As the end of the financial year approaches, it is time to start thinking about whether your year-end tax planning is in order. Tax planning requires not only a consideration of income and deductions for the year but also looking forward to opportunities ahead of 1 July. In this article we identify the key tax considerations prior to the 30 June 2025 year-end.
Changes to deny deductions for ATO interest expenses
From 1 July 2025, the General Interest Charge (“GIC”) and Shortfall Interest Charge (“SIC”) will become non-deductible, significantly affecting taxpayers with overdue tax liabilities or tax shortfalls, by increasing the after-tax cost of ATO interest charges. GIC (currently at 11.17% p.a.) applies to various unpaid tax and superannuation liabilities, accruing daily. SIC (at 7.17% p.a.) is imposed on tax shortfalls from amended assessments and accrues daily from the original due date until the amended assessment is issued. While the charges accrue daily, they are often imposed on a single day, meaning their deductibility may depend on whether the notice of assessment is issued before or after 1 July 2025. Certain business taxpayers with tax debts that have been assessed but remain unpaid should consider refinancing these tax debts which may result in replacing non-deductible GIC with deductible interest expenses, or bringing forward the repayment of tax liabilities to avoid accruing further non-deductible interest. Read more in our article here.
Franking credits and discretionary trusts
Generally, a valid Family Trust Election (“FTE”) is required for franking credits to flow through a discretionary trust to the ultimate beneficiaries. However, an FTE may not, itself, enable a trust to pass through franking credits where the intended recipient was not a beneficiary at the time the trust received the original franked dividend to which the credits were attached. For example, franking credits may be at risk where a new corporate beneficiary is incorporated shortly prior to the end of the income year, but after the date the original franked dividend was declared. It is advisable to seek professional advice if you plan to make franked distributions to a new beneficiary.
Company tax and franking rates
Australia now has a two-tiered company tax rate, with Base Rate Entities subject to a 25% tax rate, and all other companies subject to the default 30% tax rate. Similar rules apply to the franking of dividends. Some companies may have historically paid tax at 30%, but can only frank dividends at 25%, resulting in the risk of a permanent franking surplus. Ensure that each group company is reviewed prior to declaring dividends, to confirm the correct franking rate. Dividends may be able to be delayed, or brought forward, to achieve a different franking rate outcome.
Complying with Division 7A
Transactions involving a company and an associated entity (individual, trust or partnership) to which Division 7A might apply (e.g. a payment, a loan, forgiveness of a debt or use of the company’s assets) should be carefully considered to determine whether a deemed dividend arises and, if so, what action could be taken to avoid that consequence. Ensure that Minimum Yearly Repayments (“MYRs”) are made before 30 June in respect of complying Division 7A loans made in prior years. Where dividends need to be declared by 30 June to enable MYRs to be made, ensure that all necessary resolutions are made, and any assignment and offset agreements entered into before year end.
General trust considerations
For income tax purposes, the allocation of the net (taxable) income of a discretionary trust depends on how the trustee exercises its power to distribute the trust’s income to beneficiaries for the relevant income year. A valid exercise of that power is necessary to ensure the tax is borne by the appropriate beneficiary (and not the trustee). In addition to there being strict deadlines as to when decisions must be made, recent Victorian Supreme Court decisions have confirmed the importance of the duty of trustees to consider which beneficiaries are to receive distributions.
Additionally, the ATO is increasingly seeking to apply section 100A of the Income Tax Assessment Act 1936 to arrangements involving trust distributions to lower taxed beneficiaries where the beneficiary does not enjoy the full benefit of the income (e.g. where the beneficiary gifts or lends the amount to a higher taxed entity or the amount remains as a UPE). Where it applies, section 100A results in the trustee being subject to tax at 47%. The Commissioner has an unlimited period of review for section 100A.
With the recent Full Court decision in Commissioner of Taxation v Bendel [2025] FCAFC 15, more pressure is being put on section 100A than ever before, with the ATO indicating in its subsequent Interim Decision Impact Statement that it may seek to apply section 100A to arrangements involving UPEs if it is unsuccessful in the High Court. Trustees should carefully consider how they intend to manage UPE’s in light of the recent Bendel decision, as well as the ATO’s comments following the decision.
Bad debts
A business entity may be entitled to a deduction for bad and doubtful debts, provided the amount of the debt was previously included in assessable income, and the debt is ‘written off’ prior to 30 June. This means that the debt needs to be appropriately authorised as being written off in the books (authorised journal entries) by 30 June or supported by a minute or director’s resolution that is similarly authorised by that date.
However, deductions may be denied if the relevant continuity of ownership and control tests are not satisfied. Crucially, the relevant tests for trusts do not provide an equivalent to the similar business test available to preserve deductions for companies that fail the continuity of ownership test.
Where the amount of the debt was not previously included in the assessable income of the creditor, a capital loss may be available in lieu of a bad debt deduction.
Thin capitalisation
The changes to the thin capitalisation rules became effective from 1 July 2023, limiting interest and other debt deductions to a percentage (30% as the default) of earnings before interest, tax, depreciation and amortisation (EBITDA).
In addition, from 1 July 2024, the Debt Deduction Creation Rules (“DDCR”) permanently deny debt deductions (e.g. interest expenses) for payments arising in connection with certain related party transactions. Broadly, where entities have debt deductions that arise in relation to the acquisition of certain assets from associates, or fund distributions or royalties to associates, the rules may permanently deny those deductions. Whilst the rules only apply to multinational groups (both inbound and outbound), the rules can apply to wholly-domestic arrangements and the lack of transitional rules means that any historic funding arrangements may now result in significant denials of deductions. Further, new and existing integrity provisions may prevent entities from restructuring their arrangements to avoid the application of these provisions.
Working from home deductions
The ATO has updated guidance on an accepted method that individuals may use in calculating deductions for working from home expenses, as an alternative to the actual expenses method (i.e. calculating the additional expenses actually incurred in working from home).
From 1 July 2024, taxpayers will be able to claim deductions using the revised fixed rate of 70 cents per hour (up from 67 cents per hour) provided they satisfy three conditions: a) the work performed must involve carrying on substantive employment duties or in carrying on business, b) the taxpayer must have incurred deductible additional running expenses and c) the taxpayer meets the record keeping requirement.
Deductions for superannuation contributions
For an employer to be entitled to a deduction for superannuation contributions (i.e. concessional contributions), the contribution must be received by the fund on or before 30 June. The SG contribution rate increased to 11.50% of an employee’s ordinary time earnings from 1 July 2024, and will further increase to 12.0% from 1 July 2025.
Individuals wishing to claim a deduction for personal contributions must provide the fund with a notice of intention to claim a deduction and have that acknowledged by the fund before the earlier of the day the individual’s tax return is lodged and 30 June of the next income tax year. The concessional superannuation cap for the current year is $30,000.
Anti-avoidance rules
Finally, it is worth noting that tax planning should be tempered by an awareness of the many anti-avoidance provisions and integrity rules available to the ATO such as: capital benefits provided in substitution for dividends[1], trust reimbursement agreements[2], “wash sale” arrangements[3] and Part IVA more generally.
What are the next steps?
It is critical that clients consider their position and how the rules apply. Clients should contact their Pitcher Partners representative to review their situation and determine what action is required well before 30 June.
[1] Section 45B of the Income Tax Assessment Act 1936 (Cth) (“ITAA36”).
[2] Section 100A of the ITAA36.
[3] Taxation Ruling TR 2008/1.
