Highway to the danger zone: ATO publishes property development agreement draft guidance

Property development agreements (PDAs) are in the Australian Taxation Office’s (ATO)’s sights in 2026.

In January, the ATO published a Taxpayer Alert TA 2026/1 regarding the ATO’s concerns about contrived PDA arrangements that allow for deferred income recognition and the exploitation of tax losses. Please refer to our earlier article for a re-cap of TA 2026/1. The ATO has recently issued a Draft Practical Compliance Guideline PCG 2026/D2 which provides parameters on when arrangements will be considered by the ATO to be in the lower risk ‘green zone’ or in the higher risk ‘red zone’. 

Taxpayers who have entered into PDAs or are considering doing so should review their arrangements and consider whether the issues raised and compliance approach outlined in PCG 2026/D2 may apply. Some of the ATO’s suggested safe zones may not be practical if taxpayers have existing arrangements in place that cannot be amended and following the safe ‘green’ approach could have significant cash flow consequences for taxpayers if they were required to recognise income in a year when they have not received any cash payments to pay a tax liability. 

Below we outline PCG 2026/D2 and discuss some of the considerations for taxpayers who potentially fall within the ATO’s net. 

Background

PCG 2026/D2 sets out how the ATO will devote compliance resources to PDAs in considering the potential application of the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth). PCG 2026/D2 considers PDAs where a landowner engages another party to develop its land under a PDA (or a similar agreement, however described) using a long-term construction contract. Typically (but not always) the developer engages a builder to undertake the construction work. The landowner may also give security or guarantees to help the developer obtain finance.

The ATO says it is concerned that PDAs are being used by taxpayers under common ownership or control, or who are not dealing at arm’s length, to obtain a tax benefit. In particular, the ATO’s chief concern is entities that are in substance undertaking a single economic activity of property development but separate the land ownership and development activities to defer the recognition of income and circumvent the trading stock provisions.

What the ATO is targeting

The ATO is more likely to devote compliance resources to arrangements outlined in the red zone, such as commencing a review or audit. Following these compliance activities, the ATO may then decide to apply Part IVA, which can lead to the tax benefit obtained being cancelled and amended assessments (potentially including penalties and interest) being issued.

The perceived mischief that the ATO is targeting is essentially a timing mismatch. This is typically where the developer claims deductions for expenses incurred progressively over the life of the project but is only paid at completion and therefore only returns the payment as assessable income in the final income year, and similarly that the landowner values the land at cost under the trading stock provisions, meaning it too does not return income during the development phase. For multi-year projects, this means that the developer could be in a tax loss position for multiple income years. 

The ATO identifies ways which this could be used to the advantage of the entities involved in the examples provided in PCG 2026/D2. These include the following:

• where the developer’s losses are applied against income injected into the developer entity from a related trust (within the same family group for tax purposes) (see Example 6);
• where the developer’s losses are applied against income derived from other projects (see Example 7). In these cases, the ATO says it will scrutinise whether there could in fact be a general law partnership between the landowner and developer; and
• where the arrangements are replicated across multiple property development projects and the losses used to offset income elsewhere in the group, which could lead to the continuous deferral of income (see Example 8).

Features of PDA arrangements in the green zone

The ATO says that arrangements with at least ONE of the following features are likely to fall within the green zone:

• amounts are payable by the landowner and income is recognised by the developer progressively throughout the project;
• even where the PDA provides for payment only on completion, income is nevertheless recognised progressively by the developer over the life of the project in accordance with Taxation Ruling TR 2018/3Income tax: tax treatment of long term construction contracts; or
• the landowner, or the landowner and developer in partnership, recognise annual increases in land value arising from development activities as assessable income in accordance with the trading stock provisions.

In relation to the second bullet point, TR 2018/3 sets out two methods that the ATO considers acceptable for bringing profits and losses to account over the life of a long-term construction project. These are the ‘Basic Approach’ of recognising income when derived and deductions when expenses are incurred, and the ‘Estimated Profits Basis’ which permits a taxpayer to spread the ultimate profit or loss on a long-term construction contract over years taken to complete the contract, provided the basis is reasonable.

Features of PDA arrangements in the red zone

The ATO says that arrangements with all of the following features are likely to fall within the red zone:

• the landowner and developer are under common ownership or control, or are not dealing with each other at arm's length;
• a developer is interposed between the landowner and the builder or subcontractors;
• 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;
• the landowner does not recognise an annual increase in the value of trading stock arising from the development activities and construction works undertaken on the land as assessable income; and
• the purported project losses are then used across the broader economic group or used to offset other income derived by the developer.

Evidence requirements

PCG 2026/D2 also sets out the ATO’s views on the types of evidence it is likely to consider in reviewing these arrangements. This includes foundational information such as financial statements and information about the taxpayer’s group structure, as well as more specific evidence such as contracts, financing information and financial information of the group. 

Taxpayers should not assume that the identified materials are the only documents the ATO may seek to review. The ATO may also be interested in reviewing policies, emails related to the PDA and negotiations, memorandums or reports related to the project, advice from advisors and internal documents supporting project feasibility, among others. Undergoing an ATO audit can require taxpayers to devote significant time and resources away from business as usual activities in order to respond to and satisfy the ATO.  

Implications for taxpayers and next steps

Taxpayers who have existing arrangements that fall within the red zone may not be able to adjust arrangements to easily suit ATO requirements. Example 2 (a green zone example) recognises that no progress payments are made by a landowner to a developer, but the developer still recognises income progressively. Essentially the taxpayer is being taxed in circumstances where it does not receive the income to pay such tax. This could create significant cash flow issues for taxpayers if they were required to implement such an arrangement. 

As PCG 2026/D2 is in draft; it is not yet in force. The ATO has invited comments on the draft which must be provided by 15 May 2026. It is not uncommon for draft PCGs to be finalised with very few changes. It is also notable that PCG 2026/D2 is proposed to apply to arrangements entered into both before and after its date of issue. 

We therefore recommend that taxpayers for whom these issues might be relevant review their arrangements now and, particularly taxpayers whose arrangements might fall within the red zone, consider seeking advice at the earliest opportunity.