Compliance

Staying on the Right Side: Australia’s Evolving Compliance Landscape

Australia is tightening its compliance regime across penalties, trust misuse, and audit risk. Businesses and tax agents must proactively adjust to avoid penalties.

By NomadicTax Research Team • 5-8 min read • November 22, 2025

## Recent Compliance Policy Changes - The ATO is **strengthening penalty and shortfall interest charge provisions**, especially for taxpayers in **loss positions** and large entities mischaracterizing payments subject to withholding tax. These changes are now law and take effect from **1 July 2026**.([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/strengthen-penalty-and-shortfall-interest-charge-provisions?utm_source=openai)) - The **Foreign Resident Capital Gains Withholding (FRCGW)** rate has increased to **15%**, and the **threshold has been removed**, applying to all vendors of certain taxable real property. This took effect from **1 January 2025**.([ato.gov.au](https://www.ato.gov.au/individuals-and-families/your-tax-return/before-you-prepare-your-tax-return/what-s-new-for-individuals?trk=public_post_share-update_update-text&utm_source=openai)) ## Key Risk Areas to Watch - **Disguised trust income splitting**: Disputes over trusts used to divert income to lower taxed individuals are being scrutinized. Ensure trust deeds and distributions reflect actual economic reality. - **Royalty and interest payments** subject to withholding tax:** Large entities failing to withhold or properly characterize payments risk escalating penalties. - **Shortfall interest charge liability**: Repayment of over-claimed tax offsets may attract interest where previous assessments are amended downward.([ato.gov.au](https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/strengthen-penalty-and-shortfall-interest-charge-provisions?utm_source=openai)) ## Compliance best practices - Maintain **accurate and contemporaneous documentation**, especially for international dealings and intangibles. - Review corporate structures annually to ensure tax positions remain aligned with evolving law (especially trusts, partnerships, foreign investment arrangements). - Seek **private rulings or binding advice** where positions are uncertain (e.g. cross-border payments). - Use the updated ATO tools and disclosure regimes (e.g. LCMSF schema V4.0) to ensure all reporting obligations are met.([ato.gov.au](https://www.ato.gov.au/businesses-and-organisations/international-tax-for-business/in-detail/pricing/transfer-pricing/country-by-country-reporting/country-by-country-reporting-guidance/local-file-changes-from-1-january-2025?utm_source=openai)) ## Practical example A family trust that has traditionally split income to lower-taxed family members might find the ATO challenging distributions that don’t match contribution or control. If the trust deed gives discretionary power but actual payments follow a pattern, rebalancing or formalizing distributions in accordance with drivers like work input, capital contributions, or risk could reduce exposure. ## Takeaway Evolving laws mean that once routine practices—like senior family splitting income or misclassifying interest/royalties—are now under spotlight. Those managing businesses or trusts should update processes, review structures, and align documentation now rather than wait for audits.