BDO

The ATO’s focus areas are in: What you should review now

As we approach the FY26 tax planning season, the Australian Taxation Office (ATO) has been increasingly clear about the areas it is prioritising for compliance attention across private clients, family groups and professional firms, writes BDO director Tom Perks.

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InDaily
Partners
Jun 01, 2026, updated Jun 01, 2026
Photo: Unsplash
Photo: Unsplash

While the underlying tax law has not materially changed, the ATO’s guidance, messaging and recent activity provide a clear indication of where its focus now lies.

Recent ATO publications and industry commentary point to a consistent theme: a focus on tax outcomes aligning with economic reality, underpinned by governance, documentation and verifiable cash flows, particularly where trusts, service entities and family members are involved.

This creates both a challenge and an opportunity for clients:

  • The challenge of legacy arrangements being reconsidered; and
  • The opportunity to address issues early, before they become costly.

Against this backdrop, the following areas merit closer attention as part of FY26 tax planning.

1. Income splitting and personal services income (PSI)

A renewed focus on ‘inappropriate’ income splitting

The ATO continues to focus on arrangements viewed as excessive income splitting, particularly where income is generated primarily by an individual’s personal skill or labour but is diverted to lower‑taxed entities or family members.

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Practical Compliance Guideline PCG 2025/5 provides insight into how the ATO assesses these arrangements from a risk perspective where the PSI is derived through a personal service business (PSB) that passes the PSI rules. Importantly, the guidance reinforces positions long articulated by large professional firms, including:

  • Operating through a trust or company does not, of itself, justify profit splitting of PSI; and
  • Qualifying as a PSB under the PSI rules does not stop the Part IVA general anti-tax avoidance rules from applying.

The ATO’s concerns in the PCG are less about structure, and more about substance, specifically:

  • Who performs the work
  • Who controls the income-producing activity, and
  • Whether working principals are appropriately remunerated before residual profits are distributed.

FY26 planning implications

For many clients, this means reviewing:

  • Whether PSI rules apply to long‑standing structures
  • Whether remuneration paid to working principals reflects market value, and
  • Whether profit allocations can be explained by commercial drivers rather than tax outcomes.

In practice, issues often arise when long‑standing arrangements are not revisited. As profitability increases, family dynamics change or value creation evolves, previously uncontroversial structures can quickly attract ATO attention.

2. Trust distributions and section 100A

Integrity of trust distributions remains a priority

Trusts remain a key ATO focus, particularly in relation to section 100A reimbursement agreement risks. The ATO has consistently emphasised that beneficiaries must genuinely receive and control the economic benefit of trust distributions.

In practice, the ATO considers the following features high risk:

  • Circular or round‑robin funding
  • Distributions where beneficiaries do not ultimately receive the cash
  • Late or retrospective trust minutes, and
  • Arrangements lacking a clear commercial rationale.

Timely, robust documentation and observable cash flows are critical in demonstrating low‑risk outcomes.

Recent case law has reinforced this point. In FCT v S.N.A Group Pty Ltd (SNA decision), the Full Federal Court highlighted the tax risks associated with unwritten or informal related‑party arrangements, confirming that long‑standing practice alone is not sufficient to establish a deductible or defensible tax position where there is no objective evidence of a binding legal obligation. The case serves as a timely reminder of the importance of documentation that supports both the commercial reality of an arrangement and the resulting tax outcome.

Again, the cost of inaction is not limited to penalties; it also includes the difficulty and cost of reconstructing intent and cash movements years after the event, often under ATO review.

3. Written agreements for related‑party transactions

Lessons from the SNA decision

The recent SNA decision has sharpened the focus on written agreements for related‑party transactions, particularly where assets or services are provided within private groups.

In SNA, an Australian trading entity made payments to Australian related parties for the use of assets and the provision of services. The ATO did not challenge the quantum of the payments, nor did it dispute that the assets and services were in fact used. Instead, the ATO argued that the taxpayer could not demonstrate that the payments were incurred under a binding contract for the use of those assets or services.

That argument was ultimately upheld by the Court, even though:

  • There was a long history of such dealings between the parties (including expired written agreements)
  • Some of the amounts were actually paid in cash during the relevant years
  • Directors gave evidence that the payments were for the use of assets and provision of services, and
  • It was clear the assets and services had no other plausible commercial utility.

The Court’s decision reinforces a practical but critical point: long‑standing practice, commercial logic and even cash payments may not be sufficient where there is no objective evidence of a current, binding legal obligation.

While it may be tempting to question the commercial reality of the outcome, the case highlights the importance of responding pragmatically to the judgment rather than dismissing it as an outlier.

FY26 planning implications

For many private groups, this means reviewing:

  • What inter‑entity transactions exist within the group
  • Whether there is clear documentary evidence of an agreement governing those arrangements
  • Whether the agreement identifies what is being provided and the basis for pricing, and
  • Whether the parties’ conduct aligns with the documented terms.

Where the amounts involved justify it, formal service, licence or lease agreements may need to be implemented or refreshed. This is particularly relevant where arrangements have evolved over time, or where written agreements have expired but practices have continued unchanged.

4. UPEs, corporate beneficiaries and Division 7A

Ongoing uncertainty reinforces the need for discipline

Unpaid present entitlements (UPEs) to corporate beneficiaries continue to attract ATO scrutiny, particularly where funding arrangements are informal or undocumented.

Recent litigation, including the Bendel case, has highlighted the technical complexity in this area and differing interpretations of how Division 7A applies to UPEs. While aspects of the ATO’s approach have been tested in the courts and further developments are still unfolding, the ATO has not retreated from its broader compliance stance.

As a result, a conservative and disciplined approach is advised, including:

  • Putting compliant Division 7A loan agreements in place where required,
  • Clearly documenting cash flows and their alignment with distributions; and
  • Ensuring repayments are made and not effectively disregarded.

5. Ensuring trust distributions are paid to eligible trust beneficiaries

It is important that trust deeds are reviewed regularly to ensure trustee distribution resolutions are made in accordance with the deed’s requirements, and that the beneficiaries named in those resolutions are entitled to receive both the distributions and any associated tax benefits.

This is particularly important for non-widely-held trusts that have received franked dividends during the year and intend to distribute those dividends to a new corporate beneficiary that was incorporated after the trustee received the franked dividends. The ATO has highlighted that, in these circumstances, the new company will not satisfy the holding period rule and will therefore not be entitled to claim the franking offsets.

6. Family Trust Elections: small errors, significant consequences

Why FTEs are firmly back on the agenda

Family Trust Elections (FTEs) are a technical area that often receives limited attention once made. However, recent ATO activity and court cases demonstrate that errors or inconsistencies in FTEs can have severe consequences, even where there is no deliberate tax avoidance.

A well‑publicised example is the Thomas family case, where historic inconsistencies in the nominated test individuals across related trusts resulted in the ATO assessing Family Trust Distribution Tax (FTDT) at 47 per cent, with liabilities exceeding $13 million. The case illustrates how trusts can operate for many years on the assumption that family trust elections are correct, only for technical issues to surface much later, often with limited scope for rectification.

The key lesson is not about aggressive planning, but about governance and verification.

FY26 planning implications

For many clients, prudent steps include:

  • Confirming that the original signed FTE declaration is retained as the primary source of truth
  • Ensuring ATO portal records align with trust returns and internal documentation
  • Reviewing the nominated test individual and family group, particularly where family structures have evolved, and
  • Understanding that FTEs are generally irrevocable, with very limited flexibility.

In this context, relatively small administrative oversights can have significant tax consequences, often emerging many years after the original elections were made.

A unifying theme: governance over engineering

Across PSI, trust distributions, UPEs and FTEs, the ATO’s message is remarkably consistent.

Low‑risk arrangements typically demonstrate:

  • Clear governance and decision‑making
  • Commerciality that can be articulated and evidenced
  • Consistency across tax returns, legal documents and cash flows, and
  • Contemporaneous documentation rather than retrospective explanation.

Many issues arise not from aggressive tax planning, but from legacy arrangements that no longer reflect how businesses and family groups actually operate today.

Turning FY26 planning into a strategic exercise

The ATO’s current focus areas provide a strong case for planning well ahead of 30 June 2026.

Rather than approaching these issues defensively, a proactive review allows:

  • Identification of legacy risks
  • Sensible, orderly changes where appropriate, and
  • Greater confidence that structures will withstand scrutiny.

Importantly, the real cost is often not the tax itself, but the uncertainty, distraction and disruption that arise when issues are identified after the ATO has become involved.

Planning ahead for FY26

For many private clients and professional firms, effective tax planning for FY26 is less about implementing new structures and more about ensuring existing arrangements remain fit for purpose — commercially, operationally and from an ATO risk perspective.

This is where early engagement can add real value. A proactive review ahead of FY26 helps identify and address potential issues on a considered basis, providing confidence that arrangements will withstand scrutiny as businesses and family groups continue to evolve.

BDO’s business services team works with private clients and professional firms to support FY26 planning by reviewing existing tax and trust arrangements, identifying ATO risk areas, and providing practical, tailored advice on governance, documentation and compliance.

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