iscover Cross-Border Tax Risk: Five ATO Pressure Points to Watch in 2026
TaxCross-border lifestyles are now mainstream, but Australia’s tax rules remain highly technical. This article highlights five recurring pressure points in international matters—where legislation, ATO guidance and evidence requirements intersect—and practical steps to reduce amendment and review risk.
Key takeaways
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Residency: Individual residency is determined on the full facts and circumstances; no single factor is determinative.
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Evidence: In residency and trust matters, documentary evidence and contemporaneous records are often decisive.
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CFC risks: Controlled Foreign Company (CFC) exposure can arise without distributions, and software licensing characterisation issues can add complexity.
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CGT reform watch: Foreign resident CGT turns on statutory tests and valuations—and proposed reforms (including a 365-day principal asset testing concept) are commencement-dependent.
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FITO limits: Foreign Income Tax Offset (FITO) outcomes may be limited where only part of a gain is included in Australian assessable income (for example, due to the CGT discount).
“In a data-enabled environment, cross-border compliance is increasingly evidence-driven—workings, tracing and contemporaneous records matter as much as technical knowledge.”
Introduction: The post-border taxpayer
Many taxpayers now live and work across multiple jurisdictions, holding wealth through offshore companies, trusts and investment structures. While mobility increases, Australia’s tax framework remains complex—particularly for taxpayers with international connections. The ATO uses data matching and receives information through international exchange frameworks (including CRS and FATCA-related reporting and exchange arrangements), which can increase visibility of offshore accounts and cross-border structures.
This article examines five recurring technical pressure points commonly encountered in cross-border work. The case studies are illustrative and de-identified.
Scope and limitations
This article is general information only. It is not tax, legal or financial advice. Outcomes depend on individual facts and circumstances. Readers should confirm current law and ATO guidance and obtain tailored advice before acting. Legislative and administrative changes may occur after publication.
Case study 1: Residency risk and the facts-first approach (TR 2023/1)
Scenario
An Australian citizen works overseas for several years and assumes time outside Australia, by itself, establishes non-residency. The taxpayer also maintains a family home in Melbourne occupied by their spouse and children.
Technical analysis
For individuals, Australia’s domestic residency tests are contained in subsection 6(1) of the ITAA 1936 and are applied to the full facts. The ATO approach in TR 2023/1 reinforces that the “resides” test (ordinary concepts) is central, and that day counts should not be treated as a standalone safe harbour. Residency determination is highly fact-specific, requiring the totality of the taxpayer’s circumstances to be weighed.
In practice: reduce dispute risk
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Document: Track living arrangements, family location, employment/business duties, intention, and patterns of presence contemporaneously.
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Treaty analysis: If dual residency arises under domestic rules, consider whether treaty tie-breaker analysis is required (where applicable).
“Residency analysis is rarely a checkbox exercise—facts, intention and connections drive the outcome.”
Case study 2: The CFC attribution trap (Part X ITAA 1936)
Scenario
An Australian resident holds a controlling interest in a company in Singapore earning significant income from software licensing arrangements. The taxpayer assumes that if no dividends are remitted to Australia, there is no Australian tax exposure.
Technical analysis
Under Part X, the CFC rules can attribute certain income of a foreign company to Australian controllers even where profits are not distributed. Practical risk often turns on threshold characterisation (CFC/controller concepts), whether the active income test is satisfied, and whether income is “tainted” (for example, certain passive or royalty-like income).
Software licensing note (draft guidance)
Where cross-border payments relate to software arrangements, characterisation and withholding risk can be a practical flashpoint. The ATO has released draft PCG 2025/D4, describing when it will not review certain low-risk software arrangements for royalty characterisation and royalty withholding tax purposes.
Note: Draft PCGs describe a compliance approach and are administrative guidance only; they do not replace the law.
In practice: what “good” looks like
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Classify: Classify income carefully (substance over labels).
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Review: Review the entity’s activities and accounts, including any royalty-like streams.
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Report: Ensure appropriate reporting and disclosures (including international schedules where applicable).
Case study 3: Section 99B and foreign trust amounts (PCG 2024/3)
Scenario
An Australian resident receives a large amount from an offshore family trust and assumes it is a tax-free “gift” of capital.
Technical analysis
Section 99B can apply broadly where property of a non-resident trust is paid to, or applied for the benefit of, an Australian resident beneficiary—unless an exclusion applies (including where the amount can be shown to be corpus/capital rather than accumulated income). PCG 2024/3 signals a compliance focus on evidentiary support and tracing of trust property.
Note: PCGs describe compliance approaches; they do not replace the law.
In practice: tracing is the pivot
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Evidence character: Evidence the character of the amount received (corpus vs accumulated income).
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Reconstruct: Be prepared to reconstruct trust accounts over multiple years to support tracing.
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Engage early: For high-value or complex distributions, consider early engagement and—where appropriate—formal ATO guidance (for example, a private ruling) based on complete and accurate facts.
“With foreign trusts, the technical answer often depends on the quality of the paper trail.”
Case study 4: Foreign resident CGT—current law and reform watch (Div 855 ITAA 1997)
Scenario
An expatriate living in Singapore sells an interest in an Australian “land-rich” entity and assumes that because the asset is not direct real property, Australian CGT should not apply.
Technical analysis (current law)
Foreign residents can generally disregard CGT unless the asset is taxable Australian property. This can include certain indirect interests in Australian real property under Division 855 statutory tests. The correct analysis turns on legislative criteria and valuations—not labels like “shares” versus “real estate”.
Reform watch (proposals/announcements; commencement-dependent)
Treasury consultation has canvassed reforms to strengthen the foreign resident CGT regime. Proposals include moving elements of the principal asset test from a point-in-time test to a 365-day testing period, once enacted and commenced.
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Commencement: Budget materials state the start date for the “Strengthening the foreign resident capital gains tax regime” measure is deferred from 1 July 2025 to the later of 1 October 2025 or the first day of the quarter after Royal Assent (that is, the first 1 January, 1 April, 1 July or 1 October after Royal Assent).
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Status check: Readers should confirm legislative status and commencement timing at the time of any transaction, as proposals and start dates can change and do not operate until enacted and commenced.
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Practical note: As at the technical currency date, this measure is proposal/legislation-dependent and does not apply unless enacted and commenced.
Withholding (separate regime): 15% from 1 January 2025
Foreign resident capital gains withholding (FRCGW) is a separate collection mechanism. For relevant acquisitions under contracts entered into on or after 1 January 2025, the withholding rate is 15%, subject to clearance certificates and variation notices.
“For foreign resident CGT, the hardest mistakes are valuation and classification errors—especially in ‘land-rich’ structures.”
Case study 5: The FITO trap (s 770-10 ITAA 1997; Burton)
Scenario
An Australian resident sells a United States-based asset, pays US tax, applies the 50% CGT discount in Australia, and assumes they can claim a Foreign Income Tax Offset (FITO) for the full amount of US tax paid.
Technical analysis
Under the FITO rules, entitlement is constrained to foreign tax paid “in respect of” amounts included in Australian assessable income, subject to statutory limitation calculations. A practical consequence—illustrated in ATO materials and litigation outcomes relating to Burton—is that where only part of a gain is included due to the CGT discount, the available offset may be correspondingly limited (depending on the detailed facts and calculations).
In practice: make workings audit-ready
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Calculate: Calculate FITO with reference to the Australian assessable amount.
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Workpapers: Keep clear working papers, assumptions and reconciliations (including currency and timing treatment).
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Alignment: Align foreign tax evidence to the Australian characterisation of the income or gain.
Conclusion: Professional standards in a data-enabled environment
Cross-border compliance is increasingly evidence-driven. For practitioners and taxpayers alike, robust outcomes depend on contemporaneous documentation, disciplined application of multi-factor statutory tests, and avoiding “rules of thumb” where the law requires structured analysis.
For practitioners, these expectations align with professional obligations under APES 220 Taxation Services (2025), issued by the Accounting Professional & Ethical Standards Board and effective from 1 July 2025, as well as the Code of Professional Conduct administered by the Tax Practitioners Board.
About the author
Nika Widanage is the Managing Partner of AIM S Australia Pty Ltd, supporting individuals and private groups with complex tax structures, cross-border tax compliance, and practical assistance with filing overdue tax returns in Melbourne, including overdue expat tax returns in Melbourne for internationally mobile taxpayers.
This article has been prepared with regard to the professional and ethical standards applicable to taxation services, including APES 110 and APES 220.
Disclaimer (place prominently)
This article is intended for general informational purposes only and does not constitute tax, legal or financial advice. The application of tax laws depends on individual facts and circumstances. The case studies are illustrative and de-identified for confidentiality purposes. No representation is made that any approach will achieve a particular outcome in another matter. Neither the author nor AIM S Australia accepts liability for loss arising from reliance on this content. Readers should obtain tailored professional advice before acting. Legislative and administrative guidance may change after publication.
