The government has issued draft legislation to introduce a $1,000 standard tax deduction for individuals that brings with it a tightening of the FBT benefits for salary packaging. The Commissioner has had a number of case wins including on the issues of dividend stripping and deductibility of home office expenses.
LEGISLATION UPDATE
Modernisation of TFN reporting
Treasury Laws Amendment (Delivering an Efficient and Trusted Tax System) Bill 2026 has been introduced. The Bill will change the TFN reporting requirements for closely-held trusts. From 1 July 2026 trustees will only need to report beneficiary TFNs by the earlier of the lodgment date and due date of the trust's tax return. This replaces the obligation to report within one month after the end of the quarter in which the beneficiary quoted their TFN.
$1,000 instant tax deduction
Exposure draft legislation has been released to introduce a standard deduction of $1,000 for individuals earning employment income from the 2027 income year. This will replace the existing substantiation exceptions for claims up to $300 and laundry expenses. The current arrangements will remain for taxpayers claiming more than $1,000 of work-related deductions. Investment and business expenses, donations and union and professional association membership fees will be deductible in addition to the $1,000.
In order to prevent people receiving a double benefit by salary packaging expenses, the FBT provisions will be amended to:
- Exclude salary-packaged work-related deductions from the otherwise deductible rule;
- Remove the exemption for salary-packaged portable electronic devices, software, protective clothing, briefcases and tools of trade.
Foreign resident CGT regime
Exposure draft legislation has also been released to implement the previously announced changes to the foreign resident CGT regime, including
- Clarifying and broadening the definition of taxable Australian real property.
- Changing the ‘principal asset’ test, which determines whether shares or units qualify as indirect Australian real property interests, from a point-in-time to a 365-day test.
- Requiring foreign residents selling non-portfolio membership interests valued at $50m or more to notify the ATO pre-transaction.
CASE LAW UPDATE
Botella v CofT– Dividend stripping
In Botella, the Taxpayer entered into a restructure where a holding company was interposed between an individual shareholder and a former trading company (’the subsidiary’) under CGT rollover. The subsidiary then paid its retained profits to the holding company, which the taxpayer stated was for asset protection purposes. The ART held that arrangement was a ‘dividend stripping scheme’, noting the dividend to the holding company resulted in a lower tax outcome than a dividend to the original individual shareholder. The view of the ART was that the purported asset protection provided by the arrangement could have been achieved by paying the dividend to the individual.
This case also considered the application of Division 7A. The shareholder had already extracted the profits by way of a loan and the ART agreed that a deemed dividend had arisen under Division 7A, but allowed a reduction in the distributable surplus calculation for unpaid payroll tax liabilities. The ART also held that a loan agreement within a constitution does not comply with Division 7A requirements.
Key point: Dividend stripping needs to be considered where restructures insert holding companies and the existing retained profits are distributed to that company.
Hall and CofT– Home office and car expenses
The Full Federal Court has disallowed a taxpayer deductions for a share of rent and travel from home to work (overturning an ART decision).
During Covid-19 lockdown restrictions, the ABC employee worked from his spare bedroom to perform his digital role, and then travelled to the studio for his separate live role.
The Full Federal Court held that the rent retained its essential private or domestic character regardless of the requirement to work from home. Travel to the studio was also not deductible as he had two distinct roles and the travel was not undertaken to complete work already underway.
Key point: This accords with the long-term position that employees are only entitled to claim running costs in relation to home office expenses and not holding costs.
Rowland v CofT – Deductions for conventional clothing
The taxpayer, a fashion industry employee, was denied deductions for branded clothing. The ART found the clothing was conventional, not sufficiently unique or distinctive, not a uniform and not used solely for work.
Key Point: The case reinforces that the essential character of conventional clothing generally remains private.
Bhattacharya v CofT– Self-education and work-related expenses
The ART has denied an IT employee deductions for online sales, marketing and business courses.
Although business development formed part of the employment environment, the courses did not maintain or improve a skill or specific knowledge used in the taxpayer’s role. Employer encouragement to study was insufficient without a close connection to the current income-earning activities or expected increase in income from those activities.
OTHER UPDATES
Superannuation rates and threshold—2027
The ATO has published key superannuation rates and thresholds for the 2026–27 income year:
- Capital gains tax (CGT) cap amount — $1.935 million
- Concessional contributions cap — $32,500
- Non-concessional contributions cap — $130,000
Federal Budget Update
The Treasurer will be delivering the 2027-2028 Budget on Tuesday, 12 May 2025, which is expected to contain a number of tax measures including changes to the CGT discount, negative gearing and potentially trust taxation.
MC Tax Advisors will issue our annual Budget Bulletin on Budget night.
CONTACT US
For further information on any of these updates, or for general assistance, please contact our Directors, Jacci Mandersloot or Natalie Claughton.
