The Australian Taxation Office (ATO) has released Draft Practical Compliance Guideline (PCG) 2026/D2 setting out its compliance approach to the potential application of Part IVA, the general anti avoidance rule, to certain property development arrangements.

Background

The draft guideline targets arrangements where land ownership and development activities are separated, particularly within related party groups, in ways that may defer income recognition or circumvent the operation of the trading stock provisions.

The PCG is a follow on from the Taxpayer Alert released by the ATO earlier this year and link to our commentary is provided here – The ATO warning on common property development arrangement – HLB Mann Judd

The ATO acknowledges that property development agreements (PDA) are a common and a legitimate commercial structure in the Australian property sector. Under a typical arrangement, a landowner engages a developer pursuant to a PDA, with the developer either performing or subcontracting construction work a construction contract. The ATO, generally does not have any concern with this operating model.

However, the draft guideline highlights specific risks where PDAs are used between entities under common ownership or control, or where parties are otherwise not dealing at arm’s length. In these circumstances, the ATO is concerned that what is substantively a single economic activity of property development may be artificially split to create a timing mismatch between income recognition and deductions claimed.

This mismatch can result in tax losses being generated in the early years of a project and utilised across a broader group, while income is deferred until project completion.

Risk Assessment Framework

PCG 2026/D2 introduces a two zone risk assessment framework comprising a green (low risk) zone and a red (high risk) zone. The framework is intended as a practical tool to help taxpayers assess whether their arrangements are likely to attract ATO scrutiny.

Green Zone – Low Risk Arrangements

The ATO will generally not allocate compliance resources beyond verification where arrangements reflect income recognition that is aligned with economic substance. Low risk features include:

  • Progressive income recognition by the developer, where the PDA allows for progress payments and the developer invoices and recognises income progressively over the life of the project.
  • Progressive income recognition despite deferred payment terms, where payment is contractually deferred until completion, but the developer nonetheless returns income progressively using the basic approach or estimated profits basis in accordance with TR 2018/3.
  • Application of trading stock provisions by the landowner, where the landowner (or a landowner–developer partnership) recognises annual increases in land value as assessable income, with trading stock valued at cost, market selling value, or replacement value under section 70 45 of the ITAA 1997.
  • Direct contracting or partnership arrangements, where the landowner contracts directly with the builder, or where the landowner and developer operate as a general law partnership and apply the trading stock provisions to progressively recognise income.

In these scenarios, income is brought to account over the life of the development in a manner consistent with the underlying economic activity, reducing the risk of tax deferral.

Red Zone – High Risk Arrangements

The ATO indicates it is likely to undertake reviews or audits where arrangements involve all or most of the following features:

  • Related party or non arm’s length relationships between the landowner and developer, including common ownership or control.
  • Interposition of a developer entity between the landowner and builder, particularly where the developer has limited assets or commercial capability and relies on the landowner providing land as security or guarantees.
  • Timing mismatches between income and deductions, where the developer claims deductions for construction and development costs as incurred but does not recognise income until completion, either because the PDA prohibits progress invoicing or the developer elects not to invoice despite being entitled to do so.
  • Utilisation of project losses across the broader group, where losses generated during construction years are offset against other group income, suggesting a deliberate deferral of tax outcomes.

In such cases, the ATO considers there is a heightened risk that the ATO will commence a review or audit.

Practical Implications

Although PCG 2026/D2 is a draft and does not change the operation of the law, it provides clear insight into the ATO’s current compliance focus. Taxpayers involved in property development, particularly those using related party or group structures should carefully review their income recognition methodologies and trading stock treatment to ensure they reflect the economic substance of the arrangement.

The guideline reinforces the expectation that deferral of income recognition, absent a genuine commercial justification, is likely to attract increased scrutiny.

We recommend reviewing your arrangements and contacting your HLB Mann Judd tax advisor if you are unsure about your current situation.