Author Ilonka Spaeth National Head of Technical Tax and Business Advisory
About author

Ilonka Spaeth is Moore Australia’s National Head of Technical Tax and Business Advisory, providing nationwide technical leadership backed by 18+ years’ tax expertise.

Introduction

Overview

The ATO has released, for consultation, Draft Practical Compliance Guideline PCG 2026/D2, outlining when it is more likely to apply compliance resources to property development arrangements involving long-term construction contracts, particularly where there is a risk that Part IVA may apply. It is intended to sit alongside Taxpayer Alert TA 2026/1 released earlier this year which highlighted the ATO’s broader concern with what it characterises as contrived property development arrangements between related parties.

The draft PCG applies to residential, commercial and mixed-use property development arrangements where:

  • A landowner engages a related party (the developer) to develop land;
  • The arrangement is implemented via a property development agreement (PDA);
  • The development involves a long-term construction contract;
  • The developer typically engages a builder, although this is not always the case; and/or
  • The landowner may provide security over land or guarantees to support project financing.

What is the concern?

The ATO is concerned with arrangements where the form of the arrangement does not reflect its substance, particularly where:

  • Income is deferred or not recognised progressively without a commercial reason;
  • Profits are artificially allocated between landowners and developers;
  • Losses are accessed or transferred inappropriately; and/or
  • The arrangement resembles a partnership or joint venture in substance but is not treated as such for tax purposes.

Where these features are present, the ATO may consider whether Part IVA applies to cancel the tax benefit obtained.

PCG 2026/D2 risk assessment framework

The ATO sets out a traffic-light risk framework to help taxpayers’ self assess the likelihood of compliance activity.

🟢 Green zone (not a compliance priority) – lower risk arrangements including where:

  • Income is recognised progressively in line with accounting and tax principles;
  • Progress payments are invoiced and received where commercially appropriate;
  • The arrangement aligns with Taxation Ruling TR 2018/3 on long-term construction contracts;
  • Trading stock rules are applied correctly where relevant; and/or
  • The commercial terms reflect the economic reality of the project.

🔴 Red zone (compliance priority) – higher risk arrangement features include:

  • The landowner and developer are under common ownership or control, or are not dealing with each other at arm’s length; and
  • A developer is interposed between the landowner and the builder or subcontractors; and
  • The developer claims deductions for construction costs paid to the builder and other development costs as they are incurred, while recognising income from the landowner only on completion as agreed under the PDA or otherwise; and
  • The landowner does not include as assessable income the annual increase in the value of trading stock arising from the development and construction activities on the land; and
  • The resulting project losses are then used within the wider economic group, or offset against other income of the developer, suggesting the arrangement may be structured to minimise or eliminate tax payable.

The draft PCG indicates all the red zone features need to be present for the arrangement to be high risk and a target for further compliance activity. Some of these features may be shown by:

  • No invoicing or progress payments, despite no contractual prohibition;
  • Income recognition deferred until project completion without commercial justification;
  • Developer losses are utilised by another party during the construction phase;
  • Repetition of the same arrangement across multiple projects within an economic group; and/or
  • Indicators that the parties are, in substance, carrying on a partnership, but this is not recognised for tax purposes.

The draft PCG includes worked examples to illustrate how the risk assessment framework for the potential application of Part IVA applies in different scenarios.

What should Taxpayers do now?

PCG 2026/D2 signals a clear compliance focus on property development structures involving long-term construction contracts. While many arrangements will remain low risk, taxpayers should proactively assess whether their structures align with the ATO’s expectations and commercial reality. If not already, taxpayers should assess their arrangements for risk under the draft PCG and consider:

1. Review existing and proposed property development agreements.

  • Are there any agreements in place to justify the mechanism for recognising revenue to ensure the transaction is at arm’s length?
  • Does the structure of the arrangement reflect the commercial reality of who bears the risks and who earns the rewards?
  • Are the roles of the landowner, developer and builder clearly defined and commercially consistent?
  • Does the arrangement avoid outcomes that appear artificial or tax-driven, rather than commercially driven?
  • If the arrangement is not treated as a partnership for tax purposes, is there a clear commercial basis for that position?

2. Ensure income recognition reflects commercial substance.

  • Is income recognised progressively over the life of the project where this reflects the work performed?
  • Where income is not recognised progressively, is there a clear contractual or commercial reason for this treatment?
  • Are income recognition methods consistent with long-term construction contract principles (for example, those referred to in TR 2018/3)?
  • Is income recognition aligned with accounting treatment and commercial practice, rather than deferred without explanation?

3. Be alert to risk identifiers including:

Progress payments

  • Are progress payments invoiced and received where commercially appropriate?
  • If progress payments are not made, does the contract genuinely prohibit invoicing or progressive payment?
  • Is there evidence showing why progress payments are not commercially viable or appropriate, rather than merely omitted?
  • Are payment arrangements consistent across similar projects, or is this arrangement an outlier?

Allocation of profits and losses

  • Are profits allocated in a way that reflects each party’s actual contribution and risk exposure?
  • Are losses retained by the party that economically bears those losses?
  • Is there any use of developer losses by another party that could suggest tax-driven outcomes e.g., trust distributions from a profit-making trust to the loss-making developer entity to utilise tax losses?
  • Would the profit or loss allocation still make sense if tax outcomes were ignored?

Partnership indica

  • Do the parties share profits and losses, rather than one party earning a fixed or arm’s length return?
  • Do the parties jointly control key aspects of the development?
  • Is capital contributed by more than one party in a way that suggests joint enterprise?
  • If partnership indicia exist, has this been properly analysed and documented?

Repetition

  • Is this arrangement replicated across multiple projects within the same group?
  • Do multiple developments use the same structure to achieve similar tax outcomes?
  • Has the structure become a ‘standard model’ without reassessment as circumstances change?

Financing, guarantees and security

  • Does the landowner provide security over land or guarantees for project financing?
  • If so, are these arrangements consistent with the risk allocation reflected in profit sharing?
  • Is there clear evidence explaining why the landowner provides financing support but does not share in profits accordingly?

4. Maintain strong contemporaneous documentation.

  • Do you have contemporaneous documentation explaining why the arrangement was structured as it was?
  • Is there clear evidence of the commercial rationale, not just tax outcomes?
  • Are contracts, board papers and financial models internally consistent?
  • Could an independent reviewer understand the arrangement without relying on hindsight explanations?

5. Seek advice early if the arrangement involves non-standard features.

Final comments

PCG 2026/D2 not only reflects a substantial shift in the ATO’s enforcement focus on property development arrangements generally but also outlines an ‘evidence requirement’ expectation on taxpayer’s when subject to ATO review. Taxpayers who answered ‘no’ or ‘unsure’ to the risk identifiers listed above may have arrangements that fall within, or close to, the red zone. If you have any concerns about your property development arrangements, please contact your local Moore Australia office today.