Limited time to get clients’ affairs in order

The PAG I’m referring to relates to the following topics:

• Holiday homes and rental properties
• Family trust elections
• Personal services income and Part IVA
• Payday Super.

Given the relevance of these measures to your clients, it is important to understand the ATO’s administrative approach to advising them and to take advantage of the opportunities presented by the ATO before firmer action is taken.

Each of these is explained in more detail below.

Holiday homes and rental properties

ATO's focus on the issue

The ATO’s Random Enquiry Program found that nine out of 10 tax returns lodged by rental property owners contained errors, despite 86 per cent using a registered tax agent. The ATO’s ongoing concerns about the correctness of tax returns involving rental property income and deductions claims prompted the release of draft PAG on 12 December 2025.

The draft PAG comprises:

• Draft Taxation Ruling TR 2025/D1 Income tax: rental property income and deductions for individuals who are not in business;
• Draft Practical Compliance Guideline PCG 2025/D6 Apportionment of rental property deductions – ATO compliance approach; and
• Draft PCG 2025/D7 Application of section 26-50 of the Income Tax Assessment Act 1997 (ITAA 1997) to holiday homes that you also rent out – ATO compliance approach.

What is the guidance about?

TR 2025/D1 provides guidance for individuals who earn property rental income from:

1. The short-term rental market (through online booking or sharing platforms).
2. Renting out a holiday home or letting a room(s) in a home.
3. Letting the property to long-term tenants.

The draft ruling explains the following matters relating to the use of a rental property:

• When amounts received for the use of the property are assessable.
• When losses or outgoings incurred in relation to the property are deductible.
• How property owners should apportion their deductions when the property is used for both income-producing and non-income-producing purposes.
• When certain deductions for a holiday home, that is also rented out, will be denied under section 26-50 of the ITAA 1997 because it is a ‘leisure facility’.

Deductions are allowable for those periods when a property is actually rented, and costs are not deductible when the property is used for a non-taxable use. Property owners incorrectly claiming deductions when the property is being used privately (including by friends or family members), as well as those periods when the property is ostensibly ‘available for use’ but the owner does not have a genuine intention to rent the property, are particularly of interest to the ATO.

PCG 2025/D6 sets out methodologies that the ATO will accept as fair and reasonable when apportioning losses and outgoings relating to the property on a 'fair and reasonable' basis to work out the deduction that can be claimed under section 8-1 of the ITAA 1997.

PCG 2025/D7 explains how the ATO manages risk for rental property arrangements to which section 26-50 may apply. Section 26-50 is an integrity rule that, broadly, denies deductions for the costs of acquiring, retaining, using, operating, maintaining or repairing a leisure facility. This includes holiday homes.

Section 26-50 contains an exception that allows deductions to be claimed if the property is used mainly to produce assessable income (i.e. rent).

Whether a holiday home is used (or held for use) mainly to produce rent is based on a range of factors, including but not limited to:

• The way the holiday home is actually used.
• The time the holiday home is dedicated to income-producing use.
• The time the holiday home is used for private use, or held for potential private use.
• The extent to which the holiday home is available or rented out during high-demand periods, such as school holidays, public holidays or peak seasons (think of ski lodges in winter and beach houses in summer).

PCG 2025/D7 sets out three behavioural zones. There is a low risk of the ATO applying compliance resources to consider the application of section 26-50 to an arrangement that falls within the green zone, a medium risk for those in the amber zone, and a high risk for those in the red zone.

It is important to clarify that falling within the green zone in the PCG does not mean there is a low risk of the ATO applying section 26-50 to the arrangement; it means there is a low risk of the ATO considering whether the provision applies.

How long do you have to organise your clients' affairs?

This is the first time the Commissioner’s position on the application of section 26-50 to holiday homes has been spelt out in PAG. In recognition of this, the Commissioner will not devote compliance resources to consider the application of section 26-50 for expenses incurred before 1 July 2026, if the expenses relating to that holiday home were incurred under an arrangement entered into before 12 November 2025.

This means, for rental arrangements in place before 12 November 2025, taxpayers have until 1 July 2026 to get their house in order.

Family trust elections

ATO's focus on the issue

The 30-year-old tax law on family trusts is under ATO scrutiny. (See my related Accountants Daily article, FTDT: The sleeping giant awakes, from July 2025.)

Some private groups face substantial and unexpected tax bills due to distributions made outside the family group of the individual specified in a family trust election (FTE) made by a trust, or an interposed entity election (IEE) made by a trust, company or partnership. Distributions made outside the family group attract family trust distribution tax (FTDT) at the rate of 47 per cent.

The widespread misunderstanding of these complex rules over the decades has been aggravated by:

• The unforgiving nature of FTDT, which is not subject to a limited period of review.
• The automatic application of the general interest charge (GIC) once the FTDT is unpaid for more than 60 days.
• The Commissioner’s inability to disregard the application of FTDT or extend the time to revoke or vary elections.

Historical FTDT and GIC liabilities that remained undetected for years, even decades, are awakening and attracting the ATO’s attention.

How long do you have to organise your clients' affairs?

An ATO update from August 2025, and a further ATO update from November 2025, explain that taxpayers can seek remission of the GIC on a case-by-case basis in accordance with PS LA 2011/12. Up to 31 December 2026, the ATO may consider it fair and reasonable to remit GIC up to 80 per cent where an entity has taken reasonable steps to mitigate the effects of a distribution being made outside the family group.

The ATO may consider:

1. 80% remission (i.e. down to 20 per cent of the GIC liability remaining) where a taxpayer has:

• Oroactively self-reviewed their FTDT liability before a review commenced.
• Lodged the FTDT payment advice form.
• Paid the FTDT.

2. Partial remission (less than 80 per cent remission) where a taxpayer has:

• made a voluntary disclosure of an FTDT liability during the early stages of a review (prior to audit);
• lodged the FTDT payment advice form; and
• paid the FTDT.

The entity needs to provide the ATO with a GIC remission request with sufficient information to allow the ATO to decide that it was fair and reasonable. The ATO will generally consider it is not fair and reasonable to remit the GIC where:

• A risk review identifying FTDT risks has progressed to an audit.
• The ATO has issued an FTDT notice to the entity.
• There is evidence of mischief, tax avoidance, fraud or evasion.

Part IVA and PSI

ATO's focus on the issue

The long-standing position—established by case law in the 1970s and reaffirmed in taxation rulings issued by the ATO in the 1980s—that personal exertion income cannot be alienated is again a focus area for the ATO. (See my related Accountants Daily article, Part IVA looms over PSI rules, from February 2026.)

Even if the personal services income (PSI) rules do not attribute the income derived by a personal services entity (PSE) to the individual because the PSE passes the tests and is conducting a personal services business (PSB), there has always been a possibility that Part IVA of the Income Tax Assessment Act 1936 could apply.

PCG 2025/5 explains when the ATO is more likely to apply its compliance resources to consider the potential application of Part IVA to an income splitting arrangement.

Importantly, the PCG does not indicate the likelihood of Part IVA applying to an arrangement; only how likely it is that an arrangement will trigger a review under Part IVA.

How long do you have to organise your clients' affairs?

The ATO advises taxpayers should not be concerned that it will apply compliance resources to pursue Part IVA where they have made a genuine attempt to move into a low-risk arrangement by 30 June 2027.

Low-risk arrangements involve:

• Distributing the net PSI to the individual whose personal efforts or skills generated that income, so it is taxed at their marginal rate.
• The individual receiving remuneration that is substantially commensurate with the value of their personal services.
• The payment of remuneration to an associate (or a service trust or company) for bona fide services related to earning the PSI, where that amount is reasonable for the services they provide.
• Delays between earning the PSI and distributing it to the individual that are due to reasons outside the individual’s control or which are not tax-related, and which result in only a temporary deferral of tax.
• The temporary retention of profits for working capital purposes.

Payday Super

Although Payday Super has broad backing, transitioning employers to the new system from 1 July 2026 represents the biggest disruption to compulsory superannuation since its inception in 1992. All employers are expected to comply with the new law from 1 July 2026.

How long do you have to organise your clients' affairs?

Practical Compliance Guideline PCG 2026/1 sets out the factors the ATO will consider when deciding how to apply its compliance resources to investigate employers who attempt to comply in the first year of the new regime. The ATO’s compliance approach recognises that employers who try to do the right thing from 1 July 2026 to 30 June 2027 and resolve any issues quickly should not be the focus of ATO compliance action.

The risk-based framework enables the ATO to prioritise investigations of employers who have not paid the minimum required superannuation guarantee (SG) contributions for their employees by classifying employers as low-risk (green zone), medium-risk (amber zone) or high-risk (red zone).

Employers will fall into the green and amber risk zones where superannuation is paid with varying degrees of lateness (with the medium-risk zone covering those employers who are still paying superannuation on the former quarterly basis). Employers will fall into the red zone if they do not meet the requirements to be in the green or amber zones.

The ATO will prioritise the application of its compliance resources to areas of highest risk (red zone) ahead of those in the amber zone. The ATO won’t have cause to apply compliance resources to investigate employers in the green zone to determine if they have an SG shortfall. This means an employer in the green zone has a low risk of the ATO raising an SGC assessment against the employer for QE days that occur in 2026–27.

That said, the PCG doesn’t prevent an employee from making a complaint against the employer and taking recovery action under the National Employment Standards.

Conclusion

The ATO’s interesting approach in recent PAG allows varying time frames for your clients to get their affairs in order. While this is welcome, it doesn’t give taxpayers the level of certainty that some might assume PCGs provide.

Increasingly being used by the Commissioner, PCGs are a useful indication of where and how the ATO will focus its attention and its compliance resources. But, ultimately, PCGs do not protect taxpayers from the ATO raising assessments (or amended assessments) under the law where an arrangement does not comply with the law, or there is a tax shortfall.

The ATO cannot un-see what it has seen. While the ATO can choose how and when it allocates its compliance resources to investigate if an integrity provision or anti-avoidance rule applies to a taxpayer’s situation, the Commissioner does not have discretion to disregard the application of the tax and superannuation law.

Robyn Jacobson is a tax advocate and specialist with over 30 years in the tax profession. Her practical insights and expertise stem from her public practice background and more than 25 years of guiding the profession in her various roles as a professional tax trainer and advocate. She champions improvements to our tax system, with a focus on SMEs and supporting practitioners. Robyn is a Chartered Tax Adviser of The Tax Institute, and a Fellow of both CA ANZ and CPA Australia.