January 2026 Round Up | Final ATO guidelines for PSI entities, key cases and Div 296 update

This month, we take a look at the ATO’s finalised practical compliance guidance on applying the general anti-avoidance rules in Part IVA to companies and trusts that pass the personal services income tests and the ATO’s compliance approach for the new Payday Super measures for the 2027 income year.

The recent Applebee decision looks at some common working from home deductions, especially post-COVID-19.

The Government has also issued draft legislation implementing previously announced changes to the proposed Division 296 tax on superannuation balances over $3 million, a critical area of reform.

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Inside this month, Ann Dai (Tax Adviser), Michael Carruthers (Tax Director), Jason Hurst (Technical Superannuation Adviser) and Amy Yan (Associate Tax Director) bring you:

Division 296

The Government has released exposure draft legislation for consultation on the Better Targeted Super Concessions measure announced in October 2025.

Schedules 1 and 3 of the draft Bill, together with the draft Imposition Bill, propose the introduction of a new Division 296 tax to reduce superannuation tax concessions for individuals with total superannuation balances (TSB) exceeding $3 million.

From the 2026–27 income year, the measure proposes higher tax rates on superannuation earnings attributable to balances above $3 million, with headline rates of:

• Up to 30% on earnings attributable to the portion of TSB between $3 million and $10 million; and
• Up to 40% on earnings attributable to the portion of TSB above $10 million.

The existing 15% concessional tax rate will continue to apply to earnings attributable to balances of $3 million or less.

The Division 296 tax will be levied directly on individuals, separate from income tax and tax paid by superannuation funds. Individuals may elect to pay their liability either by releasing amounts from superannuation or from funds held outside superannuation. The $3 million and $10 million thresholds will be indexed to CPI, broadly maintaining alignment with the transfer balance cap over time.

Transitional arrangements will apply for CGT assets held prior to commencement. Division 296 fund earnings will be adjusted to recognise accrued gains before commencement, with two adjustment methods proposed:

• A cost base adjustment method for small superannuation funds; and
• A factor method for other complying superannuation funds.

A further transitional rule applies for 2026–27, with Division 296 determined solely by reference to an individual’s TSB on 30 June 2027. As a result, individuals with a TSB of $3 million or less at that date will not be subject to Division 296 tax for that year, even if their balance exceeds $3 million on 30 June 2026.

The exposure draft does not include draft regulations. Treasury has indicated that supporting regulations will address key operational details, including:

• Exclusions from total superannuation earnings for certain interests;
• Attribution of relevant superannuation earnings, including alternative calculation methods;
• Valuation rules for certain superannuation interests; and
• The calculation of transitional CGT adjustments for large superannuation funds.
  
  
•  Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025 

Personal services businesses and Part IVA

The ATO has issued PCG 2025/5 which sets out the Commissioner’s view on the types of arrangements that are ‘lower’ or ‘higher’ risk of Part IVA applying and the likelihood the Commissioner will apply compliance resources to review those arrangements.

The PCG focuses on situations where clients use a company or trust to generate personal services income (PSI) and the entity is able to pass the PSI tests so that it is classified as a personal services business (PSB). While the PSI attribution rules don’t apply to automatically cause the individual who performed the work to be taxed on the relevant profits, the ATO’s long-standing view is that Part IVA could potentially apply if profits relating to an individual’s personal services are split with others or retained in a company.

Indicators of a low risk arrangement include:

• The net PSI is distributed to the individual whose personal efforts or skills generated that income and taxed at their marginal rate.
• The remuneration received by the individual is substantially commensurate with the value of their personal services.
• Remuneration (for example, salary or wages) is paid to an associate for bona fide services related to the earning of the PSI if that amount is reasonable for the services provided by them.
• There is a timing difference between the earning of the PSI and distribution of net PSI to the individual, either for reasons outside the control of the individual and PSE or where the delay is explained by circumstances not attributable to tax. This creates only a temporary deferral of tax to a following income year.
• The PSE makes a superannuation contribution on behalf of the individual, who is an employee of the PSE, for the purpose of providing a superannuation benefit.
• There is an intention to temporarily retain the profits for working capital purposes, such as to fund business operations or acquire an asset for a clear commercial purpose, and that intention is carried out.

Indicators of a higher risk arrangement include:

• The net PSI is distributed to another entity so that it is taxed at an overall lower rate than if the individual had received the income directly.
• The remuneration received by the individual is less than commensurate with the value of their personal services.
• The PSE does not distribute any income to the individual who provided the actual services.
• There is an intention to temporarily retain the profits for working capital purposes, but the intention is not carried out and there are no sound commercial reasons for not carrying that intention out.
• The net PSI (or a part thereof) is split with an associate of the individual, thereby reducing the overall income tax liability.
• Remuneration is paid to an associate (or a service trust) that is not commensurate with the skills exercised or services provided by the associate.
• The net PSI (of a part thereof) retained in the PSE is greater than required for clear commercial purposes, and the retained funds are subsequently made available to the individual for their personal use (for example, via a complying Division 7A loan). However, the mere fact that PSI is retained is a sufficient indicator of high risk.
  
  

•  PCG 2025/5 | Legal database 

First year compliance approach for Payday Super

The ATO has finalised PCG 2026/1 which sets out its compliance approach for the first year of operation of Payday Super. This relates to the possibility of the ATO investigating a superannuation guarantee (SG) shortfall for a qualifying earnings (QE) day for 1 July 2026 to 30 June 2027.

For the first year, the ATO will prioritise the application of compliance resources to the areas of highest risk, to investigate employers who have not paid the minimum amount of SG contributions for their employees. The ATO has indicated it will not have cause to apply compliance resources in respect of employers falling in the low-risk zone.

• Low risk: The employer made on-time contributions intended to fully meet SG obligations, but some contributions were not received by the fund on time. Those contributions are later received and allocated to employees as soon as reasonably practicable, resulting in nil final SG shortfalls for all employees.
• Medium risk: The employer does not meet the low-risk criteria, but all final SG shortfalls are reduced to nil within 28 days after the end of the relevant quarter.
• High risk: The employer does not meet the low- or medium-risk criteria. This includes situations where one or more employees still have an SG shortfall after 28 days following the end of the quarter.

Where an employer attempts to pay the minimum amount of contributions for all employees in line with Payday Super, but issues arise that cause the contributions to be late, the level of risk will depend on whether, and how quickly, the error is corrected.

The PCG also covers some examples of how the risk zones apply. The ATO also provides that employers can move between the risk zones within the year, for example, if they stop making on-time contributions part way through the year.

•  PCG 2026/1 

$6 million net asset value test not met

This case focused on the application of the $6m maximum net asset value (MNAV) test under the small business CGT concessions and whether the market value of the shares that were sold was different from the actual sale price.

The Kilgour Trust had sold its minority 20% interest in conjunction with the two other shareholders in Punters Paradise Pty Ltd (Punters) to News Corp Investments Pty Ltd (News Corp). The purchase price of $31,057,722 was apportioned between the vendors in amounts reflecting the number of shares sold by them, the trustees of the minority holdings each receiving $6,211,544 reflecting their 20% holdings.

The taxpayer, Mrs Kilgour, as a beneficiary of the Kilgour Trust was assessed on the capital gain by reference to the distribution which she received. The capital gain was calculated having regard to the ‘market value’ of the shares as CGT assets. Mrs Kilgour contended that she should be assessed on a lower capital gain because she qualified for the small business CGT concessions in Division 152 of the ITAA 1997 by satisfying the MNAV test.

She argued that the market value of the shares was less than $6 million, despite the actual proceeds received being more than this. Her arguments were based on the following points:

• News Corp paid above the true market value due to factors unrelated to the inherent worth of the minority shareholdings themselves.
• The deal was not conducted at arm's length, meaning the parties did not negotiate on fully independent commercial terms when agreeing to the Share Sale Agreement. Under section 116-30, this would require substituting the actual sale proceeds with a lower market value of the shares.

The taxpayer argued that for CGT purposes, the market value should be determined by viewing each 20% parcel in isolation, as if it were a standalone transaction, rather than considering the collective sale of 100% of the shares in the company to News Corp at the same time.

The Full Federal Court dismissed the taxpayer’s arguments and decided that:

• The parties to the Share Sale Agreement dealt with each other at arm’s length; and
• The market value substitution rule did not apply and the capital proceeds received were an accurate representation of the market value of the transaction

Therefore, the beneficiaries of the Kilgour Trust were not entitled to apply the small business CGT concessions as the MNAV test was failed.

•  Kilgour v Commissioner of Taxation [2025] FCAFC 183 (12 December 2025)