February 2026 Essential Tax Summary

This month, we take a look at the ATO’s finalised practical compliance guidance on applying the general anti-avoidance rules in Part IVA to companies and trusts that pass the personal services income tests, and the ATO’s compliance approach for the new Payday Super measures for the 2027 income year.

The recent Applebee decision examines common working-from-home deductions, especially post-COVID-19.

The Government has also issued draft legislation implementing previously announced changes to the proposed Division 296 tax on superannuation balances over $3 million, a critical area of reform.

As change occurs, we’ll keep you posted through Fortis social media accounts.

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 introducing a new Division 296 tax to reduce superannuation tax concessions for individuals with total superannuation balances (TSB) above $3 million.

From the 2026–27 income year, the measure proposes higher tax rates on superannuation earnings that relate to balances above $3 million. The headline rates are 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, separately from income tax and tax paid by superannuation funds. Individuals may choose to pay the liability by releasing amounts from superannuation or using 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 before commencement. Division 296 fund earnings will be adjusted to recognise accrued gains before commencement, with two proposed methods: 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 only by reference to an individual’s TSB on 30 June 2027. This means 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 exceeded $3 million on 30 June 2026.

The exposure draft does not include draft regulations. Treasury has indicated that supporting regulations will cover key operational details, including exclusions from total superannuation earnings for certain interests, how relevant superannuation earnings are attributed (including alternative calculation methods), valuation rules for certain superannuation interests, and how transitional CGT adjustments will be calculated 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 policymakers.

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. The draft Bill proposes excluding 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 both core and supporting activities that could indirectly promote these activities. Any exceptions would be limited by a strict “sole purpose” test. 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 RDTI eligibility for activities conducted only for harm minimisation purposes, such as:

• preventing problem gambling
• reducing addiction
• 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 an 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 (TFNs) to the ATO.

The main proposed changes include:

• Streamlining TFN reporting so trustees of closely held trusts report beneficiary TFNs when lodging the trust tax return, rather than quarterly. This applies where a beneficiary has quoted their TFN and is presently entitled to a share of trust income.
• Allowing the Commissioner to 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.
• Requiring the Commissioner to notify both the trustee and the beneficiary where the Commissioner is not ensuring a correct TFN has been provided, or where the identifying information does not match. In these cases, the beneficiary is treated as not having quoted their TFN, and the trustee may need 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
• ensure the correct amount of tax is assessed

The proposed changes do not alter existing TFN withholding rules for closely held trusts. Trustees will still need 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 create tax-effective opportunities around retirement pensions and non-concessional contributions for some 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, 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 retire in May 2026 and has a superannuation balance of $2,400,000.

• If he starts an income stream at retirement, he can move $2,000,000 into a tax-free retirement pension and leave $400,000 in accumulation, where earnings are taxed at 15%.
• If he waits until 1 July 2026, he can move $2,100,000 into a retirement phase pension.

How personal TBCs work

Clients who commenced a retirement phase income stream before 1 July 2026 will have a personal TBC that can differ from the new general TBC of $2,100,000. This is because indexation applies only 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.

• Mary used 50% of the general TBC, so she will receive 50% indexation on 1 July 2026. Her personal TBC will increase by $50,000 to $2,050,000.
• If Mary had commenced her pension with $2,000,000, she would not receive any indexation, and her personal TBC would remain $2,000,000.

Because indexation is proportional, from 1 July 2026, clients may have a personal TBC anywhere between $1,600,000 and $2,100,000. A client’s personal TBC and indexation entitlement can be viewed on the ATO Portal and under their myGov login. This should be checked before commuting or commencing any retirement phase pensions.

Non-concessional contributions

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 open up opportunities for some clients. Contribution caps are indexed to the December 2025 average weekly ordinary time earnings (AWOTE) numbers, which will be released in late February 2026.

From the Regulators

Remission Requests for Interest and Penalties

From 2 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.

Key points:

• Forms must be lodged via ATO Online services or by mail.
• A separate form is required for each taxpayer, and for each type of interest or penalty.
• Where an agent does not have access to ATO Online services, they can contact the registered agent phone line, and the ATO will complete the form on their behalf.
• If 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 updated its website guidance outlining the circumstances where a GIC remission request is more likely to be approved or rejected.

Pillar Two Compliance

The ATO has updated its website guidance on the new lodgment obligations 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:

• GloBE Information Return (GIR)
• Foreign lodgment notification
• Australian IIR/UTPR Tax Return (AIUTR)
• Australian DMT Tax Return (DMTR)

For tax consolidated groups, each group entity in Australia, including subsidiary members, needs to lodge either a GIR or a 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 may make post-tax personal super contributions on behalf of employees in line 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
• 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. If the credits aren’t claimed within that 4-year period, they expire and the ATO has no discretion to amend assessments to include them.

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 close to the 4-year credit time limit. For Top 100 large corporates, the ATO expects real-time disclosures, including errors on the BAS.
• Ensure credits are correctly calculated and keep accurate records to support claims. Penalties may apply if you claim credits you’re not entitled to.
• Actively manage the risk of credits expiring 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 example where an apportionment methodology is changed for earlier periods to increase the rates claimed. This is likely to take the ATO longer to review and may require further information, so factor this into timeframes.

The 4-year credit time limit is different to the period of review. The period of review is the time the ATO can amend an assessment, generally 4 years from when the BAS is lodged. The ATO can 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 cannot amend assessments to include them, even if the period of review is still open. This means there can be situations where the ATO amends for overpaid or underpaid GST, or overclaimed credits, but additional credits cannot be included in an amended assessment.

The practical takeaway is to make sure any credit entitlements are claimed within the 4-year credit time limit.

Further information on how the 4-year credit time limit applies 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.

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 shift towards earlier and firmer enforcement action.

A DPO prevents a person with outstanding tax liabilities from leaving Australia until the 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 used alongside other firmer actions, including:

• director penalty notices
• garnishees
• credit reporting referrals
• wind-up applications

These actions are more likely where they 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 support of their tax adviser.

Commercial Deals Service Resources

The ATO has updated its website guidance with case studies and videos showing how it can assist in providing certainty on commercial deals.

Small business CGT concessions

A partnership sold a property and sought to fully reduce the capital gain using the small business 50% active asset reduction and the small business rollover. The ATO requested further information to support that the partnership was carrying on a primary production business. After reviewing the material and considering TR 97/11, the ATO found there was insufficient evidence of active trading. The partnership tax returns showed no primary production income or expenses, so the partnership was not eligible for the concessions. The taxpayer accepted the ATO’s position and withdrew the claims.

Market value substitution rule

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

Value shifting in restructures

A restructure involved 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 a share split that increased the value of those shares. The ATO determined these steps resulted in a direct value shift from individual shareholders to a family trust. Applying the general value shifting regime, the ATO treated capital gains as arising for the individuals in the 2022 income year, providing tax certainty for the later transaction.

Foreign resident CGT withholding

In a foreign resident CGT matter, 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 reviewed the calculation of the CGT discount for a non-resident beneficiary of a trust. The taxpayer 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

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 show the ATO’s focus on evidence, valuations, and CGT integrity issues, particularly for 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 arrangements that are “lower” or “higher” risk for Part IVA, and when the ATO is more likely to 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 passes the PSI tests so it is treated as a personal services business (PSB). While the PSI attribution rules do not automatically tax the individual who performed the work on the profits, the ATO’s long-standing view is that Part IVA could apply if profits relating to an individual’s personal services are split with others or retained in a company.

Indicators of a lower risk arrangement include:

• The net PSI is distributed to the individual whose personal efforts or skills generated the 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 earning the PSI, and the amount is reasonable for the services provided.
• There is a timing difference between earning the PSI and distributing 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 later 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 profits for working capital purposes, such as funding business operations or acquiring 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 it is taxed at an overall lower rate than if the individual received the income directly.
• The individual’s remuneration 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 profits for working capital purposes, but the intention is not carried out and there are no sound commercial reasons for not carrying it out.
• The net PSI (or part of it) is split with an associate of the individual, 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 (or part of it) retained in the PSE is greater than required for clear commercial purposes, and the retained funds are later made available to the individual for personal use (for example, via a complying Division 7A loan). The PCG also notes that retaining PSI itself is a strong indicator of higher risk.

Right to Occupy Under a Deceased’s Bill

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 held by the deceased just before death.

The phrase “right to occupy the dwelling under the deceased’s will” is not defined in the ITAA 1997 and takes its ordinary meaning. Having regard to the context of section 118-195, and consistent with case law, the ATO indicates this is limited to circumstances where the right to occupy is expressly granted under the terms of the will to an individual specifically named in the will.

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

This means:

• a right given by an executor or trustee using a broad discretionary power in the will does not qualify
• a right established by a separate deed or agreement between beneficiaries and the estate’s representatives is not considered a right “under the deceased’s will”

The draft determination also includes examples where a right to occupy arises under separate arrangements, through a trustee’s broad discretion, or under a court order. For example, the ATO indicates a family provision order made under 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 its 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, with exemptions assessed on a case-by-case basis.

The Public CBC regime applies to qualifying reporting entities for reporting periods starting on or after 1 July 2024. It requires 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
• trusts with constitutional corporate trustees
• entities 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. This means 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 they are not consolidated globally and meet the thresholds.

CBC reporting obligations apply if aggregated turnover includes Australian-sourced income of $10 million or more in the reporting period. Reports are due within 12 months of the end of the period and will be published by the ATO on a government website.

Exemptions are granted only in exceptional circumstances where disclosure would be inappropriate. The ATO will balance transparency objectives against potential harms, including:

• national security risks
• breaches of Australian or foreign laws
• substantial commercial damage

A partial exemption is the ATO’s preferred approach.

Considerations for an exemption include:

• whether the circumstances are unusual and go beyond routine
• the size and likelihood of the adverse impacts, supported by evidence
• whether the information is already public, or effectively disguised through aggregation
• retrospectivity
• the potential for disclosure to mislead
• compliance costs

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

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

Transfer Pricing Issues Related to Inbound Distribution Arrangements

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

The draft update includes these proposed changes:

• Clarification of scope
  • The update reiterates 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 that 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 or services to third parties where the intellectual property is substantially held by related foreign entities, and the Australian entity/entities do not significantly contribute to the creation of the products or services
• Introduction of a “white zone”
  • A new risk 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 or court decision (within 3 income years)
    • a recent review with a low or high assurance rating, and no material change since the relevant 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 are proposed to indicate different risk levels.

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

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 contrived arrangements involving related party property development management agreements.

These arrangements typically use related party structures to defer the recognition of taxable income while exploiting tax losses, often in a deliberate and repeated way. The Commissioner describes a common structure where a special purpose developer entity is inserted between the landowner and the builder. The ATO view is that this “interposition” can artificially separate landownership and development activities that are, in substance, a single economic activity of property development.

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

Key risks highlighted include:

• Artificial deferral of income that would otherwise be assessable
• Exploitation of tax attributes, such as losses, in ways that lack commercial rationale
• Potential application of promoter penalties

The ATO is actively reviewing these arrangements and expects to publish a draft practical compliance guideline for public consultation shortly.

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 the SISA or the Superannuation Industry (Supervision) Regulations 1994 (SISR).

It applies to contraventions occurring on or after 1 July 2014, and positions education as a compliance tool to address gaps in a trustee’s knowledge or understanding of their duties and obligations, with the aim of preventing contraventions from occurring.

Cases

Capitalised Interest Not Deductible

The ATO has released draft Legislative Instrument LI 2025/26, 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:

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 the outgoing was not incurred in gaining or producing Charles’ assessable income, and 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. This reinforces 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
• approximately $96,000 in income, showing a genuine profit intention

The taxpayer was not successful in claiming ITCs for entertainment expenses or for property investment activities, which were not accepted as creditable acquisitions.

On penalties, the Commissioner imposed:

• a 50% shortfall penalty for recklessness
• 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 key factor was the taxpayer’s failure to report sales income while also claiming ITCs for the same enterprise.

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

Separately, the Tribunal made pointed comments on the use of AI tools in tax research. While it was unclear whether the taxpayer relied on AI, 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, and this wasted Tribunal resources. The comments are 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 occupancy expenses or logbook-based car expenses.

Occupancy expenses

The ART considered two key questions in deciding whether the taxpayer could claim occupancy expenses for a home office:

• whether the home office qualified as a place of business, meaning it had the character of a dedicated business location, rather than being an extension of the employer’s workplace or a matter of personal convenience
• whether the expenditure was actually incurred in the course of producing assessable income

The ART found against the taxpayer on both issues. The taxpayer claimed occupancy expenses during a period when the employer was phasing in a return-to-office policy after COVID-19 restrictions eased. The employer did not require or direct the taxpayer to work from home, but the taxpayer continued working from home three days per week. The ART treated the home setup as ancillary to the primary workplace rather than a standalone place of business.

The room used for work was also not solely used as a place of business. For example, it stored a weights bar and was shown as a bedroom on the floorplan. These 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 because the logbook was not completed contemporaneously. The taxpayer produced different versions of the logbook that were inconsistent with each other and did not give evidence under oath about the logbooks. The ART upheld the Commissioner’s allowance of only $3,600 under the cents per kilometre method.

Penalties

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

$6 Million Net Asset Value Test Not Met

This case looked at the $6 million maximum net asset value (MNAV) test under the small business CGT concessions, and whether the market value of shares sold differed from the actual sale price.

The Kilgour Trust sold its minority 20% interest in Punters Paradise Pty Ltd (Punters), alongside the other two shareholders, to News Corp Investments Pty Ltd (News Corp). The total purchase price was $31,057,722 and it was split between the vendors based on the number of shares each sold. The trustees of the minority holdings each received $6,211,544 for their 20% interests.

Mrs Kilgour, as a beneficiary of the Kilgour Trust, was assessed on the capital gain based on the distribution she received. The capital gain was calculated using the “market value” of the shares as the relevant CGT assets.

Mrs Kilgour argued 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 claimed the market value of the shares was less than $6 million, even though the proceeds received were more than this.

Her arguments included:

• News Corp paid above the true market value due to factors unrelated to the inherent worth of the minority shareholdings.
• The deal was not at arm’s length, meaning the parties did not negotiate on fully independent commercial terms. Under section 116-30, she argued this required substituting the actual sale proceeds with a lower market value.
• For CGT purposes, the market value should be determined by treating each 20% parcel in isolation, as if it were a standalone transaction, rather than considering the collective sale of 100% of the company to News Corp at the same time.

The Full Federal Court rejected these arguments and found that:

• the parties dealt with each other at arm’s length, and
• the market value substitution rule did not apply, because the capital proceeds were an accurate representation of market value in the circumstances

As a result, the MNAV test was failed and the beneficiaries of the Kilgour Trust were not entitled to apply the small business CGT concessions.

Legislation

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

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

Key updates include:

• Instant asset write-off extended
  • Schedule 7 extends the $20,000 instant asset write-off for eligible small business entities (aggregated turnover under $10 million) for a further 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.

• Deduction for reverse-charged GST
  • The Act 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.

If you have any questions regarding the above information, please do not hesitate to contact our office to speak to one of our team.