Key Private Group Tax developments: 2024 year in review

Top 500 & Next 5,000 Review

The Australian Taxation Office (ATO) continued its reviews of the Top 500 and Next 5,000 largest privately owned groups in Australia. 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.

In the ATO’s most recent findings report on the Top 500 program the ATO appear to have mixed confidence in the tax governance ratings for trading entities, non-trading entities and wealth extraction across select Top 500 groups. This is reflected in their most recent annual report, where the ATO have identified a higher approximate income tax gap for High Wealth taxpayers than other market segments. Division 7A continued to feature in may Top 500 and Top 5,000 engagements, with the ATO finding red flags for escalation to review or audit in more than 25% of Top 500 engagements involving Division 7A. Tax partner Shaun Cartoon highlighted this issue in an opinion piece in the AFR which you can read here.

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

Family Trust Elections & FTDT

In 2024, the ATO continued to scrutinise Family Trust Elections (FTEs). The potentially severe Family Trust Distributions Tax (FTDT) and interest implications combined with an unlimited review period make this asleeper issue in many private groups.

FTEs provide concessionary treatment to family trusts. They allow family trusts to flow franking credits to beneficiaries, pass the continuity of ownership test required to recoup tax losses, access the small business restructure roll-over, and reduce relevant reporting requirements.

FTDT is payable where a family trust or interposed entity makes a distribution of, or confers a present entitlement to, income or capital to a person who is not the individual specified in the FTE or a member of their family group. FTDT is levied at a rate of 47%. Importantly, directors of a company may be jointly and severally liable to FTDT. 

The rules are complex, broad in scope and can have significant tax implications. Breaches of the rules can be difficult to anticipate and, unlike Division 7A, cannot be excused if a breach involves an honest mistake or inadvertent omission. With little guidance from the courts or the ATO, this area remains ripe for disputes. For more information on FTEs and FTDT click here.

ATO Products on Section 99B

On 28 November 2024, the ATO released its much-anticipated Taxation Determination (TD 2024/9) and Practical Compliance Guideline (PCG 2024/3) on section 99B of the Income Tax Assessment Act 1936.   

Broadly, section 99B(1) includes trust property that is paid to or applied for the benefit of an Australian resident beneficiary in their assessable income, subject to the limited exceptions in section 99B(2). Paragraph 99B(2)(a) contains an exception for amounts of trust corpus, except to the extent the trustee would have been assessed on that corpus had it been a “hypothetical resident taxpayer”. Paragraph 99B(2)(b) contains a similar exception for an amount that, had it been derived by a “hypothetical resident taxpayer”, would not have been included in its assessable income.

 In TD 2024/9, the Commissioner has clarified his view that:

• in considering the “hypothetical taxpayer” for the purposes of s 99B, the only relevant characteristic of that taxpayer is Australian residency; and
• when determining whether an amount would be assessable to that taxpayer, the Commissioner will consider all the surrounding circumstances which gave rise to the relevant amount.

PCG 2024/3 sets out the ATO’s compliance approach to section 99B.  It highlights common scenarios where the provision may apply, such as when migrants continue to receive distributions from non-resident trusts after moving to Australia, or when Australian residents receive distributions from non-resident decease estates.  The guideline also provides insight into acceptable record-keeping practices and evidence requirements, and sets out a compliance approach for low-risk distributions.

Importantly, where the Commissioner seeks to apply s 99B(1) to an amount, the onus is on the taxpayer to prove that the whole amount should not be assessable under s 99B where, for example, part of the amount is corpus. In those cases, the ATO expects extensive documentation to substantiate a taxpayer’s position, including trust deeds, distribution minutes, and copies of the trust’s financial accounts. Additional documentation may be necessary depending on the specific circumstances of the arrangement. Taxpayers, and their advisors, are strongly advised to carefully make and maintain records of their dealings, particularly with regard to distributions from foreign trusts.

Part IVA and Private Groups

2024 was a big year for Part IVA and other anti-avoidance rules, with a number of judicial decisions considering how such provisions apply to private groups.

The Full Federal Court unanimously upheld the taxpayer’s appeal in Minerva Financial Group v Commissioner of Taxation. It held that Part IVA did not apply to a decision not to exercise a discretion to distribute trust income to a corporate beneficiary, and instead to allow the distribution to flow to the default beneficiaries. The Court emphasised that Part IVA does not apply merely because the Commissioner can identify another means of achieving a similar outcome with would have resulted in more tax.

The Commissioner successfully defended the taxpayer’s Federal Court appeal in Merchant v Commissioner of Taxation. There, the Court applied Part IVA to a scheme involving an acquisition and sale of shares to trigger a capital loss ahead of the disposal of shares that was expected to generate a capital gain. The Court also found that the forgiveness of loans used to finance the transaction amount to a dividend stripping scheme. 

The Full Federal Court upheld the Commissioner’s appeal in Commissioner of Taxation v Michael John Hayes Trading Pty Ltd as trustee of the MJH Trading Trust. The Court found that a scheme involving the return of fully-franked dividends to the relevant companies by way of loan or loan repayments was a dividend stripping operation. However, the Court emphasised that tax avoidance must be the sole or dominant purpose, rejecting the Commissioner’s submission that an incidental tax avoidance purpose was sufficient. 

State Tax Update 

International Tax Treaties

Following a determination by Revenue NSW on 21 February 2023 which stated that citizens of New Zealand, Finland, Germany, India, Japan, Switzerland, Norway and South Africa would no longer be required to pay surcharge purchaser duty and surcharge land tax in relation to NSW residential property, the Treasury Laws Amendment (Foreign Investment) Bill 2024 was passed on the 8 April 2024. This effectively means that citizens of the above countries must now pay surcharge purchaser duty when acquiring residential property in NSW, and surcharge land tax on residential property they own in NSW.

Commercial and Industrial Property Tax (CIPT)

On 20 March 2024, the Victorian Government introduced the Commercial and Industrial Property Tax Reform Bill 2024 (Bill). The Bill mirrors the announcements and information issued by the Victorian Government last year, and operates to replace stamp duty with an annual “property tax” for qualifying commercial and industrial properties.

Read more about the CIPT in our article here.

In summary, CIPT applies to qualifying commercial or industrial property that is sold on or after 1 July 2024. At the time of settlement, the purchaser of that land can choose to either:

1. pay the property’s final stamp duty liability as an upfront lump sum, or
2. pay an annual payment for 10 years, equivalent to the property’s final upfront stamp duty liability plus interest, through a “transitional loan” scheme available to eligible purchasers.

The property is then subject to a 10-year transitional period, after which the property will become liable for the new tax. CIPT will be charged annually with the rate currently set at 1% of the unimproved value (site value) of the land (0.5% for eligible build-to-rent properties) with no tax-free threshold. 

CIPT is separate and charged in addition to land tax.

Any unpaid CIPT will be secured by a statutory first charge on the relevant land, and is recoverable from a lessee, mortgagee or occupier of the land in the event of default.

Voluntary disclosures following Oliver Hume decision

On 8 October 2024, in response to the Court of Appeal’s decision and reasoning in Oliver Hume Property v Commissioner of State Revenue, the Victorian State Revenue Office released ruling DA-057v2, which clarifies its view regarding the application of the associated transaction provision to capital raisings.

In October, the SRO announced that it is offering an amnesty on penalty tax and reduced interest to 3% for voluntary disclosures made by March 31 2025.

Following that time, the SRO has announced it will increase compliance activity and reviews on past transactions, particularly in the context of capital raisings.

Expansion of vacant residential land tax in Victoria

From 1 January 2025, the Victorian Government’s substantial expansion to vacant residential land tax (VRLT) announced in 2023 comes into effect.

The VRLT is a surcharge that applies to taxable residential land in Victoria that is vacant for more than 6 months of a year (continuous or aggregate), unless an exemption applies. An owner of vacant residential land is required to notify the State Revenue Office (SRO) in writing by 15 January each year.

First introduced in 2018, the VRLT is not a new tax, but has now become a must-consider impost on landowners with the amendments significantly expanding its scope to capture almost all land in Victoria. The concept of “residential land” is broad, and captures any land that is used, or capable of being used, solely or primarily for residential purposes. This can include residential land that is under construction or being renovated, or premises that are uninhabitable. For VRLT purposes, land is “vacant” if it has not been used and occupied for more than 6 months of the year (continuous or aggregate), by either the owner of the land or a permitted occupant as their PPR, or a tenant under a bona fide lease (including short-term leases). The concept of being “used and occupied” is given its ordinary meaning and can be understood as time that a home is “lived in”.

An important exemption from VRLT is for holiday homes, which applies when the SRO is satisfied that a property is used and occupied by the owner as a genuine holiday home for at least 4 weeks of the year (continuously or in aggregate). For the exemption to apply, the owner must be a natural person (i.e. not a company or a trust), and have their PPR elsewhere in Australia, and the holiday home exemption only applies to one property per person.

When applicable, VRLT is charged in addition to ordinary land tax and levied at 1% of the land’s capital improved value, which assesses its whole value, including the value of any buildings and capital improvements on the land. The rate of VRLT will increase by 1% for each year that the property remains subject to VRLT in the preceding year, up to a maximum of 3% after three years of vacancy.