Navigating the Tax Landscape: 2025 Outlook for Private Groups

In this article our Tax team outlines key tax developments for private groups to watch in 2025.

Top 500 & Next 5,000 Review

The Australian Taxation Office (ATO) will continue its reviews of the Top 500 and Next 5,000 largest privately owned groups in Australia, with additional funding allocated to the Tax Avoidance Taskforce in the 2024 Federal Budget. Both programs involve tailored one-to-one-engagements to build a comprehensive understanding of a private group’s tax affairs, aiming to detect any historic tax risks and increase forward-looking compliance. These reviews can result in tax audits or a voluntary disclosure having to be made, so care is required in the way a Top 500 or Next 5,000 response is managed.

The ATO have flagged a number of key risk areas and sectors which will attract their attention in 2025. Key risk areas include cross-border intangibles migration and related-party finance, non-arm’s length income for SMSFs, qualified person rules for discretionary trust beneficiaries, and, as always, compliance with Division 7A. There are a number of specific sectors the ATO will target, including private equity and property and construction, and, with the historic intergenerational transfer of wealth in Australia, succession planning. Moreover, many of the same key risk areas we have outlined for corporate and multinational taxpayers are also relevant for private groups.

Our Private Groups Tax Disputes Portal is your go-to source for more information about the ATO’s specific tax engagement programs.

Division 7A

Division 7A continues to be a key area of focus for the ATO, and there are a number of significant developments that threaten to change the landscape in 2025.

The Commissioner’s long held position that an unpaid present entitlement owed by a trustee to a company constitutes a loan remains in doubt, following the Commissioner’s Full Federal Court appeal in Commissioner of Taxation v Steven Bendel & Anor. If the Court finds in the taxpayer’s favour, it threatens to overturn 14 years of ATO and industry practice, and the ramifications may be widespread. This highly anticipated decision is expected to give taxpayer’s some certainty on the application of Division 7A in 2025.

Wholesale changes to the thin capitalisation regime saw the introduction of the debt deduction creation rules (DDCR) in 2024, which appear to intersect with Division 7A loans. A compliant Division 7A loan requires mandatory minimum yearly repayments of principal and interest at the benchmark interest rate (currently 8.77%). The DDCR threatens the deductibility of benchmark interest where a related-party borrows from a private company to acquire a CGT asset from an associate, or where an entity funds a payment or distribution to an associate with related-party debt.

As discussed in detail by ABL tax partner Jonathan Ortner in the Tax Institute's newsletter TaxVine (published in November 2024), this threatens to impugn legitimate commercial transactions undertaken by private groups subject to thin capitalisation. Finalised ATO guidance is expected in 2025.

Back-to-Back Rollovers

In early 2025, we can expect the Commissioner’s much anticipated guidance on the use of back-to-back rollovers and the application of the “nothing else” rule in CGT rollovers.

Since publishing his views on the meaning of ‘restructuring’ in the context of demerger relief, demergers and back-to-back rollovers have been a continuing flashpoint between taxpayers and the Commissioner. In short, the broader the Commissioner casts the arrangement under which a taxpayer must receive a particular asset (and nothing else), the more difficult it is for the taxpayer to establish that it received ‘nothing else’ and qualify for rollover relief.

Should the taxpayer satisfy the ‘nothing else’ condition, the Commissioner may still seek to apply the general anti-avoidance rules. Back-to-back rollovers may amount to a ‘tax benefit’ as they effectively allow a taxpayer disregard a capital gain, and involve the taxpayer structuring into a choice which would otherwise be protected under the tax law.

Residency

Global mobility for wealthy individuals and their private groups will become increasingly important in 2025, yet Australia’s tax residency rules remain in a state of flux.

For example, the Government flagged legislating new individual tax residency rules, which would introduce a simplified bright line test where an individual would be an Australian tax resident where they were physically present in Australia for 183 days or more.

The Federal Government has also promised to restore the corporate tax residency rules following the High Court’s decision in Bywater, by introducing a requirement that corporate taxpayers have a sufficient economic connection to Australia.

These changes are sorely needed in a world where global mobility is increasingly important, and governments around the globe are looking to assert their rights to tax ultra high net wealth individuals and their private groups.

There is also a unique opportunity for Australia to capitalise on the recent cancellation of the UK’s non-domicile regime. Another missing piece of the puzzle is the availability of an appropriate visa to reside in Australia. Time will tell whether the new “National Innovation Visa” (NIV), announced in this year’s federal budget will be offered as a temporary visa, thereby providing the kind of tax incentives that would attract high-net worth non-doms. For more detail, click here.

Foreign Resident CGT

On 28 November, Parliament passed its proposed changes to the capital gains tax (CGT) regime for foreign residents. Subject to receiving royal assent before the new year, the amendments will apply from 1 January 2025. Transfers that occur under a contract entered into prior to that date will fall outside the new measures.

The measures will have significant implications for non-residents, particularly for cross-border transactions involving Australian infrastructure assets. The measures will:

increase the foreign resident CGT withholding rate from 12.5% to 15%, and
remove the de minimis threshold of $750,000 for Australian real property. This means that any disposal of a relevant CGT asset by a foreign resident after 1 January 2025 will be subject to 15% withholding, regardless of the assets’ market value.

Vendors can continue to apply for clearance certificates from the Commissioner to advise purchasers that they are not a foreign resident in respect of an Australian real property transaction or an indirect Australian real property interest that provides company title interests.

In addition, the Government have flagged new measures to ensure that Australia can tax capital gains made by foreign residents on assets with a close economic connection to Australian land or natural resources.

The proposed measures:

clarify and broaden Australia’s foreign resident CGT base to ensure a range of assets with a close economic connection to real property or natural resources are expressly designated as taxable Australian property.
extend the testing period for the “principal asset test” to the previous 365 days before the disposal, rather than the current point in time test. This brings Australian domestic law in line with OECD guidance.
introduce a new notification requirement for a foreign resident vendors to notify the ATO before entering into a transaction to sell membership interests worth more than $20 million, irrespective of the underlying assets held in the structure.

Though the precise scope of these amendments is yet to be seen, no transitional relief has been announced and we expect they will have a significant impact on foreign investors.