Compliance guidance for property developers and landowners

As foreshadowed in our earlier article, the Australian Taxation Office (ATO) has released a draft Practical Compliance Guideline (PCG 2026/D2) addressing the use of Property Development Arrangements (PDAs) involving long-term construction contracts and the potential application of Part IVA (the general anti-avoidance rule). 

PCG 2026/D2, issued on 1 April 2026 introduces a proposed risk assessment framework that categorises certain PDAs as either within a low-risk “green zone”  or a high-risk “red zone”.  PDAs within neither risk zone are likely to ATO engagement to understand their nature. 

PCG 2026/D2 plainly targets PDAs that seek to artificially generate tax losses, and the improper use thereof within an economic group, with the ATO’s clear message being  that tax outcomes should follow the economic substance of PDAs.

This guidance is a response to concerns articulated in TA 2026/1 regarding contrived PDAs between related parties that artificially separate land ownership and development activities to defer income recognition and exploit tax losses within an economic group. 

It is important to note that the mere existence of deferred payment terms or related-party agreements is not automatically a compliance concern – genuine arm’s-length or one-off PDAs without aggressive tax loss exploitation are unlikely to attract ATO scrutiny. 

However, PCG 2026/D2 signals that arrangements designed to secure a tax advantage by delaying income recognition and exploiting resultant tax losses will be closely examined under the lens of Part IVA. 
PCG 2026/D2 is proposed to apply both to new and existing PDAs, meaning property developers and landowners should review current and previously used structures against the risk indicia now rather than assume only future deals are impacted.

Below we outline the key points of PCG 2026/D2, including the ATO’s compliance approach, the green zone vs red zone risk criteria, illustrative examples of low-risk and high-risk scenarios, and what these developments mean for property development industry participants.

Typical PDA structure

ATO’s Risk Assessment Framework: Green Zone vs Red Zone

The crux of PCG 2026/D2 is a two-zone risk framework that helps taxpayers self-assess PDAs. Depending on how an arrangement is structured and how income is recognised, the ATO may categorise it as Green (low risk) or Red (high risk), with corresponding compliance responses. 

The table below summarises the Green vs Red zone criteria and the ATO’s compliance approach for each:

Property development arrangements that do not fit neatly into either zone may still be reviewed on a case-by-case basis if the ATO identifies risk factors. The guidance seeks to provide clarity that truly low-risk arrangements (green zone) are unlikely to attract significant ATO attention, whereas high-risk (red zone) arrangements will be prime candidates for compliance action, including audits and potential Part IVA enforcement. However, ambiguity remains in respect of PDAs that fall into neither the green zone, nor include all the relevant features to be within the red zone. Accordingly, significant uncertainty remains for the property development sector. Hopefully, further refinements will be made to the draft PCG through the consultation process with industry before the final version is published.

Key ATO Concerns and Focus Areas

The ATO’s overarching concern is with arrangements that, in substance, are single economic property developments deliberately fragmented through related-party contracts to enable tax deferral and loss exploitation. 

In particular, Draft PCG 2026/D2 highlights the following issues for property developers and landowners:

• Related-Party PDAs and Non-Arm’s Length Deals: The ATO is scrutinising PDAs where the landowner and developer are related entities or commonly controlled, suspecting these may not be genuine commercial arrangements but rather engineered to achieve tax deferral. Legitimate one-off or arm’s-length PDAs without an aim to exploit tax losses should generally not problematic, however repeated or non-commercial related-party structures are red-flagged.
• Deferred Income Recognition: A key red flag is mismatched timing of income and deductions – for example, a developer claims construction expense deductions each year while deferring all its revenue from the landowner until the project’s completion, with the landowner not recognising increases in the value of its landholdings. This results in tax losses for the developer throughout the project, which can then be offset against other income in the same economic group, effectively sheltering profits from tax. The ATO views such timing misalignment as a strong indicator of tax avoidance purpose.
• Use of Tax Losses: PCG 2026/D2 specifically calls out the use of losses generated by the developer to offset other taxable income (within the same corporate group or via trust distributions) as a sign of a high-risk, contrived arrangement. For instance, a developer entity with accumulated losses might receive income from a family trust solely to soak up those losses and avoid tax on the trust’s earnings. Repeating such arrangements across multiple projects (e.g., setting up new developer entities for successive projects) to continuously defer tax is particularly concerning to the ATO .
• Part IVA Focus: By explicitly invoking Part IVA (General Anti-Avoidance Rules) in this guidance, the ATO signals that it may treat high-risk PDAs as tax avoidance schemes. If Part IVA is applied, the ATO can cancel the tax benefits of the arrangement, leading to backdated tax liabilities, interest, and substantial penalties for taxpayers involved. This raises the stakes significantly for those operating in the red zone.
• Evidence & Documentation Expectations: The appendix to PCG 2026/D2 outlines the evidence the ATO will seek during reviews or audits of PDAs. Taxpayers are expected to maintain comprehensive documentation for their property developments, such as:
  • Contracts & agreements: Complete copies of the PDA between landowner and developer, construction contracts with builders, and any related agreements among all parties involved.
  • Financing documents: Loan agreements, guarantee and security arrangements (e.g. where a landowner’s land is used as loan collateral), bank loan applications, and internal financing records.
  • Financial records: Group financial statements, profit-and-loss accounts, tax reconciliation statements, general ledgers, and other records evidencing how income and expenses from the development are recorded.
• By putting these requirements in writing, the ATO is cautioning taxpayers that inadequate evidence of commercial rationale and proper tax treatment will not be tolerated. Property developers and landowners should ensure their arrangements are backed by solid documentation and clear business reasons, not just tax benefits.

Implications for property developers with related party PDAs

For property developers, landowners, and investors involved in related-party PDAs or long-term construction contracts, the draft PCG 2026/D2 has several important implications:

• Impact on Project Structuring: Going forward, related party arrangements between developers and landowners will need to ensure that tax outcomes align with actual project activity. If you have related-party deferred-payment PDAs, consider structuring them to allow regular billing or interim income recognition for the developer (for example, via progress payments or using percentage-of-completion accounting). Alternatively, landowners might need to apply trading stock rules (assuming the land is held as trading stock) to recognise annual increases in land value when projects span multiple years. The focus is to avoid arrangements that produce large timing mismatches between expenses and income, as these will draw attention and scrutiny from the ATO.
• Retrospective Reach – Review Existing Arrangements: Notably, PCG 2026/D2 is proposed to apply to arrangements entered into before its final issuance. That means clients with current PDAs or long-term construction contracts should review their existing structures. If your arrangement bears the high-risk red zone hallmarks (for example, a related-party developer deferring all income while claiming deductions, and the improper use of losses), you may face an elevated risk of ATO review or audit under this new guideline.
• Risk Mitigation and Compliance: RSM recommends that clients with related party property development projects proactively assess their arrangements against the PCG’s risk criteria. If you identify red-zone features in a current or planned structure, consider mitigation steps:
  • Accelerate Income Recognition: Explore ways to recognise income progressively (e.g. issue invoices periodically or adopt ATO-endorsed long-term contract methods to fall into the green zone).
  • Consider Partnership Classification: If a landowner and developer are effectively sharing risks and returns, carrying on business jointly or in receipt of income jointly, seek advice on whether the arrangement could be deemed a partnership for tax purposes. It is noted, however, that being characterised as a partnership could trigger significant adverse tax implications (for instance, the landowner may have partly disposed of its asset to the partnership, or the partnership itself might need to recognise trading stock income each year).
  • Maintain Robust Documentation: Given PCG 2026/D2’s emphasis on evidence, prepare a comprehensive document trail for each project. This includes formal agreements (PDAs, construction contracts), details of any financing arrangements and guarantees, board papers or internal memos explaining the business rationale, and thorough financial records showing how income and costs are accounted for. Well-organised documentation will be critical if the ATO reviews your PDA – and can also help demonstrate that your arrangement has commercial substance.
  • Monitor Loss Utilisation: Be cautious using tax losses from development entities to offset other income. If your development entity is generating losses that are being used to shelter unrelated income (for example, via trust distributions or consolidated group offsets), recognise that the ATO views this as a red flag for tax avoidance motives. It may be prudent to revisit such arrangements.
  • Looking Ahead – Consultation and Final Guidance: Finally, stakeholders in the property development sector should note that this guidance is still in draft form. The ATO is seeking industry feedback, with public consultation open until 15 May 2026. We encourage property developers to consider making submissions to ensure the final PCG reflects commercial realities and provides workable solutions. The ATO’s inclusion of an evidence requirements appendix suggests it is keenly interested in understanding industry practices. Engaging with the consultation process (directly or through industry bodies) is an opportunity to share concerns or seek clarifications on this important guidance.

By staying informed and proactively aligning property development arrangements with the ATO’s guidelines, those in the real estate and construction sector can better manage tax risks. 

PCG 2026/D2 is a signal that related-party PDAs which defer income and improperly utilise tax losses will face increased scrutiny. With the consultation period underway, now is the time to assess your projects, strengthen compliance, and consider strategic adjustments. 
 

FOR MORE INFORMATION

RSM Australia’s Real Estate & Construction team are available to help you navigate these changes – from reviewing current PDAs for risk, to advising on restructuring options, and ensuring that your property development ventures remain both commercially sound and tax compliant.