During January, the ATO has realeased a Taxpayer Alert in relation to property development arrangements, together with a Taxation Determination regarding the main residence exemption and right to occupy a dwelling under a Will. In this bulletin, we also outline the legislation for the updated Division 296 tax per legislation released just prior to Christmas.

LEGISLATION UPDATE

Division 296 Superannuation Tax

Treasury has released draft legislation, Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025. This will introduce the new Division 296 superannuation tax to commence from the 2027 income year.

The tax will apply to individuals based on their total superannuation balance (TSB) at the end of each income year. Excluding the 2027 income year, if their TSB was higher at the end of the prior year, this higher balance will be used. Tax will then be applied at:

• 15% on the portion of earnings equal to the percentage of TSB between $3m and $10m; and
• 25% on the portion of earnings equal to the percentage of TSB above $10m.

These thresholds will be indexed incrementally. Tax will be levied directly on the individual, who will have the option to pay by releasing amounts from superannuation.

Fund earnings calculation: Will be based on taxable income but will include the gross up for franking credits and foreign income tax offsets without an offsetting tax credit.

Attribution of fund earnings: Small funds (no more than 6 members) will attribute earnings to members in accordance with regulations and report this to the ATO. This will be based on the member’s time-weighted share of the fund over the relevant income year and will require an actuarial certificate.

Transitional arrangement: Small funds can choose to adjust the cost base of all CGT assets held on 30 June 2026 to market value. Taxable capital gains for Division 296 purposes will then need to be adjusted.

Points to note:

• The valuation of SMSF assets at 30 June 2026 will be crucial, including for SMSFs where members are not yet subject to Division 296.
• Members can still be subject to Division 296 in the year of death if their TSB at the start of the year was above the threshold.
• SMSF’s investing via a unit trust will not benefit from the cost base adjustment on commencement for any taxable capital gain derived by the unit trust on its underlying assets.

RULINGS & COMPLIANCE GUIDELINES UPDATE

TA 2026/1 – Property Development Arrangements

The ATO has issued a Taxpayer Alert outlining its concerns with property development arrangements where the landowner interposes a special purpose development entity between it and the third party builder undertaking construction works. These typically display characteristics which include:

• The developer does not derive any income for managing and delivering the development until the project is completed.
• Losses (from the deductions claimed progressively for construction costs while the recognition of income is deferred) are offset against other income earned by the developer or used to offset other income of the economic group.
• The arrangement may be repeated, resulting in minimal tax being paid across the economic group.

The ATO concern is that this artificially separates land-ownership and development activities, creating a mismatch between the recognition of income and deductions. These arrangements may be a scheme to which the general anti-avoidance provision Part IVA may apply.

TD 2026/D1  – Right to occupy dwelling under a will

TD 2026/D1 deals with one of the conditions that may be satisfied by a deceased estate or beneficiary in order to access the main residence CGT exemption. If the home was, from the time of death until the ownership interest ends, the main residence of an individual who had a "right to occupy the dwelling under the deceased's will", the exemption is available for a dwelling which was the deceased's main residence just before their death and was not being used to produce assessable income.

The right must be expressly granted under the will to an individual specifically named in it or granted in a family provision order directed by a court. It is not sufficient for the right to be granted under a broad
discretion given to the executor or under an arrangement between beneficiaries and the executor. The ATO also state that a right is not granted under a Will if it is granted under a testamentary trust deed.

Key point: This raises considerations if an individual wishes to grant a beneficiary the right to live in their home after their death for a limited period (rather than under a life tenancy), or if any right is granted under a testamentary trust rather than the Will itself.

CASE LAW UPDATE

Geocon Land Holdings No 5 Pty Ltd v FCofT

The Full Federal Court has allowed a property developer’s appeal from a decision that it had passed on overpaid GST to purchasers of its residential units and would therefore obtain a windfall gain if the GST was refunded. The taxpayer had incorrectly calculated GST on the unit sales under the margin scheme.

Under the GST Act a taxpayer is prevented from receiving a refund of overpaid GST to the extent it has  been passed on to another entity. The Court held that as neither the price for the units, nor the amount received by the taxpayer was affected by GST, the question arose whether the taxpayer would have received the same amount from the purchasers irrespective of the overpaid GST. The Court remitted the matter to the ART for rehearing, finding that it had adopted an incorrect approach.

The ATO is seeking leave to appeal this decision to the High Court.

Key point: The ATO view is that if GST is overpaid on sale of new residential premises due to a calculation error is not refundable. It is therefore important to ensure that margin scheme calculations are being carried out correctly at first instance.

Appeals Update

The Full Federal Court has dismissed the Commissioner’s appeal from the decision of Ierna & Ors where it was held that Part IVA did not apply to a restructure that was used to facilitate the repayment of Division 7A loans.

The taxpayer in Kilgour’s case has applied to the High Court for leave to appeal a Full Court decision. The taxpayer is seeking to argue that a sale of shares to News Corp was not at arm’s length and the price was inflated by the inclusion of a ‘special value’. As such, a lower value was to be treated as capital proceeds under the CGT provisions and in determining whether the small business CGT concessions applied.

The High Court has also heard appeals in the Merchant case (Part IVA and dividend stripping) and Bendel (Division 7A) and therefore we can expect these decisions to be handed down shortly.

CONTACT US

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