The ATO has released a series of significant rulings and draft guidelines that will affect how individuals, families and businesses structure their tax affairs. The updates tighten long-standing practices, introduce new compliance risk zones and signal a clear shift in how the ATO expects taxpayers to structure and document their affairs. Focus areas include personal services income, holiday homes, payment of franked dividends and the Payday superannuation regime.

Below is a concise overview of the key changes and what they may mean for you.

The Dichotomy of the PSI Rules & Part IVA

The ATO released Practical Compliance Guideline (PCG) 2025/5 confirming that even if the Personal Services Income (PSI) regime is satisfied, Part IVA can still apply to arrangements where PSI is earned using a company or trust structure (i.e. personal services entities (PSEs)). Part IVA broadly targets arrangements which have the dominant purpose of obtaining a tax benefit.

PSI is income derived mainly from personal exertion and typically covers medical professionals, IT contractors and certain tradespeople. To the extent that one of the 4 Personal Services Business (PSB) tests are satisfied, the PSI rules don’t apply. The benefit of satisfying the PSI regime is that you can claim certain deductions and payments to your spouse (or other associate) for support work such as secretarial duties – where such deductions are not available to an individual deriving salary and wage income.

This PCG is relevant in cases where individuals, using a PSE which satisfies the PSB tests, have diverted their PSI to family members (e.g. spouses or adult children) who do little or no work (income splitting), or have accumulated profits within a corporate entity (e.g. bucket company) to cap their tax rate at the lower rate (e.g. 25%) and to defer the top up tax payable by individuals on a higher marginal tax rate (profit retention). The ATO is concerned that such individuals achieve a tax outcome that differs significantly from what would have occurred had they worked as a sole trader or employee.

Essentially, even when these types of Taxpayers who deliver their personal services through a corporate or trust structure (PSE) satisfy the PSI rules, Part IVA can still apply to attribute the income to the individual that delivered the personal service.

PCG 2025/5 is a self-assessment guideline that separates arrangements into either a high risk (i.e. immediate audit target) or low risk category (i.e. safe harbour).

Examples of situations in the high risk category include:

• A doctor pays his spouse $50,000 for minimal work (i.e. the spouse has no commercial right to income derived from the doctor’s clinical skill).
• An IT consultant retains $100,000 in the company for future flexibility (i.e. the company is acting as a personal savings and investment vehicle to defer top-up tax).

Examples of situations in the low risk category include:

• 100% of the net PSI (after genuine expenses) is paid to the individual as salary or wages, the salary of the individual is at market rate for the work performed and any retained profit is for a genuine business need (e.g. for purchasing specific business assets such as medical equipment or heavy machinery).

We can assist you in reviewing your structure to determine where you are likely to fall within the ATO’s risk rating framework.

Holiday Homeowners Beware

Do you own a holiday home which is also rented out during the year? Historically, the ATO allowed for a reasonable apportionment of expenses, even where private use was substantial. Under the proposed changes, this is no longer the ATO’s interpretation.

The ATO has issued a stringent new package of draft guidance (TR 2025/D1, PCG 2025/D6 and PCG 2025/D7) that replaces the old framework. If the draft guidance is finalised in its current form (comments on this draft can be made up to 30 January 2026), it will be a significant blow for many individual holiday home owners by changing the tax treatment of holding costs on holiday homes from apportionment (partial deduction) to denial (zero deduction).

The New Hurdle: Proving Commercial Intent

To claim any deduction for ownership expenses (such as interest, council rates, and insurance), you must now be able to prove that the property is held “mainly for the purpose of producing assessable income.”

This is determined by your commercial intent, not just by counting the days the property was rented. If the ATO determines that you are prioritising your personal use over commercial use—effectively treating the property as a lifestyle asset – the ATO may deny all holding cost deductions in full. It is no longer a matter of losing 20% or 30% of your claim for private use; you risk losing 100%.

The “Red Zone”

The ATO has defined a “Red Zone” (high risk) that will attract greater ATO compliance activities. You are likely in this zone if you:

• frequently “block out” the property for personal use during peak demand periods (e.g., Christmas, Easter, school holidays).
• advertise in restricted ways (e.g. only word-of-mouth or above market rates).
• place unreasonable conditions on tenants that discourage renting.

In the ATO’s view, if the above factors are present, you are generally not holding the property “mainly” for income production.

Green Zone defences

To defend your deductions, your commercial intent must be demonstrable and documented. Typical actions that would indicate that you are prioritising deriving income over personal use and therefore qualify as “Green Zone” behaviours include:

• Ensure the property is genuinely available for rent year-round, especially during peak holiday seasons.
• Continuously advertise through mainstream channels (e.g., Airbnb, Stayz, local real estate agents) at market rates and without any unreasonable restrictions.
• Limited personal/other non-commercial use of the property.

Transitional Relief

The ATO has indicated they will not devote compliance resources to expenses incurred before 1 July 2026 pursuant to rental arrangements that were entered into before 12 November 2025.  This gives taxpayers an opportunity to review how their holiday homes are used.

Additionally, these proposed changes are only intended to apply to individuals.

If you own a holiday home, we encourage you to reach out to your SiP advisor to discuss whether these changes may apply to your situation.

Ready, Set, Go… Preparing for Payday Super

From 1 July 2026, the thirty-year-old cycle of paying superannuation quarterly will be abolished. Under the new “Payday Super” regime, employers will be required to pay their employees’ Superannuation Guarantee (SG) contributions at the same time they pay salary and wages—specifically, within 7 business days of the payday.

Snapshot of the New Regime

The new model is built on two core concepts:

1. Qualifying Earnings (QE): A new, single earnings base that includes Ordinary Time Earnings (OTE) and salary sacrifice amounts.
2. QE Day: The day you pay the employee (i.e. payday).

A Harsher Penalty Framework

The cost of non-compliance is set to skyrocket. The new regime replaces the old penalty framework with more punitive measures:

• Administrative Uplift: A penalty that can start at 60% of the shortfall, linked to the scale of the default (replacing the current $20 administration fee).
• General Interest Charge (GIC): Now applies to the full SG Charge amount (including the uplift and QE earnings).
• “Choice Loading” Penalty: A new separate penalty specifically for failing to pay into the employee’s chosen fund, even if the payment is made on time to a default fund.

The Cash Flow Shock

This is not just an administrative tweak – these changes will have a significant effect on cash flow. Currently, businesses benefit from a timing buffer, where they can hold SG funds for almost 120 days before the quarterly deadline. Under the new regime there is no buffer as the SG liability needs to be funded almost immediately.

Businesses will need to adjust 2026 budgets to account for more frequent (weekly/fortnightly/monthly) superannuation outflows.

Transitional relief in the first year of operation (2026-2027)

Recognising the scale of this change, the ATO’s draft guideline PCG 2025/D5 outlines a transitional framework for the first year (1 July 2026 – 30 June 2027):

• Low Risk: Employers who make a genuine attempt to comply and who rectify errors as soon as possible will generally not be subject to ATO review.
• Medium Risk: Employers who miss the 7-day window but fully rectify shortfalls by the old quarterly deadline (28 days after quarter-end) will be a low priority for ATO audit activity.
• High Risk: Employers who continue to have SG shortfalls by the old quarterly deadline and make no genuine attempt to shift to the new frequency will be a high priority for ATO enforcement.

Further, the ATO’s Small Business Super Clearing House (SBSCH) will also be closing from 1 July 2026. Businesses that are using the SBSCH will need to modify how the SG payments are made and may consider using a commercial clearing house that integrates with Single Touch Payroll.

Discretionary Trusts and Preserving Pre-CGT Status (XLZH case)

The Administrative Review Tribunal (ART) decision in XLZH v FC of T has affirmed that assets acquired prior to September 1985 in a pre-1985 discretionary trust can retain their tax-free status, rejecting a technical ATO challenge.

The ATO Challenge

The ATO argued that a trust deed amendment made in 2011, which introduced a new corporate beneficiary, caused the trust’s assets to lose their pre-CGT (Capital Gains Tax-free) status. They relied on Division 149, which strips the assets of their pre-CGT status if the “majority underlying interests” in the asset change by 50% or more. The ATO attempted to apply a strict mathematical test to trace these interests.

The Judicial Win: Substance over Form

The ART rejected the ATO’s approach. It ruled that applying a strict test (s149-30(1)) to a discretionary trust is effectively impossible, as beneficiaries do not hold fixed interests until the trustee’s discretion is exercised (i.e. no tracing possible to ultimate owner).

Instead, the Tribunal applied the “reasonable assumption” test (s149-30(2)). It found that the trust had shown a continuity of the original family group over time. The decision prioritised the substance of the trust’s history—that it had been continuously administered for the benefit of the same family—over the technical argument that a deed change shifted the ultimate ownership.

The outcome of this case is a win for the taxpayer, and is helpful for succession planning associated with intergenerational wealth transfers.

Franked Distributions & Capital Raising (PCG 2025/3)

The ATO has finalised PCG 2025/3, providing guidance on the integrity rule which is designed to stop companies from artificially raising capital to fund the payment of franked dividends.

The Integrity Rule

Under these rules, if the ATO determines that a capital raise lacks a genuine commercial purpose and is primarily intended to release franking credits to shareholders, they can declare the entire distribution “unfrankable.” This results in shareholders losing the benefit of the franking credits attached to the dividend.

The “Green Zone”: Safe Harbour

Crucially for our SME clients, the PCG establishes a “Green Zone” (Low Risk) for legitimate succession planning.

For instance, scenario 5 of the guideline specifically protects arrangements where a distribution is made to facilitate the departure of a shareholder (e.g. a retiring founder). Even if this exit dividend is funded by issuing new equity to family members or management, the ATO accepts this as a valid commercial transaction. Provided the purpose is genuine succession, the franking credits are safe.

The “Red Zone”: Danger

Conversely, you will be in the “Red Zone” (High Risk) if:

• There is a close timing alignment (e.g. less than 12 months) between raising capital and paying a special dividend.
• There is no material change to the company’s financial position.
• Documentation is sparse or non-existent.

If you are planning a share buy-back or a succession event, you must ensure that documentation — board minutes, valuation reports, and shareholder agreements — clearly articulate the commercial purpose to ensure you remain within the Green Zone safe harbour.

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The above tax summary is intended to be general in nature and does not constitute advice. Should you believe that any of the above matters may be relevant to you or your Group’s particular circumstances, please discuss the specific details with your Slomoi Immerman Partners advisor.