CPI Triggers 1 July TBC Increase

After the December 2024 CPI figures are released, the general transfer balance cap (TBC) will rise from $1,900,000 to $2,000,000, effective 1 July 2025. This change may create tax-effective retirement pensions and non-concessional contribution opportunities for certain clients.

• Retirement income streams

Individuals starting a retirement phase income stream for the first time after 1 July 2025 will be eligible for the full $2,000,000 cap. For some, it may be beneficial to delay starting their retirement income stream until on or after 1 July 2025.

For clients who began a retirement phase income stream before 1 July 2025, the proportional indexation rules mean their personal TBC could range between $1,600,000 and $2,000,000. To determine your client’s exact personal TBC and eligibility for indexation, check their details in the ATO Portal via their MyGov login before making any changes to their retirement phase pensions.

• What about non-concessional contributions?

The indexation of the superannuation contribution cap depends on earnings figures, which won’t be issued until late February, however total super balance, which affects non-concessional contributions (NCCs) is associated with the general transfer balance cap. Those with over $1,900,000 TSB won’t be able to make any NCCs before 30 June. For the 2025-26 financial year, individuals with a TSB under $2,000,000 on 30 June 2025 can make an NCC of at least the annual NCC cap.

Foreign Exchange Rates

The average foreign exchange rate has been published by the ATO for the year ending 31 December 2024, and monthly foreign exchange rates to date for the financial year ending 30 June 2025.

Rental Bond Data-Matching Program

Guidance of the rental bond data-matching program has been updated by the ATO. The ATO has been gathering rental bond data from several State departments that go back to 1985 and will collect data up to the 2026  financial year.

The data collected includes:

• Client identification details for individuals
• Managing agent identification details
• Rental bond details, such as lease details, amount of rental bond, bond refunds etc.

The data-matching programs help the ATO to address tax risks, including:

• Failure to lodge
• Incorrect reporting of rental income
• Incorrect reporting of capital gains tax
• Non-compliance with foreign investment laws for foreign residents.

Foreign Resident Capital Gains Withholding Changes

The rate of foreign resident capital gains withholding (FRCGW) for property sales is now 15% for contracts signed on or after 1 January 2025.

Foreign Residents Disposing of Property

The ATO focuses on foreign residents who sell taxable Australian property (TAP) and don’t file returns that correctly suggest the ATO of any loss or gain. The ATO also pays attention to purchasers who don’t withhold FRCGW from foreign residents. Foreign residents are liable to capital gains tax in Australia if they sell TAP, which consists:

• Taxable Australian real property (TARP)
• Indirect interests in Australian real property
• Asset used in running a business through a permanent establishment in Australia
• Options, or rights, to obtain any of the above assets.

The ATO focuses on foreign residents who:

• Hold direct or indirect interests in TAP assets.
• Sell TARP or indirect interests but fail to meet their CGT obligations related to the disposal.
• Value or characterise or assets in a way to falls within the CGT exclusion
• Enter into transactions such as ‘staggered sell-down’ arrangements to avoid paying Australian CGT
• File returns that are not according to the new ‘associate-inclusive test’ in determining total participation interests
• Fail the principal asset test by inadequately assigning market value to non-TARP assets.
• Are not likely to have enough assets or funds remaining in Australia to meet their tax obligations related to the disposal of TARP assets.

Purchasers have to gather FRCGW at 15% and remit this to the ATO, unless the foreign resident vendor contains a variation notice clarifying a reduced rate of withholding, before or at settlement.

Build to Rent Developments

Guidance on the build-to-rent (BTR) development tax incentives has been updated by the ATO. The BTR development tax incentives provide owners access to:

• An increased deduction rate of 4% for capital works related to BTR developments
• A concessional final withholding tax rate of 15% on eligible fund payments.

To access these incentives, the BTR owner needs to notify the ATO to opt in by filing the Build to Rent Development – notice of Events form.

BTR owners need to notify the ATO about the following events:

• Starting an active BTR development – The form must be given to the ATO prior to the commencement date. Otherwise, the choice will be taken to have been made on the day the form is received.
• Expanding an active BTR development.
• The ownership interest in the active BTR development is obtained by another entity.
• They obtain ownership interests in an active BTR development.
• Ceasing an active BTR development.

The form should be done by an authorised individual and needs to be lodged with the ATO on or prior to 28 days after the relevant event.

Division 7A Myths Debunked

The ATO focuses on Division 7A mistakes and myths. Some of the common myths flagged include:

• Shareholders believe that they can use company money freely in any way they want. No, the company is a separate legal entity, so Division 7A might apply to any money or other benefits offered to shareholders and associates.
• Division 7A applies to the shareholders of a private company. No, Division 7A can also apply to associates of shareholders, which is defined broadly.
• After the end of an income year, dividends may be recorded in a journal entry to efficiently counterbalance any minimum yearly repayment obligation for that year. However, all agreements and offsets must be completed by the relevant deadline, which is typically 30 June.
• If payments to shareholders and their associates are made using other entities, Division 7A can be avoided. No, division 7A may still apply where the compny’s shareholder or their associate is the target entity to whom the payment is directed.
• The interest rate is imposed on a Division 7A loan is the same every year. No, generally, the benchmark interest rate changes each year.
• A taxpayer can bypass Division 7A if they temporarily pay back the loan before the lodgement day, utilising company funds for the payment. However, repayments won’t be considered if taxpayers later reborrow the same or a higher amount from the company after making the payment.

Receiving Payments or Assets from Foreign Trusts

The ATO is targeting Australian residents receiving payments or assets from foreign trusts. Under section 99B of the ITAA 1936, such amounts must be included in assessable income, with exceptions. Trust property includes loans, third-party payments, gifts sourced from the trust, and distributions or transferred assets. However, the taxable amount may be reduced if it’s already taxed in Australia or represents untaxed corpus (except when it includes income or gains that would have been taxed if earned by an Australian resident).

New International Tax Measures Affecting Private Groups

• Thin capitalisation

Thin capitalisation rules present three new tests that apply to income years commencing on or after 1 July 2023. The changes apply to most multinational businesses running in Australia, privately owned Australian entities that are foreign-controlled, and privately owned and wealthy groups with outbound operations.

• Global and domestic minimum tax

The government has passed legislation as part of implementing key aspects of Pillar Two of the OECD/G20 Two-Pillar Solution in Australia, which includes:

• A 15% global minimum tax for MNE groups.
  • Include the Inclusion Rule applying to income years commencing on or after 1 January 2024.
  • Undertaxed Profits Rule (UTPR) applies to income years commencing on or after 1 January 2025.
• A 15% domestic minimum tax for MNE groups applying to income years commencing on or after 1 January 2024.

Multilateral Instrument

The ATO has updated its guidance on how the Multilateral Instrument (MLI) modifies tax treaties. The MLI allows jurisdictions to amend their tax treaties to prevent base erosion and profit shifting. While the MLI took effect in Australia on 1 January 2019, its impact on existing treaties depends on both parties’ agreement to apply the MLI. The ATO website provides further details, including a list of affected treaties and their modification dates.

Inbound Related-Party Funding for Property and Construction

The ATO has updated its guidance on tax issues for private groups receiving inbound related-party funding for property and construction. It covers transfer pricing, arm’s length funding, and the commerciality of funding arrangements. The guidance includes industry-specific examples and the ATO’s assessment of tax risk, highlighting high- and low-risk funding practices.