Grant Thornton offers more context following ATO property tax alert

“The ATO believe ‘repeated use’ of long-term construction contracts in a deliberate manner to defer income and inappropriately manipulate the Trading Stock Provisions, could be considered schemes under Section 177D to which the Part IVA anti-avoidance provisions could apply,” she said.

“Often these PDA’s [property development arrangements] are set up to replicate structures put in place with external parties to demonstrate the commerciality of the arrangement and clearly segregate the separate roles and risks of the Landowner and the Developer.”

Sinclair noted that the ATO wasn’t questioning tax outcomes for development arrangements made at arm’s length. However, those utilising PDAs between related parties, especially where the developer entity had little substance, would need to watch out.

“Those with related parties involved in PDA’s should ensure that the entity that has taken on the role of Developer has the resources to provide the development activities required.”

“Clearly, an entity with no substance, skilled resources to make development decisions, or the ability to fund the activities, is going to draw closer attention from the ATO.”

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.

Sinclair noted that the ATO alert repeatedly referenced long-term construction contracts, the taxation of which was governed by TR2018/3. This ruling referenced contracts relating to ‘construction’ activities, not broader development.

She argued that ‘development activities’ concerned more than just construction, spanning across project feasibility design, approvals, planning, staging and marketing, project management, and financing. Despite this, the ruling had some relevant information, she noted.

“Regardless, TR2018/3 allows for the Basic Method of determining taxable income to be adopted where long-term construction contracts apply (ie the PDA) – which means costs can be claimed when they are incurred and income is recognised in the year it is derived.”

“For developers, this is generally when sales occur, and a share of the proceeds is received from the landowner.”

Like other tax practitioners, Sinclair said she was keeping an eye out for more information in the accompanying practical compliance guide, soon to be released by the ATO.

“The ATO have stated they are actively reviewing arrangements they believe have the characteristics of the Tax Alert (2026/1), and will soon be publishing a Practical Compliance Guideline for comment.”

“We await the clarifications and hope the ATO provides some positive examples of arrangements where related parties are involved that will not draw their attention.”