via section 40-285 under section 40- 289 of the Income Tax (Transitional Provisions) Act 1997.
 

Inside this month, Holiday Homes Under the Microscope

This month we look at the ATO’s sharpened compliance focus across property, business incentives and emerging technologies. New draft guidance on holiday homes signals a much tougher approach to deductions for short-term rentals, particularly where lifestyle use blurs with genuine income-earning intent. The Federal Government’s review of the Electric Car Discount also places current EV tax benefits under the spotlight, prompting businesses and employees to revisit timing and eligibility. We then turn to the rise of AI-generated tax “advice” — and the costly traps emerging as the ATO cracks down on misinformation. Finally, we unpack the nuances of downsizer contributions and the main residence exemption, highlighting key conditions and misconceptions that frequently trip up retirees. 

Holiday Homes Under the Microscope: What the ATO’s New Guidance Means for You

For many Australians, a holiday home does double duty. It’s a place to escape with family and friends, and during the rest of the year it’s listed on Airbnb or Stayz to help cover the costs. 

Until recently, many owners assumed they could claim most of the usual deductions for the property without much trouble, as long as appropriate apportionments were made. However, that position is now under more scrutiny than ever following the release of some new draft guidance documents by the Australian Taxation Office (ATO) – TR 2025/D1, PCG 2025/D6 and PCG 2025/D7. 

The ATO is looking to significantly tighten the rules around holiday homes that are used to derive some rental income. While the documents are still in draft form, they clearly signal the ATO’s compliance focus going forward.

What is the ATO Concerned About?

In simple terms, the ATO wants to distinguish between properties that are genuinely held to maximise rental income and those that are primarily lifestyle assets with some incidental rental use.

The ATO confirms that all rental income must be declared, even if it is occasional or earned through informal arrangements. However, if the property is really a holiday home and isn’t used mainly to produce rental income during the year then the owner can’t claim any deductions for expenses such as interest, rates, land tax, repairs and maintenance. 

That is, the ATO might not allow any of these expenses to be claimed as a deduction, even if the property is used to generate taxable rental income for some of the year at market rates. If the property is classified as a holiday home by the ATO then owners can only claim deductions for limited direct expenses such as cleaning or advertising.

The ATO is particularly focused on properties that:

• Are blocked out for private use during peak periods (for example, school holidays or ski season),
• Are advertised inconsistently or at above-market rates,
• Generate ongoing tax losses year after year.

How Expenses Must be Claimed

Even if the property isn’t classified as a holiday home, it will often still be necessary to apportion expenses if the property is only used partly for income producing purposes. PCG 2025/D6 outlines how expenses should be apportioned. The key principle is that claims must be “fair and reasonable”. Common methods include:

• Time-based apportionment (for example, based on days rented or genuinely available for rent), and
• Area-based apportionment (where only part of a property is rented).

Getting this wrong, or failing to keep evidence, increases audit risk. The ATO has access to booking platform data and can easily compare listings, calendars and reported income.

The Financial Impact can be Significant

Consider a holiday unit that earns $30,000 a year in off-peak rent but is kept for private use during peak holiday periods. Under the new approach, the ATO may conclude the property is really a holiday home and could reduce deductible expenses from tens of thousands of dollars to only a small fraction, resulting in a materially higher tax bill.

Co-ownership also needs care. Income and deductions are generally split according to ownership interests, regardless of who uses the property more. Renting to relatives at discounted rates can further limit deductions.

Practical Steps you Should Take Now

Although the guidance is proposed to apply from 1 July 2026 (with transitional relief for arrangements in place before 12 November 2025), now is the time to review your position:

• Are you holding and using the property to genuinely maximise rental income? Is the property advertised broadly and consistently, including during peak periods?
• Use market pricing: Set rent in line with comparable properties in the same area.
• Keep strong records: Retain booking calendars, advertisements, enquiries, and a diary showing private versus rental use.
• Review ownership and strategy: In some cases, changing how a property is operated can improve its commercial profile and tax outcome, but beware of CGT liabilities, duty and legal fees.
• Document existing arrangements: If you may qualify for transitional relief, evidence is critical.

The Bottom Line

The ATO is not banning deductions for holiday homes, but it is drawing a firmer line between genuine investment properties and lifestyle assets. With the right structure, pricing and record-keeping, many owners can still claim appropriate deductions and improve cash flow.

If you own a holiday property, a proactive review could save you from an unpleasant surprise later. Please contact us if you would like us to assess your current arrangements and help you plan ahead. 

Electric Car Discounts Under Review: What It Means for Your Business (and What You Should Do Now)

Electric vehicles (EVs) are no longer a niche choice. By late 2025, they account for more than 8% of new car sales in Australia, driven in no small part by generous tax incentives. One of the most significant is the Federal Government’s Electric Car Discount, introduced in mid-2022. For many businesses and employees, it has materially reduced the cost of owning or leasing an EV.

That said, the rules are now under review. While no immediate changes are proposed, this is an important moment to understand the benefits, assess whether they suit your circumstances, and consider timing.

How the Electric Car Discount Works (in Plain English)

The discount is not a cash rebate. Instead, it operates through tax concessions that can significantly reduce the real cost of an EV:

1. Fringe Benefits Tax (FBT) exemption

Where an eligible EV is provided to an employee as a fringe benefit, private use is exempt from FBT. This is often the biggest saving. Without the exemption, FBT is effectively charged at up to 47%. For many employees, the exemption can reduce the annual after-tax cost of a vehicle by thousands of dollars.

Important points:

• The exemption applies to battery electric vehicles and hydrogen fuel cell vehicles.
• Plug-in hybrid vehicles lost eligibility for new arrangements from 1 April 2025.
• The car must be first held and used after 1 July 2022 and be below the luxury car tax threshold at first purchase.

2. Higher luxury car tax (LCT) threshold

Fuel-efficient vehicles, including EVs, benefit from a higher LCT threshold ($91,387 for 2025–26, compared to $76,950 for other cars). This can prevent the 33% luxury car tax applying to part of the purchase price.

3. Reduced import costs

Certain EVs are also exempt from the 5% customs duty, reducing upfront acquisition costs.

Commercially, these settings have made EVs very competitive. Lower running costs (electricity versus fuel, fewer servicing requirements) and solid resale values have strengthened the business case, particularly for salary packaging and small fleets.

Why the Government Is Reviewing the Rules

A statutory review of the Electric Car Discount has now commenced. The key reason is cost. Uptake has exceeded expectations, and the projected cost to the budget has increased significantly over the forward estimates.

The review will examine:

• Whether the concession is still required to encourage EV adoption.
• Whether eligibility settings should be tightened (for example, limiting benefits to certain vehicle types or price points).
• How the discount interacts with other policies, such as the National Vehicle Emissions Standard commencing in 2025.

Public consultation is underway, with a final report not due until mid-2027. Importantly, there is no suggestion of immediate changes, and any reforms are more likely to be prospective.

Practical Takeaways for Business Owners and Employees

While uncertainty always creates hesitation, the current rules are clear and legislated. From a practical perspective:

• Now is a good time to review fleet or salary packaging arrangements, particularly if you are considering replacing a vehicle in the next 12–24 months.
• Existing arrangements are expected to be grandfathered, reducing the risk of retrospective changes (although we can’t guarantee this).
• Ensure vehicles are clearly under the LCT threshold at first purchase and meet all eligibility criteria if you want to access the FBT exemption.
• Check the tax treatment of charging infrastructure provided in connection with an eligible EV, this won’t necessarily qualify for an FBT exemption.

Final Thought

The Electric Car Discount remains one of the most valuable concessions available for employee vehicles. While a review introduces longer-term uncertainty, the commercial reality today is that EVs can deliver genuine tax and cash-flow savings when structured correctly.

If you are considering an EV—either personally or through your business—now is the right time to run the numbers. Please contact our team if you would like tailored advice on whether an electric vehicle strategy makes sense for you under the current rules.

AI Tax Tips: Helpful Shortcut or Costly Trap?

As a business owner or investor, time is always tight. So it’s no surprise many people now turn to AI tools like ChatGPT for quick answers on tax deductions, super contributions or structuring ideas. The responses sound confident, arrive instantly and cost nothing. What could go wrong?

Plenty.

The Australian tax and super system is complex, highly fact-specific and constantly changing. While AI can be a useful starting point, relying on it for decisions can expose you to audits, penalties and poor financial outcomes. We’re increasingly seeing the clean-up work when AI advice goes wrong.

Where AI Can Help (and Where it Can’t)

AI is quite good at explaining basic concepts in plain English. It can help you understand what “negative gearing” means, outline the difference between concessional and non-concessional super contributions, or prompt you to think about record-keeping. Used this way, it can save time and help you ask better questions.

The problem starts when AI moves from explaining concepts to giving “advice”.

Tax and super outcomes depend on your specific facts: your income levels, business structure, age, residency status, assets, timing and future plans. AI does not know these details unless you provide them—and you generally shouldn’t. Even then, it cannot exercise judgement or balance competing risks the way an experienced adviser can.

The Accuracy Risk: Confident, but Wrong

AI tools are known to “hallucinate” – that is, provide answers that sound authoritative but are incorrect or incomplete. In practice, this can mean:

• Claiming deductions that don’t apply to your circumstances
• Miscalculating capital gains tax or ignoring integrity rules
• Suggesting super strategies that breach contribution caps or eligibility rules
• Quoting legislation, cases and rulings or concessions that don’t exist or are out of date.

These errors are rarely obvious to a non-expert, but they are normally obvious to the ATO, courts and experienced advisers.

A recent decision handed down by the Administrative Review Tribunal highlights some of the key problems. In Smith and Commissioner of Taxation [2026] ARTA 25 the taxpayer appeared to rely on AI tools to identify cases which supported their argument, but this approach was shot down by the Tribunal. Some of the cases didn’t exist and others were simply not relevant to the matter being considered. 

If the person using the AI tool doesn’t verify the existence of the cases provided by the tool and read them to ensure their relevance then “the Tribunal’s resources are being wasted, as the Tribunal must look for cases that don’t exist and read cases that have no relevance at all”.

ATO Scrutiny is Increasing, not Decreasing 

The ATO isn’t anti-AI—they use it internally for fraud detection and analytics. But for you? The ATO’s misinformation guide makes it clear that AI tools can provide false, inaccurate, incomplete or outdated information. The ATO’s message is to verify everything, or face the music. Surveys reveal 64% of businesses seek AI accounting help first, only for pros to unscramble the mess—wasting time and money.

ATO AI transparency statement | Australian Taxation Office

Protect yourself from misinformation and disinformation | Australian Taxation Office

When something is wrong, the ATO will generally amend the return, charge interest and may apply penalties—even if the mistake came from AI advice rather than intent.

We are seeing this play out most clearly with work-from-home claims, property deductions and SMSF compliance.

Superannuation: High Stakes, Little Margin for Error

Super is an area where AI advice can be particularly dangerous. Self-managed super funds, in particular, operate under strict rules. AI often overlooks key issues such as eligibility, timing, purpose tests and investment restrictions. The result can be non-compliance, forced unwinding of transactions and penalties that run into thousands of dollars.

Super mistakes can also permanently damage your retirement savings.

Data Security and Privacy

There is also a practical risk many people overlook: entering personal or financial information into AI platforms. Once data is entered, you lose control over how it is stored or used. This creates privacy and fraud risks that are simply not worth taking.

A Smarter Approach: AI Plus Professional Advice

AI is best used as a support tool, not a decision-maker. It can help you understand the landscape, but important tax and super decisions should always be reviewed in light of your full circumstances.

At our firm, we encourage clients to bring questions early, test ideas and have conversations before acting. That approach almost always costs less than fixing problems after the fact.

The bottom line: AI can be a helpful assistant, but it is not your accountant. When it comes to protecting your wealth and staying compliant, tailored professional advice remains essential.

Downsizer Contributions and the Main Residence Exemption

When clients sell a long-held family home, they may be able to channel part of the proceeds into superannuation by using the downsizer contribution rules.

Basic Eligibility Conditions

To qualify, the seller must meet a number of conditions:

• They must have reached the eligible age of 55 years (at the time of making the contribution).
• The eligible dwelling must be located in Australia and have been owned for at least 10 years.
• The disposal of the dwelling must be exempt from CGT under the main residence exemption to some extent (full exemption not required).
• The contribution must be made within 90 days of settlement, and an election form must be lodged with the fund no later than when the contribution is received.

The downsizer contribution can only be used once per individual and is limited to the lesser of the gross sale proceeds or $300,000 per person.

Does the Sale Need to be Fully CGT-exempt?

A common question is whether the sale must be fully exempt as the main residence.

Importantly, a full exemption is not required.

Even if only part of the capital gain is exempt under main residence rules, the property may still qualify — provided all other conditions are met.

Is the Property Required to be the Main Residence at Sale?

Equally important: the property does not need to be the seller’s principal residence at the time of sale.

Living in the property for some years and renting it out later does not disqualify it, as long as the ownership and residence history supports at least a partial main residence exemption. 

Special Rules for Pre-CGT Properties

Where a property was acquired before CGT began, the rules look at whether part of the gain would have been disregarded had CGT applied.

A key requirement is that there is a dwelling that qualifies as the main residence. Disposal of vacant land will generally not satisfy the test and therefore will not meet downsizer requirements. 

Eligibility of a Non-Owning Spouse

It is common for only one spouse to be listed on the property title.

A non-owning spouse may still qualify for a downsizer contribution if all other requirements are met, apart from ownership.

However, a spouse who never lived in the property and could not reasonably have treated it as their main residence is unlikely to be eligible.

Preservation and Access to Funds

A downsizer contribution is subject to the standard preservation rules. Once contributed, the amount cannot be accessed until:

• You reach preservation age (60) and retire, or
• You reach age 65, regardless of retirement status.

Consider future cash-flow needs before making the contribution.

Before you Contribute

Although seemingly straightforward, downsizer contributions involve several nuances. Please contact us if you have any questions.

Related links:

• Downsizer super contributions
• Downsizer contributions and capital gains tax