Earlier this year, the Australian Tax Office (ATO) released Taxpayer Alert TA 2026/1, which signalled heightened scrutiny of related party property development arrangements. The alert put the industry on notice that structures involving interposed developer entities – particularly those that defer income recognition or generate losses used elsewhere in a group, were firmly on the ATO’s radar.
The ATO has now taken the next step.
The draft Practical Compliance Guideline — PCG 2026/D2
On 1 April 2026, the ATO released the draft Practical Compliance Guideline PCG 2026/D2 (“Guidance”), which sets out a formal risk assessment framework for property development arrangements involving long-term construction contracts. This Guidance provides considerably more detail on how the ATO intends to classify and respond to these arrangements.
It is important to understand the status of this Guidance. A Practical Compliance Guideline (“PCG”) outlines how the ATO applies the law, as it interprets the law and how the ATO allocates its audit and compliance resources to ensure taxpayers comply with the law as interpreted by the ATO. A PCG is not the law itself, nor is it a Public Ruling. Ultimately, it is the Courts that determine what the law actually is, and the Courts will ultimately decide whether the arrangements identified in TA 2026/1 and the Guidance give rise to any of the tax concerns the ATO has raised. That said, the Guidance provides a clear picture of where the ATO intends to direct its compliance efforts and taxpayers should take the framework seriously as a practical matter.
The Guidance introduces a two-zone risk framework:
Green zone (low risk): Arrangements will generally be considered low risk where income is being recognised progressively throughout the life of the project. Green zone arrangements generally exhibit one of the following features:
- The Property Development Agreement (PDA) is structured so that amounts are payable progressively by the landowner to the developer and the developer recognises income progressively throughout the life of the project.
- Even where the PDA provides for payment only on completion, the developer nevertheless recognises income progressively over the life of the project by applying a recognised methodology under Taxation Ruling TR 2018/3, such as the basic approach or the estimated profits basis.
- Annual increases in the value of the land arising from development activities are recognised as assessable income by the landowner (or the landowner and developer in partnership, where applicable) in accordance with the trading stock using either market selling value or replacement value rather than the cost method.
Red zone (high risk): An arrangement is more likely to attract ATO scrutiny where all of the following features are present:
- The landowner and developer are under common ownership or control, or are otherwise not dealing at arm’s length.
- A developer entity has been interposed between the landowner and the builder.
- The developer is claiming deductions for construction costs as they are incurred but is not recognising income until project completion, whether because the PDA prevents progressive invoicing or because the developer simply chooses not to invoice, creating a timing mismatch that results in the developer reporting losses during the life of the project.
- The landowner is not bringing to account any increase in the value of its trading stock, typically because it has elected to value their trading stock using the cost method and those project losses are being used to offset other income within the broader economic group, whether through trust distributions, tax consolidation or a combination of both.
Where this pattern is replicated across multiple projects, the ATO views it as a deliberate strategy to defer income tax on an ongoing basis and is likely to commence a review or audit, including consideration of the anti-tax avoidance provisions.
It is also important to understand the scope of the Guidance. The Guidance is only concerned with arrangements where both of the following are present: a developer entity is interposed between the landowner and the builder, AND the developer and landowner are related (or otherwise not dealing at arm’s length). Both of these features need to be present for the Guidance to apply. For example, if a landowner and builder are related and there is no separate developer entity interposed, the Guidance is not looking at that scenario. Similarly, if the builder and developer are related but the landowner is unrelated to the builder and developer, the Guidance is also not applicable. This is a meaningful limitation on scope that narrows the range of structures captured by the Guidance.
Notably, the Guidance does not include an amber or intermediate zone. This means arrangements that do not fit squarely within the green zone parameters may, by default, attract a higher level of ATO interest, even where there are genuine commercial reasons for the structure.
Why this matters for you
There are several aspects of the Guidance that property developers, landowners and their advisors should be aware of:
- Retrospective application. The ATO has proposed that when finalised, the Guidance will apply to arrangements entered into both before and after its date of issue. This means existing structures, including projects currently under construction, could be assessed against this framework. Taxpayers cannot simply rely on the fact that their arrangements were established before the Guidance was released.
- The cost method may not be enough. Many landowners have historically elected to value their trading stock at cost, which is a perfectly legitimate statutory election. However, the Guidance effectively treats this election as insufficient for green zone classification unless the developer is separately recognising income progressively. This is an important shift in the ATO’s compliance posture.
- Commercial substance matters more than ever. The ATO is looking closely at whether developer entities have genuine commercial substance, their own assets, employees, capacity to perform development work, and independent decision-making. Structures where the developer exists largely on paper and outsources all activity to a builder are squarely in the ATO’s sights.
- Loss utilisation is a key focus. Where project losses generated by the developer are being offset against other income within the family group, this is treated as a significant risk indicator, particularly where the pattern is replicated across multiple projects.
What you should do now
The Guidance is open for public comment until 15 May 2026. Once finalised, it will establish the framework against which the ATO assesses these arrangements going forward and retrospectively.
We strongly encourage anyone involved in related party property development structures to take the following steps:
- Review your current arrangements against the green and red zone criteria in the Guidance. Consider whether your income recognition approach, invoicing practices and entity structures align with the ATO’s expectations.
- Assess whether your developer entities have genuine commercial substance and whether you can demonstrate clear, non-tax commercial reasons for the structure you have in place.
- Understand how your trading stock elections interact with the framework, particularly if you have been electing the cost method and your developer is not recognising income progressively.
- Consider whether any adjustments to existing arrangements are warranted, noting that changes mid-project carry their own commercial, legal and tax implications that need to be carefully managed.
This is an area where early action and informed advice can make a meaningful difference. The ATO has made its compliance intentions clear, and the window to review and, where necessary, adjust your position is open now.
Our property and tax advisory team has been closely following developments in this space since the release of TA 2026/1 and is well placed to assist you in reviewing your arrangements and assessing your risk profile under the Guidance.
If you would like to discuss how the Guidance may affect your business or your clients, please do not hesitate to contact our property team.
