What will shape the Tax Landscape in 2025?
As we reach the end of another year, with all of its challenges, it is worthwhile considering what we as tax agents and advisors might look forward to and look out for, in the New Year.
We have drafted our Top 5 of the expected tax issues that will impact our clients and ourselves, in 2025.
1. The Bendel Federal Court Appeal
No doubt all small business advisers are aware of the Bendel case and the 2023 Tribunal decision that overturned 14 years of the ATO’s December 2009 view that Unpaid Present Entitlements between a Trust and a company constitute “loans” for Division 7A purposes.
As was expected, the ATO appealed that decision, and the Appeal was heard before the Full Bench of the Federal Court in late August this year. Whilst a decision before Christmas is looking increasingly unlikely, when the decision is handed down it will be of huge interest to everyone within the small business community.
Ever since that fateful day, exactly 15 years ago today, when the ATO released their draft tax ruling that became TR 2010/3, the use of trusts to conduct a business where working capital requirements dictated that the Trust had to retain funds to operate, became financially (and administratively) punitive. The requirement to either pay out the funds to the corporate beneficiary or convert the UPE to a Division 7A loan, added another level of financial administration and costs to many small businesses.
The outcome of the Bendel Appeal will require some careful consideration for those businesses that have continued to operate from a Trust. A favourable decision may enable Trustees to revert to funding working capital by way of UPE’s, but will it also force the Government to finally introduce the proposed legislative changes to Division 7A?
A successful Appeal by the ATO will vindicate their previous U-Turn 15 years ago, but will it then require stricter compliance to Division 7A whereby UPE’s are ‘immediately’ treated as loans for Division 7A purposes, requiring the same compliance as a standard loan?
This will be a major decision in the SBE space for 2025.
2. A Federal Election – Tax Reform?
We have already been exposed to an unofficial election campaign in the weeks leading up to Christmas, but as usual there hasn’t been much discussed in respect to Tax Reform. Whilst Negative Gearing, Franking Credits and CGT discounts occasionally get some airplay, neither of the major parties have, as yet, put forward anything resembling a Tax Reform policy or initiative.
It looks like we may have to rely on the Independents, and specifically the Teals through Ms. Allegra Spender MP’s recent Tax Green Paper that seeks to start the Tax Reform process by outlining the challenges of our current tax system and identifies a possible process for tax reform.
Whether any of the major parties have the courage to take this on remains to be seen. However, don’t underestimate the role that accountants can play through their professional bodies and/or the Tax Institute. If you get a chance to say something, please do.
3. New TASA Code changes for Tax Agents
Since the PWC scandal came to light, the Tax Practitioners Board (TPB) has been provided with a number of legislative instruments to enforce additional obligations on registered Tax Agents.
Of these additional obligations, 8 will commence in the 2025 calendar year, with 1 July 2025 being the start date for Tax Agent firms with 100 or less employees.
The most contentious of these new obligations is the requirement for Tax Agents to notify the TPB or the ATO where they have reasonable grounds to believe that a client has made a false or misleading statement to the ATO.
Issues surrounding the materiality of false statements, requirements to withdraw from an engagement and the form and details within the notification, still need some clarification well before the 1 July 2025 (for smaller firms) commencement date.
4. Further developments on the Application of s100A to Family Groups
The potential application of section 100A to unpaid trust distributions has been a significant cause of concern in recent years for those who advise family groups. The ATO’s 2022 guidance provided the customary “traffic light” risk analysis approach that the ATO proposed to take in its Private Wealth reviews (albeit without an Amber Zone!)
Whilst many advisers recognize that behaviours within the Red Zone require action, it is the ordinary family dealings between trustees, parents and their immediate family members that fall between the ATO’s Green Zone and the Red Zone.
After the decisions in Guardian and B Blood last year, there was some expectation that the ATO would seek to clarify the application of section 100A to these ordinary family dealings of distributions to immediate family members that remain unpaid, whatever the reason. However, an ATO Deputy Commissioner has recently stated that there are currently NO section 100A cases in the litigation area.
We certainly found this statement surprising given the ATO’s public and concerted push to apply a 45-year-old provision to current family group behaviour without relying on the benefit of judicial guidance. It remains to be seen what compliance action the ATO takes in relation to section 100A in 2025.
5. ATO Compliance action on their Professional Service Firm Guidelines
Lastly, and again after a 10-year gestation period, the ATO have stated that in 2025 they will begin to apply compliance resources to their Professional Service Guidelines outlined in PCG 2021/4.
Our last Tax Flash outlined the ATO’s Risk Zones which they will seek to apply across all Professional Service Firms. However, what has been clear from recent ATO compliance action is that they will focus on Accounting Firms before other Professional Service firms in order to change behaviours that they believe are in the Red Zone.
The upcoming lodgement of professional’s 2024 tax returns, together with your tax planning discussion for 2025 with your professional clients (including yourselves!) should include consideration of these guidelines and a determination of which ATO Risk Zone your client (and you) fall within.
Whether the Professionals seek to challenge the ATO view through the Tribunal or the Courts will also be one to look out for in 2025 and beyond.
If you have any queries on the above, please contact Sean Pearce.