1. Division 7A - Bendel and the High Court
The High Court will clarify whether an unpaid present entitlement (UPE) is a “loan” for the purposes of section 109D of the Income Tax Assessment Act 1936.
The decision in Bendel (Full Federal Court judgment is here) may have profound implications given the Australian Taxation Office’s (ATO) interpretation of this issue since 2009. What becomes of Taxation Determination TD 2022/11 if the High Court finds against the ATO? Will the law be amended? Is it business as usual if the ATO wins in the High Court?
2. Family trust distribution tax– an ongoing compliance focus
Family trust distribution tax (FTDT) has become a significant compliance area for the ATO (see here), and we expect continued audit activity in 2026.
FTDT is unforgiving and punitive. Unlike Division 7A, the ATO has no discretion to disregard FTDT caused by inadvertent errors and FTDT is not subject to limited statutory amendment periods (unlike most provisions of the tax law).
Now is the time to carefully review trust deeds, trustee distribution practices, and the breadth of the meaning of “distributes” for the purpose of FTDT (see Taxation Determination TD 2017/20)
3. General interest charge remission – tightening administrative settings
The tax profession has noticed that the ATO may be taking a stricter approach to the remission of the general interest charge (GIC). Compounding the frustration faced by taxpayers and their advisors where the ATO refuses to remit GIC (sometimes with little to no reasoning provided by the ATO) is the limited practical avenues for review.
The ATO’s introduction of a quasi-approved form for GIC remission applications (see here, and in particular the statement that “[i]f you don't use the correct form, your application may take longer for us to consider or we may need to ask you for additional information”), together with a review by the Taxation Ombudsman into the ATO’s management of the remission of GIC (see here), suggests that GIC remission will remain a live issue throughout 2026.
Finally, and best not forgotten, GIC incurred on or after 1 July 2025 is no longer specifically deductible.
4. Revenue v Capital distinction in respect of property development
In 2025, David Morton (a retired farmer) successfully argued in the Federal Court (with Sladen Legal as the instructing solicitors) that the subdivision and sale of his pre-CGT property did not amount to the carrying on of a business or an isolated profitmaking scheme (see decision here). The ATO appealed that decision and the outcome of the ATO’s appeal to the Full Federal Court is expected in 2026.
The Full Federal Court decision will be highly relevant to landholders contemplating subdivisions or staged disposals of long-held property (as should the recently released Taxpayer Alert TA 2026/1 about certain related-party property development arrangements involving long-term construction contracts).
5. Franking credits and the qualified person rules in respect of trusts
We expect that the integrity of Australia’s imputation system will continue to attract close attention from the ATO, particularly in respect of discretionary trusts and newly incorporated beneficiaries for the purposes of the qualified person rules.
The ATO is expected to release a taxation determination on the qualified person rules in 2026 (see here). This determination may encapsulate some of the sentiments expressed on the ATO website concerning the qualified person rules and new beneficiaries after the “ex dividend” date (updated in November 2025 – see here, and in particular, examples 5 and 6).
6. Division 149 and discretionary trusts
In 2025, the Administrative Review Tribunal decided against the ATO on whether Division 149 of the Income Tax Assessment Act 1997 applied to negate the pre-CGT status of shares held by a discretionary trust. The ATO has appealed the decision.
The litigation included arguments from the ATO contrary to its long-held view in Income Tax Ruing IT 2340 on discretionary trusts and Division 149 (see our article here)
The Commissioner’s willingness to litigate on this issue suggests a potential shift in approach (and highlights that “IT” rulings are different from public rulings). Trustees of discretionary trusts owning pre-CGT assets should accordingly exercise caution if they are amending their trust deed to insert or exclude beneficiaries associated with a particular family (even where resettlement risks are thought to be managed).
7. PCG 2025/5 and personal services businesses
Practical Compliance Guideline PCG 2025/5 highlights an increasingly assertive ATO stance on the application of Part IVA to personal services businesses.
We expect this area to generate further engagement between advisers and the ATO in 2026, particularly for sole traders who restructure into personal services businesses and alienate income to family members.
Judicial guidance would be welcomed on this issue.
8. Back-to-back CGT rollovers and Part IVA
We expect 2026 to be the year when the ATO finally releases guidance on the application of Part IVA to arrangements involving multiple CGT rollovers (see here).
The ATO since 2018 had said that it would release a Taxation Determination on “the Commissioner’s view on the use of rollovers for certain arrangements which may include the interpretation and application of the ‘nothing else’ condition in CGT rollovers”.
After the Full Federal Court’s decision in AusNet Services Limited v Commissioner of Taxation [2025] FCAFC 21 that exposed the limitations of the Commissioner’s contentions on the “nothing else” condition (see our article here), the ATO pivoted to a PCG on the application of Part IVA on multiple CGT rollovers.
What a PCG with “traffic lights” and heavily abstracted examples mean for restructures is unknown. At a minimum, as with other PCGs, it will create uncertainty for taxpayers as the ATO tries to change behaviour through its views on the “lore’, rather than the law.
9. Part IVA – continued momentum
The 2025 calendar year saw a steady stream of Part IVA litigation, some of which produced favourable outcomes to taxpayers.
For example, the High Court in Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 held that certain cross-border payments made by Schweppes Australia for beverage concentrate were not "royalties" and therefore not subject to royalty withholding tax or diverted profits tax.
And the Full Federal Court in Commissioner of Taxation v Hicks [2025] FCAFC 171 (Hicks) held that neither Part IVA (nor section 45B of the ITAA 1936) applied to a corporate restructure and capital reduction by the founders of City Beach (while also noting that “[t]he bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies”).
There is no indication that litigation in the Part IVA space will slow in 2026, in particular with Mr Merchant (the founder of Billabong) successfully obtaining special leave to the High Court to litigate another 2025 Part IVA dispute (Merchant v Commissioner of Taxation [2025] FCAFC 56) and the ATO seeking special leave to the High Court to appeal the decision in Hicks.
10. The CGT discount – reform back on the agenda?
There is renewed speculation that the CGT discount may again be targeted for reform. A report, expected in March 2026, by the newly created Select Committee on the Operation of the Capital Gains Tax Discount is likely to canvass options in this space (see here).
The NSW Treasury saying to the Select Committee that the discount and negative gearing “skew incentives towards property investment” adds to the speculation of there being changes to the discount in the 2026 Federal Budget.
The question then becomes what changes? A reduction in the discount percentage? The re-introduction of indexing? Will it be grandfathered before a certain date like when the discount was removed for foreign residents?
Conclusion
The above is but a small snapshot of what we expect will occupy our minds these coming months. And if income tax wasn’t tricky enough, let’s not forget the impending introduction of Payday Super (see our article here), greater scrutiny from the Tax Practitioners Board (see their 2026 compliance priorities here), and continued complexity in the state tax space (particularly in Victoria in respect of new taxes – see our article here).
Please contact us if you have any questions.
Edward Hennebry
Special Counsel
T +61 3 9611 0113 | M +61 428 439 730
E ehennebry@sladen.com.au
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
This article was originally published on the Sladen Legal website: Holidays are over and it’s back to business: 10 Income Tax Issues Set to Keep Us Busy in 2026
