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ATO flags concerns with contrived property development arrangements between related parties
On 14 January 2026, the Australian Taxation Office (ATO) issued Taxpayer Alert TA 2026/1, which sets out its concerns with respect to certain property development arrangements (PDA) between related parties and puts in-scope taxpayers on notice regarding the potential application of Part IVA of the ITAA 1936 to such arrangements.
Although the media release that accompanied TA 2026/1 [1] acknowledges the commonplace nature and legitimacy of PDAs, the potential impact of the ATO’s view that PDAs inherently artificially separate what is a single economic activity (analogous in certain respects to the view espoused nearly a decade ago in TA 2017/1 [2] ) is unclear.
The resultant uncertainty should soon be substantially resolved when the ATO publishes the corresponding draft Practical Compliance Guideline (PCG) that is foreshadowed in TA 2026/1.
The draft PCG should be expected imminently.
In-scope arrangements
Under these arrangements, a special purpose developer entity (developer) is interposed between an entity that owns the land being developed (landowner) and another entity undertaking building and construction works on the land (builder).
The developer and the landowner, whom are related parties or under common ownership or control, enter into a long-term PDA with features that give rise to a deferral of income whilst allowing the developer to claim deductions progressively for construction costs throughout the project, thereby generating losses which are then applied to other income derived directly by the developer, or distributed to the developer by a related party.
The ATO contend that the interposition of the developer artificially separates the landownership and development activities which are, in substance, a single economic activity of property development.
The ATO considers that the general anti-avoidance rule (Part IVA) may apply to cancel the tax benefit such schemes where there is an objective lack of commercial substance.
Whilst the ATO has indicated that a supplementary draft PCG will soon be published for comment, taxpayers with related-party PDA arrangements should seek professional advice as to the potential risks for existing arrangements.
The ATO identify the following hallmarks that give rise to concern:
Interposed Developer Entity:
A special purpose developer is interposed between the landowner and the builder. The landowner and developer are related (under common ownership/control).
The ATO contends that this structure artificially separates land ownership from the development activity even though, in substance, the development is one integrated project.
Long-Term Development Agreement:
The landowner and developer enter a PDA, structured as a long-term construction contract spanning multiple years.
Developer with No Capacity:
The developer entity often has minimal employees or assets and does little to no actual development work itself.
In practice, all construction is outsourced to a third-party builder, and financing is provided or guaranteed by another related entity (for example, the landowner may secure the developer’s bank loan with its land). The developer exists in form only, acting merely as a conduit.
Up-front Deductions, No Matching Income:
As the project progresses, the developer incurs substantial construction costs (paid to the builder) and claims tax deductions for these expenses in each income year.
However, because the developer opts not to invoice the landowner and therefore reports tax losses in those interim years (deductions with no income). Moreover, as the developer does not hold the land, the trading stock provisions in Division 70 of the ITAA 1997 do not apply.
Use of Losses to Offset Other Income:
The tax losses generated by the developer are then utilised within the broader economic group under common control. For instance, the developer might receive distributions from a related family trust or other group income, which the losses fully offset, sheltering that other income from tax.
This means group profits go untaxed, using the developer’s losses against other income.
Repeating the Cycle:
Groups may repeat the arrangement in perpetuity. For example, as one project nears completion (when the developer would finally recognise a large amount of income under the PDA), the group sets up a new project or new developer entity generating fresh losses, timed to offset the impending income from the first project.
By operating projects in this continuous manner, the group may defer tax on its profits indefinitely.
TA 2026/1 emphasises that in the concerning scenarios little or no tax is paid despite significant wealth being created, which distorts fair competition in the industry.
ATO’s Concerns and Position in TA 2026/1
The ATO’s position is clear: these arrangements are contrived, tax-motivated schemes that undermine the integrity of the tax system.
Given these concerns, the ATO indicates that such arrangements may constitute a tax avoidance ‘scheme’ under Part IVA of the ITAA 1936. If Part IVA is invoked, the ATO can cancel the tax benefits – meaning the deferred income may be brought to account and subject to tax (plus interest and penalties), or the deduction disallowed.
Implications for Property Developers and Landowners
Property developers, landowners, and broader property groups with related party arrangements should carefully evaluate their current structures in light of TA 2026/1, which signals that the ATO is looking closely at related-party PDAs. Potentially impacted parties should consider potential interactions with relevant administrative guidance such as TR 2018/3 as well as AASB 15.
RSM Australia will await and provide a further update upon the publication of the soon-to-be-published draft PCG on the matter.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
[1] Taxpayer alert – contrived property development arrangements | Australian Taxation Office
[2] TA 2017/1 | Legal database
