2025 UPDATE—WHAT TO EXPECT IN THE YEAR AHEAD

Bendel decision—Division 7A

The Full Federal Court decision on whether the Division 7A definition of ‘loan’ includes unpaid present entitlements (UPEs) is due to be handed in 2025. This decision will be relevant for UPEs that have not yet been converted to formal loans.

Legislative changes

• Foreign resident capital gains withholding tax rate has increased to 15% and the threshold has been removed from 1 January 2025.

• New Code of Professional Conduct obligations apply to small tax practitioners from 1 July 2025.

• It has been proposed that taxpayers will no longer be able to claim deductions for GIC and SIC from 1 July 2025. This is not yet law.

Allocation of professional profits

Practical compliance guideline PCG 2021/4 applies to all professional practices for the 2025 income year. Consideration of this guideline will be relevant for professional practitioners in planning 2025 income distributions.

TAX RULINGS, GUIDELINES, PRACTICE STATEMENTS & ALERTS

PCG 2024/D4—Capital raised for funding franked distributions (section 207-159)

The ATO has issued its guidelines for assessing the level of risk that it will apply the new integrity measure that denies franking credits attached to a company dividend which has been funded by a capital raising:

• Green zone scenarios—factors that indicate a low risk include the dividends being consistent with the prior 3 years; the issue of equity funded is less than 5% of the franked dividends paid; or the capital raising and distribution are to facilitate the departure of shareholders.
• Red zone scenarios—factors that indicate a high risk include a close alignment in timing between an issue of equity and the payment of the relevant dividend; and an unusually large dividend in comparison to the prior 3 years without a corresponding increase in company profit.

TD 2024/D3 & TA 2024/2 - Division 7A and company guarantees

The ATO has issued a draft ruling and taxpayer alert on arrangements to circumvent Division 7A through the guarantee by private companies of loans made by third parties. Section 109U can apply if a company guarantees a loan made by a financial institution to a related company that has no/minimal distributable surplus, and the borrower company on-lends the amount to a related trust or individual. Where this is a contrived arrangement, the guarantor company can be deemed to have paid a dividend to the ultimate borrower.

Key point: The provision does not apply to the more common scenario where a private company guarantees a loan made directly by a financial institution to a non-corporate borrower. In this case, Division 7A can apply if the borrower defaults and the guarantor is required to make a payment to the lender under the guarantee.

TA 2024/1—Early Stage Investor Tax Offset

The ATO has also issued a taxpayer alert dealing with cases where individuals have claimed the early stage investor tax offset on shares acquired through arrangements designed to artificially meet the conditions for claiming the offset, allowing individuals to benefit with minimal (if any) risk on their investment.

 TR 2004/18DC—Application of CGT event K6

CGT Event K6 is designed to stop the potential avoidance of CGT where, instead of a company or trust disposing of a post-CGT asset, pre-CGT interests in the entity are disposed. The Event can arise if the market value of post-CGT property other than trading stock (held directly or indirectly) is at least 75% of the net value of the entity just before the disposal.

A draft update has been made to the ruling on calculating a capital gain under CGT Event K6, revising    aspects of the ATO’s view on the calculation.

PS LA 2024/1 – Suspected fraud involving unconnected third parties

The ATO has issued a practice statement setting out its policy on the steps to take where there is suspected fraud affecting a taxpayer by an unrelated entity. Possible indicators that a third party may have acted without the taxpayer’s authority include:

• The taxpayer's personal details have been reported as stolen.
• Lodgement, registration or updates to financial account details appear to have been made by someone other than the taxpayer, or someone to whom the taxpayer gave system access.
• A financial institution confirms that the account receiving payment is in the name of a third party, and the account also receives multiple refunds in respect of different taxpayers.

In such cases, taxpayers will not be liable for losses to the revenue.

TR 2020/1DC2 & LCR 2021/2DC —NALI and in-specie contributions

The ATO has issued draft updates to its contributions ruling and the non-arm’s length income (NALI) law companion ruling, to provide how a contribution can trigger NALI. If a fund pays less than market value for an asset  purchased under a sale contract the acquisition is not a contribution. In this case, the fund has incurred non-arm’s length expenditure (NALE) under a non-arm’s length dealing for the purposes of applying NALI.

As the NALE is a specific expense associated with the asset, all income derived from the asset will be NALI, including any capital gains from the disposal of the asset. This represents a change in the ATO approach, where previously the shortfall was treated as a contribution to the fund.

TAX PRACTITIONER BOARD UPDATE

The TPB has confirmed that tax practitioners do not need to report any code breaches that they become aware of after 1 July 2024 where they occurred before this date. The breach reporting obligations only apply in relation to breaches that happened on or after 1 July 2024.

CONTACT US

For further information on any of these updates, or for general assistance, please contact Our Directors, Jacci Mandersloot or Natalie Claughton.

The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.