‘Warning shot’: Experts react to ATO property development tax alert

Adam Crowley, national real estate and construction leader at RSM Australia, said the alert had put in-scope taxpayers “on notice,” but added that the ATO did not appear to be worried about all property development agreements (PDAs), a common arrangement in the development sector.

“The key takeaway for developers is that the ATO are putting the industry on notice that ‘contrived related-party arrangements’ that incorporate PDAs are a concern, rather than taking aim at PDAs themselves,” he said.

“The ATO’s concerns in TA 2026/1 centre primarily on contrived related party arrangements which use PDAs to create an artificial mismatch between the recognition of income from the property development activity and deductions claimed for the costs of development, such that tax on the profits may be deferred, potentially indefinitely.”

Arrangements of concern included those where PDAs were used to artificially separate land ownership from development activities, repeatedly defer income recognition and accumulate project losses that could be used to obtain a tax benefit within the economic group.

These setups typically involved the creation of a shell developer entity interposed between the landowner and builder, and bound to the landowner through a PDA.

According to the ATO, such arrangements were being misused to generate artificial losses in the developer entity, which were used to offset other income in the economic group, leading to little or no tax being paid.

Jenny Wong, tax lead at CPA Australia, said the taxpayer alert was a “clear warning shot to property groups using related-party structures to defer income while accelerating deductions.”

“Long-term construction contracts and special purpose vehicles aren’t inherently problematic, but the ATO is making it clear that form will not override substance. Where structures are designed to generate perpetual losses and defer tax indefinitely, the ATO will look through them,” she said.

The ATO said the alert would soon be followed by a full-fledged draft practical compliance guide (PCG) outlining the Tax Office’s compliance approach and providing more information on authorities’ criteria for high and low-risk arrangements.

Wong said the PCG would be critical in enabling taxpayers in the property development space to assess their risks.

“PCGs often reveal where the ATO draws the line between acceptable commercial structuring and higher-risk, tax-driven arrangements, and taxpayers should be watching this space closely,” she said.

RSM’s Crowley similarly urged those in the development sector to keep an eye out for the new PCG, and to get professional advice regarding their own risks if their arrangements had features akin to those flagged by the ATO.

“While this alert places emphasis on contrived arrangements, it will be important for those utilising PDAs to seek professional advice and keep an eye on the soon-to-be-released PCG to mitigate potential risks for existing arrangements,” he said.