Division 7A 'not going away', ATO warns private groups

ATO deputy commissioner Louise Clarke has outlined some of the ATO's key priorities for the private wealth space for 2026 following some significant developments last year.

Clarke said Division 7A will continue to be a major focus area for the ATO in regards to privately owned and wealthy groups.

"We continue to see private groups using business funds or assets without considering the tax consequences," she said.

"Division 7A isn't going away and we'll remain focused on the fundamentals: making sure complying loan agreements are in place, making minimal yearly repayments and applying the correct benchmark interest rate. This includes scrutinising requests for the Commissioner's discretion under section 109RB."

The ATO will also be expanding its focus into arrangements aimed at circumventing Division 7A and the application of Division 7A where business assets are provided to shareholders or their associates, she said.

Clarke said the ATO was also awaiting the outcome of the Bendel decision, currently before the High Court.

In Commissioner of Taxation v Bendel, the Full Federal Court ruled that an unpaid present entitlement between a corporate beneficiary and a trust did not constitute a loan under section 109D(3) of the Income Tax Assessment Act 1936, challenging the ATO's views in TD 2022/11 and TR 2010/3.

"I look forward to getting judicial clarity on some important legal principles that are very relevant for our market," she said.

Clarke also reminded private groups and their advisers that the two-year transitional period set out under PCG 2021/4 Allocation of professional firm profits – ATO compliance approach has now expired and does not apply to 2024–25 returns.

"We'll review profit allocation arrangements and re-engage where high-risk arrangements persist. You're strongly encouraged to assess your profit allocation arrangement using the risk assessment framework," she said.

"If you self-assess to be in the red risk zone, you can expect we'll prioritise our compliance resources towards your tax affairs."

Clarke noted that the guidelines under PCG 2021/4 can only be applied to arrangements that pass the 2 gateways.

"If you derive income from other sources, such as personal services, you can't rely on these guidelines to allocate profits," she said.

Effective tax governance will also continue to be a key focus across the entire market.

"The recent Full Federal Court decision in S.N.A. Group, which considered the deductibility of expenses claimed in relation to intra-group transactions within a closely-held group," Clarke said.

"While the decision is still within the appeal period and subject to further judicial consideration, it's an important reminder that arrangements, particularly within entities in a closely-held family group, should be properly documented."

Clarke said keeping the ATO would continue to keep a close eye on changing behaviours in the private wealth segment so that it can quickly respond to "emerging trends and areas of concern to provide timely advice and guidance and apply compliance resources where they're needed".