Property development agreements: ATO releases draft guidance for consultation

The Australian Taxation Office (ATO) has released draft Practical Compliance Guideline (PCG) 2026/D2, outlining its proposed compliance approach to long-term property development agreements (PDAs). The draft PCG builds on Taxpayer Alert TA 2026/1, released earlier in 2026, which cautions against contrived property development arrangements between related parties that defer income or manipulate the recognition of project losses.  

The draft PCG provides clear guidance on PDAs which the ATO considers would fall in the high risk ‘red zone’, being related party PDAs such as those described in TA 2026/1, and PDAs which the ATO considers would fall in the low risk ‘green zone’, being arrangements that do not give rise to any timing benefit. 

For PDAs that are not caught by the PCG (which we expect to be the majority), the PCG creates uncertainty and imposes an evidentiary burden on taxpayers to support any claim that their arrangements do not fall in the high risk ‘red zone’. The PCG stops short of defining what, beyond ‘deferred payment terms’, elevates an arrangement into a higher risk category. 

The use of PDAs is common in Australia's property and construction sector – which the ATO has acknowledged – but the guidance falls short of providing the clarity and practical guidance many taxpayers will need. 

The draft PCG is open for comment, with submissions due by 15 May 2026.  

Background to the ATO’s concern: TA 2026/1

In January 2026, the ATO released TA 2026/1 in relation to “contrived property development arrangements between related parties that defer recognition of income and exploit tax losses”. The ATO was concerned about situations where related parties structure PDAs in an artificial or contrived manner to obtain a tax benefit.

Specifically, the ATO was concerned about arrangements where:

• the land ownership and development activities have been artificially separated;
   
• the landowner and the developer are related;
   
• the developer does not have the capacity to undertake development itself (e.g. no or minimal employees/assets), and services provided to the landowner are all outsourced to the builder and funded by another party; 
   
• there is a mismatch (>1 income year) between the recognition of income and deductions claimed from the property development – that is:
   
  • the developer does not derive any income until the project is completed, and as the developer does not hold the land, the trading stock rules do not apply; but
     
  • the developer claims deductions progressively as costs are incurred;
     
• the developer’s losses are used against other income of the developer or the broader economic group; and
   
• the arrangement is deliberately repeated so losses from new projects are offset against income from an earlier project, resulting in reduced tax or no tax being paid, sometimes indefinitely.

Summary of the draft PCG: risk assessment framework and focus areas 

The draft PCG sets out a binary risk framework of a high risk ‘red zone’ and a lower risk ’green zone’, with a central theme that tax outcomes should align with economic activity, not legal form. 

Green Zone 

An arrangement will fall into the ‘green zone’ (and therefore should not trigger compliance resources) where it has: 

• progressive income recognition by developers over the life of the project; 
   
• landowners recognising value increases via the trading stock rules; and  
   
• arm’s length terms.

In other words, a taxpayer can expect to fall into the ‘green zone’ where it has voluntarily eliminated any timing benefit. 

Red Zone 

The ‘red zone’, which mirrors the Commissioner’s concerns in TA 2026/1, signals heightened scrutiny, potential reviews, and the need for robust contemporaneous evidence where the following are present: 

• deferral of all income until project completion; 
   
• mismatches where developers claim deductions but no corresponding income; 
   
• related‑party shifting of income/loss across entities or periods; and
   
• replication of structures across multiple projects to systematically utilise losses.

Focus areas 

However, the classification of ‘green zone’ and ‘red zone’ transactions leaves a large middle ground where taxpayers may struggle to determine their risk for compliance resources. Beyond the green and red zones, the draft PCG makes it clear the Commissioner views the following as focus areas, increasing risks of compliance resources being applied:

• Related party structuring, namely where the landowners and developers are not dealing at arm’s length and functions are artificially separated to produce tax advantages.
   
• Substance of the developer entity ie where structures contain thinly capitalised developers with limited commercial substance or risk assumption.  The draft PCG makes it clear that the ATO expects developers to demonstrate genuine commercial roles and not merely act as intermediaries. 
   
• Where tax outcomes do not align with economic activity and taxpayers are not adopting progressive recognition methodologies (even where cash flows are deferred). 
   
• Repeated group structures, where groups have replicated similar structures across multiple developers, have been labelled as a priority compliance target. 

Examples of green zone and red zone arrangements

The draft PCG provides examples of how the risk assessment framework is to be applied in different scenarios. These examples are summarised below.

Issues not addressed 

What is noticeable is what the draft PCG does not cover. Whilst it acknowledges that “[t]he use of PDAs is common in Australia's property and construction sector” and that “[g]enerally, [the ATO does] not have a concern with this operating model”, it stops short of defining what, beyond having ’deferred payment terms‘, elevates an arrangement into a higher-risk category.  

Range of PDAs not addressed 

As flagged above, many mainstream PDAs are outside the two risk zones outlined by the draft PCG.  Where a taxpayer finds themselves neither in the red nor the green zone, the ATO signals it may still engage to “understand the nature of your arrangement” but has not specified the triggers, leaving taxpayers to infer risks from TA 2026/1 and general principles about substance over form and with little more certainty than they had before the draft PCG was issued. 

Deferred Payment Terms 

Lack of clarity also exists in the ATO’s treatment of deferred payment terms, which typically arise where any or all of the following arrangements are present: 

• the developer is paid only at project completion or upon sale of lots; 

• development or construction fees are contingent on project success; and

• landowners receive consideration through profit share or residual entitlement structures. 

While these arrangements may be commercially justifiable, the ATO views them as a key driver of tax timing distortions that may attract engagement. However, the draft PCG also suggests that the mere existence of deferred terms does not, in itself, give rise to compliance concerns. Taxpayers are then left with the question: what additional features convert benign deferral into a risk? 

Exploitation of project losses 

The draft PCG indicates arm’s‑length arrangements that do not involve the “exploitation of project losses” are unlikely to attract scrutiny, but it does not define what constitutes “exploitation of project losses”. TA 2026/1 describes concern with related‑party structures that manufacture or shift losses, which may inform interpretation, but the draft PCG lacks any clear examples or objective tests in this regard. Without a working definition or examples, taxpayers face uncertainty in assessing arrangements that legitimately generate or utilise losses in the development cycle.

Evidentiary requirements 

The PCG provides examples of the type of evidence the ATO is likely to consider when reviewing PDAs. However, the types of evidence are caveated as being general in nature and non-exhaustive – which leaves open the wide range of evidence that the ATO may request. While the inclusion of documentation expectations is helpful to an extent, it effectively shifts the burden onto taxpayers to evidence their position in the absence of bright-line rules. This means that taxpayers are likely facing increasing compliance burden and cost despite the absence of defined risk markers, particularly for out‑of‑scope PDAs, even when arrangements are commercial and arm’s‑length.

The Part IVA context

We need to remember the context of the PCG is Part IVA.

Without conceding anything on outcomes, it is unsurprising the ATO wants to review related party transactions with a view to checking whether the purpose of the PDA is to release deductions to the developer. 

The application of Part IVA in the context of arm’s-length PDAs warranted some meaningful comment as there is usually a commercial motivation for the PDA which would often mitigate against the application of Part IVA. 

Instead, all we have is a general statement at Paragraph 15 of the draft PCG that arm’s-length arrangements are unlikely to attract compliance activity (unless they involve loss exploitation which is not explained further in the PCG).

This is particularly concerning as PDAs are a significant aspect of the residential market and tend to be used in a lot of the larger, more complex deals involving large landowners, including governments, churches, charities, and similar bodies.

There is often a commercial driver for these types of landowners using PDAs including: the non-existence of land (air-rights); the need for oversight in substantial government projects; and cases involving retentions by the landowner (is the suggestion that they should sell and buy back?). Given that these are valid commercial reasons for the use of a PDA by clearly arm’s-length parties, should Part IVA ever be relevant?

Part of the response will doubtlessly be that arm’s-length parties must act on an arm’s-length basis but do we really think developers would negotiate to not get paid until the end of the deal or the reasonable alternative to a PDA was a partnership and/or an upfront transfer of the land (both of which would create often unsustainable transaction and holding costs). So, there will, as always, likely be a scheme and probably a tax benefit but it is hard to see how the ATO develops a reasonable counterfactual or a dominant purpose in many of these transactions.

These transactions don't easily fit into the current concept of the ‘green zone’ (being that any tax benefit is cancelled) but there really should be a set of transactions which can be said to fall outside any Part IVA considerations.

Notwithstanding that there may be commercial reasons for the use of PDAs, absent some sensible extension to the ‘green zone’ arrangements, parties may become less willing to enter into PDAs. PDAs will become more difficult to negotiate, risk will have to be priced in and the alternative of asking the ATO for a ruling is neither time efficient nor likely to result in a clearance especially given the precedent value (in the market, if not technically) of a positive ruling. 

Reading alongside the Morton decision 

It is worth noting the Full Federal Court’s decision in Commissioner of Taxation v Morton [2026] FCAFC 31 (Morton) which was handed down on 27 March 2026 and upheld the primary judge's finding that a retired farmer who entered into a development agreement with an independent third-party developer was not carrying on a business of property development or a profit-making scheme.  As a result, Morton’s sale proceeds from the subdivision and sale of the lots were characterised as capital, not assessable income.  

The Commissioner argued the sale proceeds were assessable income on the basis the taxpayer had carried on a business by developing, subdividing and selling of the land and the development and sale agreements demonstrate that the acts and activities undertaken by the developer were done by or on behalf of the taxpayer and were therefore the acts or activities of the taxpayer.

The Full Federal Court ultimately held the sale of the lots was the mere realisation of a capital asset and that proceeds were not taxable as income. The fact that Morton appointed the developer to carry out the development on his behalf did not mean that Morton ventured the land to a business venture or to a profit-making undertaking or plan. The development, subdivision and sale of the block constituted no more than an enterprising means of achieving the best price when realising the capital asset.

There were many factors that point to the realisation of the block as being motivated by factors other than those normally to be expected in a business context, including that: 

• Morton did not acquire the land with an intention of profiting from its sale by subdivision, but rather purchased it from his father for the purpose of conducting farming operations;
   
• the circumstances of the sale were not of Morton’s making, but rather he sold the block because farming on it was no longer viable; 
   
• Morton did not seek to achieve the maximum available proceeds, but adhered to his two tenets; 
   
• Morton did not borrow money to fund the development; and 
   
• Morton was unwilling to be involved in any active way in the development. 

The decision in Morton does not necessarily challenge the risk factors outlined in the draft PCG – in our view, Morton is based on a strong set of facts – however, it does signal the Commissioner’s clear focus on PDAs.