Bumper Part 1: Year in review

While policy development paused for several months due to the Federal election, the year has been marked by significant legislative reform and regulatory activity. Looking ahead, practitioners and taxpayers alike must remain vigilant and prepare for further changes, ensuring systems and processes are up to date as the regulatory environment continues to evolve.

Key legislative developments this year

Instant asset write-off

Delays in legislating the temporary increase in the small business instant asset write-off (IAWO) to $20,000 for 2025–26 have caused uncertainty. The enabling legislation was passed by parliament on 27 November 2025 and was enacted on 4 December 2025. Similar IAWO threshold increases were made for 2023–24 and 2024–25.

This means small businesses with an aggregated turnover of less than $10 million can immediately deduct the cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose by 30 June 2026.

Whether the temporary increase is extended for another 12 months to 30 June 2027 is a matter for the Government. If there is no extension, the asset threshold reverts to its legislated threshold of $1,000 from 1 July 2026.

There is wide support for the increase in the asset threshold to $20,000 for 2025–26. However, from a policy perspective, it would be more efficient to implement a permanent increase in the threshold, rather than extending it on an annual basis.

No deduction for interest charges

From 1 July 2025, the GIC and shortfall interest charge (SIC) are no longer deductible. My September column and an ATO fact sheet from 27 August 2025 explain this change. The deduction is denied based on when the GIC or SIC assessment is incurred, not when the primary tax assessment arises. GIC and SIC incurred before 1 July 2025 continue to be deductible.

GIC or SIC incurred from the 2025–26 income year onwards, even if relating to earlier tax assessments, cannot be deducted.

Student loans

Following the 2024 amendments that reduced the indexation of student loans, a one-off 20% reduction has been applied to Higher Education Loan Program debts and certain other student loans incurred on or before 1 June 2025. With this 20% reduction now enacted into law, the ATO has been rolling it out in stages. Most reductions are expected to be applied before the end of the 2025 calendar year, but some complex cases may not be completed until early 2026.

Increase in superannuation guarantee rate

The superannuation guarantee rate (SG) rose to 12% on 1 July 2025, completing the scheduled 0.5% annual increases since 2021. The new rate applies to ordinary time earnings paid from 1 July 2025, regardless of when work was performed or which pay period the payment covers.

Payday Super

My recent two-part series on Payday Super (PDS), Part 1: understanding the new law and Part 2: not quite ‘all systems go’, explains the most significant reforms to superannuation in more than 30 years. With these changes, employers must pay their employees’ superannuation at the same time as salary and wages rather than quarterly.

The reforms may be law, but now the work to implement PDS begins. Key concerns with the new regime include:

●              the short runway to 1 July 2026 and the readiness of the systems and employers;

●              the risk that employers may not be able to ensure contributions they make are processed and accepted by their employees’ superannuation funds within the PDS timeframes; and

●              the ATO’s transitional approach in PCG 2025/D5, which will provide little protection or certainty to employers.

Being in the green zone in the PCG does not absolve an employer of liability for the SG charge—it means the ATO won’t allocate compliance resources to investigate employers who are in the green zone. Nevertheless, the ATO is bound by legislation and must assess the SG charge if it becomes aware that an employer has a shortfall in respect of a QE day, regardless of the employer’s position in the green zone.

The new regime gives employers a chance to rethink how they handle employee superannuation payments. Making an early voluntary disclosure is the best way to reduce penalties under PDS. If there’s a shortfall, quickly make a late contribution directly to the fund and disclose this to the ATO right away. Although employers will still need to pay earnings on the shortfall, taking these actions can help them avoid extra penalties, like the uplift amount, late payment penalty and GIC.

While we are waiting for regulations, legislative instruments, and necessary software updates from digital service providers, it’s important for employers and advisers to become familiar with the requirements of the new regime as soon as possible. Start discussing these changes with your clients now so your business clients can review their software, systems, and processes and ensure they’re prepared for PDS.

Accounting firms that perform the payroll function for clients will similarly need to ensure they are ready for PDS.

Changes to foreign resident capital gains withholding rules

From 1 January 2025, legislative changes were made to the foreign resident capital gains withholding rules to:

●              increase the withholding rate to 15% (from 12.5%); and

●              remove the $750,000 threshold below which withholding previously did not apply for transactions involving taxable Australian real property and certain indirect Australian real property interests.

Although aimed at foreign residents, these changes now require all Australian residents selling real property valued under $750,000 to obtain a clearance certificate to avoid withholding when selling their homes or investment properties.

Luxury car tax changes

Effective from 1 July 2025, the criteria for classifying a car as fuel-efficient for LCT purposes have been amended; the maximum allowable fuel consumption has been reduced from 7 litres per 100 kilometres to 3.5 litres per 100 kilometres.

Significant ATO guidance

Personal services businesses and Part IVA 

The ATO recently issued PCG 2025/5, which explains when the ATO is more likely to apply its compliance resources to consider the potential application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) to the alienation of personal services income (PSI). The PCG applies to income splitting arrangements where the PSI of an individual is derived through a personal services entity (PSE) that conducts a personal services business (PSB), even if the PSI rules do not attribute the income to the individual.

Some taxpayers mistakenly believe that Part IVA does not affect their arrangements if they pass the PSI tests and are conducting a PSB. This misunderstanding has persisted since the rules were established, even though there has always been a possibility that Part IVA could apply in these scenarios.

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. It reassures taxpayers that if they genuinely shift to a low-risk arrangement by 30 June 2027, the ATO is unlikely to dedicate compliance resources to pursue Part IVA against them.

Interestingly, if payments made to a related service trust do not match the value of services provided by the associate, the arrangement is considered higher risk. While there are valid commercial reasons for using service entity arrangements—accepted by the ATO in TR 2006/2—service fees charged by a related entity can amount to income splitting if the fees are artificially inflated or lack commercial justification. Such service trust arrangements are already of interest to the ATO, so the potential diversion of PSI further increases the chance of compliance scrutiny.

The ATO has long held the view that Part IVA can apply to income-splitting arrangements where the PSI rules are satisfied, so the release of this latest guidance should come as no surprise. Taxpayers are encouraged to review their arrangements and ensure their PSI is not improperly alienated, even when the PSE is conducting a PSB.

Family trust elections

ATO focus on family trust elections

As explained in my July column, the sleeping giant has awoken. The 30-year-old tax law on family trusts and family trust distribution tax (FTDT) is now under ATO scrutiny. 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).

Misunderstanding of these complex rules has persisted for decades, aggravated by:

●              an unlimited amendment period for FTDT; and

●              the Commissioner’s inability to disregard the application of FTDT or extend the time to revoke or vary elections.

The ATO’s recent update explains that, until 31 December 2026, it may reduce GIC (up to 80%) if reasonable steps have been taken to mitigate the effects of a distribution being made outside the family group.

Thomas appeal

For the first time in over three decades, the unforgiving FTE rules will come before the Federal Court. The applicants are seeking declaratory relief from the court under Part IVC of the Taxation Administration Act 1953 (Cth) to vary FTEs associated with a private group. In 2005, an individual was specified in an FTE, even though the same trust had previously specified a different, but related, individual in an earlier FTE back in 2000.

Distributions made outside the family group of the original test individual led to an FTDT liability amounting to $13.2 million for 2019–20 and 2020–21.

Holding period rule and newly incorporated corporate beneficiaries

As discussed in my August column, an emerging issue is the ATO’s disallowance of franking credits attached to distributions made to newly incorporated corporate beneficiaries, on the grounds that the 45-day holding period rule (set out in former Division 1A of Part IIIAA of the ITAA 1936) has not been met.

Example 5 in the ATO’s recently issued web guidance explains that a company incorporated after the shares became ex-dividend is not a qualified person and, as such, is not entitled to a franking tax offset in respect of the shares.

New rental property and holiday home guidance

Recently issued draft guidance from the ATO explains when income from letting a property on the short-term rental market or to long-term tenants is assessable, and under what circumstances deductions can be claimed. The guidance further sets out methodologies for apportioning expenses in cases of personal use of the property.

Significantly, the draft guidance sets out for the first time when deductions will be denied for holiday homes considered ‘leisure facilities’, where such properties are not used or held ‘mainly’ to produce rent.

Rental arrangements established prior to 12 November 2025 have until 1 July 2026 to get their house in order. This means the ATO will not devote compliance resources to consider the application of section 26-50 Income Tax Assessment Act 1997 to such arrangements for expenses incurred before 1 July 2026.

Holiday home owners who prioritise producing rent over personal use need not be concerned. However, individuals who have claimed excessive deductions should be concerned, as the ATO intends to adopt a significantly more stringent approach moving forward.

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.