Why the ATO is taking a closer look at property development agreements

Property Development Agreements (PDAs) have long been a common way for landowners and developers to work together. 

They allow landowners to retain ownership of their land while leveraging the expertise and resources of a development partner. However, guidance from the Australian Taxation Office (ATO) indicates increased scrutiny of related-party property development arrangements, particularly where the structure may produce tax outcomes that do not align with the underlying commercial activity.

At a recent Property Council member briefing hosted by RSM Australia, Adam Crowley, National Real Estate and Construction Leader, explored the implications of the ATO's latest guidance and what it means for developers, landowners and advisers. 

Note: This article focuses on the high-level takeaways discussed at the briefing. For those seeking technical insight, RSM has also published a more detailed breakdown of ATO concerns with property development arrangements between related parties.  

The ATO's focus is on tax outcomes, not the structure itself

The ATO has been clear that PDAs remain a legitimate and commercially accepted development model. The concern is not the existence of a PDA, but whether the structure exists for a legitimate reason or to achieve certain tax outcomes.  

The guidance focuses on related-party structures where income recognition may be deferred while deductions are claimed progressively. In particular, the ATO is examining related party transactions concerning PDAs where:

• a special purpose development entity has limited commercial substance
• losses are utilised elsewhere within the economic group
• the timing of income recognition does not align with the underlying economic activity.  

The ATO's concern is that these arrangements may create an artificial separation between land ownership and development activities, resulting in tax outcomes that do not reflect the commercial reality of the transaction.

Documentation and contemporaneous evidence matter more than ever

One of the strongest messages from the briefing was that documentation is becoming increasingly important.

The ATO's draft guidance places significant weight on contemporaneous evidence. Project documentation, financing arrangements, feasibility studies and commercial decision-making records may all be relevant in demonstrating why a particular structure was adopted and whether there were genuine non-tax reasons for doing so.  

For many property groups, this may require a greater level of documentation than has historically been maintained.

Understanding the new risk framework

The ATO's proposed compliance framework introduces low-risk and high-risk categories for related-party development arrangements.  

Lower-risk arrangements are generally characterised by income being recognised progressively and tax outcomes aligning with the economic activity taking place throughout the life of the project. Higher-risk arrangements tend to involve deferred income recognition, loss utilisation within a broader group and development entities with limited commercial substance.  

While the framework provides some guidance, a key concern raised during the session was that many ordinary commercial arrangements may not fit neatly into either category, creating significant uncertainty for many in the development sector adopting PDA structures.