Background to the draft Guideline

The draft Guideline addresses property development arrangements of a particular kind. Typically, a landowner engages another party (a developer) to develop its land under a property development agreement (PDA) using a long term construction contract. The developer then commonly engages a builder to undertake the physical construction work.

The ATO's concern centres on entities that are in substance undertaking a single economic activity of property development. These entities seek to separate land ownership from development activity using related parties or non-arm's length dealings with the aim of deferring income recognition.

This draft Guideline sits alongside Taxpayer Alert TA 2026/1 released earlier this year. That alert flags the ATO's broader concern with what it characterises as contrived property development arrangements between related parties designed to defer income recognition and exploit tax losses.

Importantly, the draft Guideline does not replace, alter or affect the ATO's interpretation of the underlying law. Rather, it sets out the Commissioner's compliance priorities and resource allocation approach. It gives taxpayers transparency about where scrutiny is most likely to be directed.

The draft Guideline is currently open for public comment. Submissions are due by 15 May 2026.

What the draft Guideline introduces

A two zone risk framework

The risk assessment framework classifies arrangements into two zones:

• Green (low risk) – the ATO will generally not allocate resources for intensive examination beyond verifying the taxpayer's self-assessment.
• Red (high risk) – the ATO is likely to allocate compliance resources to undertake further scrutiny, which may include commencing a review or audit and assessing the potential application of Part IVA.

Classification is based on the features of the arrangement and the taxpayer's approach to income recognition.

When finalised, the Guideline is proposed to apply retrospectively. It will cover arrangements entered into both before and after its date of issue. This carries significant practical importance for taxpayers with existing structures.

The green zone: low-risk arrangements

Arrangements that fall within the green zone generally exhibit one of the following features:

• Progressive invoicing and income recognition: The PDA is structured so that amounts are payable progressively by the landowner to the developer, with income recognised progressively by the developer throughout the project.
• TR 2018/3 compliance without progress payments: Even where the PDA provides for payment only on completion, income is nevertheless recognised progressively by the developer over the life of the project in accordance with Taxation Ruling TR 2018/3 on the tax treatment of long term construction contracts.
• Trading stock provisions applied by the landowner: Annual increases in the value of the land arising from development activities are recognised as assessable income under the trading stock provisions. This recognition is by the landowner, or by the landowner and developer in partnership where applicable.

The draft Guideline provides five worked examples illustrating green zone outcomes. These include scenarios where:

• a related-party developer returns income progressively using either the basic approach or the estimated profits basis under TR 2018/3, while the landowner applies the cost method under the trading stock provisions;
• cases where no progress payments are made but the developer nonetheless recognises income progressively for tax purposes, with the landowner electing the cost method; and
• arrangements where the landowner and developer operate as a general law partnership, jointly contracting with the builder and applying the trading stock provisions progressively.

A further green zone example addresses the position where the developer does not recognise income progressively and does not receive progress payments, but the landowner nonetheless recognises income based on the annual increase in the value of its trading stock at market selling value or replacement value. This essentially means deductions claimed by the developer progressively are offset by income recognised by the landowner.

The red zone: high-risk arrangements

Arrangements falling within the red zone typically involve all of the following features in combination:

• the landowner and developer are under common ownership or control, or are not dealing with each other at arm's length;
• a developer is interposed between the landowner and the builder or subcontractors;
• the developer claims deductions for construction costs as they are incurred while recognising income from the landowner only on completion (whether because the PDA does not permit earlier invoicing or because the developer simply chooses not to invoice progressively) creating a timing mismatch that results in the developer reporting losses during the life of the project;
• the landowner does not recognise an annual increase in the value of trading stock arising from development activities as assessable income; and
• the purported project losses are then used across the broader economic group or applied to offset other income derived by the developer. This may indicate that the arrangement is being used deliberately to ensure reduced tax or no tax is paid.

The fact that the ATO indicates all of these features must be present before an arrangement falls within the high risk zone is helpful and significantly limits the potential scope of high risk arrangements.

The Guideline sets out three red zone examples.

The first involves a developer that chooses not to invoice the landowner during a project even though the PDA expressly permits it, resulting in losses that are then absorbed by distributing trust income into the developer entity from a related trust within the same family group.

The second involves a developer that fails to return income progressively. Instead, it uses losses from an ongoing project to offset income from other completed projects. Critically, the ATO notes that the parties may not consider themselves to be operating as a general law partnership. However, the terms of their arrangement and their conduct may give rise to indicia of partnership. Such a finding would have consequences for the correct application of the trading stock provisions.

The third scenario involves the replication of the arrangement across multiple projects within the same economic group. Developer losses are systematically applied to offset group income. This commonly occurs through a tax consolidated group that includes the developer but not the landowner, or through trust distributions within the group. What distinguishes this scenario is the continuous deferral of income tax across a broader portfolio of developments.

Significantly, the ATO makes clear that it will apply the same compliance approach regardless of the reason for the failure to invoice progressively. It does not matter whether this results from the terms of the PDA or from a deliberate election by the developer.

Practical implications for the property development sector

The draft Guideline represents a material escalation in the ATO's enforcement engagement with the property development sector.

The ATO's framing of this issue under Part IVA is also significant. It signals that the ATO views the most problematic arrangements not merely as involving incorrect income recognition, but as potentially constituting schemes to which the general anti-avoidance rules may apply. The consequences of a successful Part IVA determination (being cancellation of the tax benefit and potential penalties) are severe.

Impacts to developers and landowners

The key question for any related party arrangement is whether income is being recognised progressively. Arrangements that defer all income recognition to project completion without progressive recognition elsewhere in the structure are the primary target. This creates a clear cash flow risk for developers and landowners.

Cash flow is a key concern in long term development projects. It is not uncommon for entities to defer intercompany payments to manage cash. For example, a landowner may not have liquid funds to pay the developer until sales settle at the end of the project.

The Guideline effectively warns that tax should follow economic progress despite cash constraints. Requiring landowners or developers to bring unrealised development gains to account and effectively tax 'paper' profits before any real cash is realised is likely to strain project cash flows.

Further, landowners and developers should be mindful of partnership risk. Several examples in the Guideline (both low and high risk) signal the existence or potential existence of a partnership between the landowner and developer.

If a landowner is closely involved in managing the development or is effectively sharing profits with the developer, there is a chance that the arrangement could be viewed as a partnership for tax purposes, and perhaps also a general law partnership. While this issue is not a focus of the Guideline, Example 7 highlights that the ATO is likely to scrutinise partnership classification as part of any review or audit.

Landowners

For landowners specifically, the Guideline highlights a critical choice that can push an arrangement into the low or high risk zone. The timing of income recognition on the land’s value uplift is central.

Where land is held as trading stock, a landowner may elect to value it at cost, meaning any increase in value from development is not taxed until sale or project completion. Many landowners undertaking development naturally gravitate to the cost method to defer tax on unrealised gains. However, the Guideline zeroes in on this as a contributing factor to 'red zone' risk. If the landowner does not annually bring to account the increased value of the partly developed land, and at the same time the developer is claiming deductions each year, the ATO sees a mismatch designed to produce a tax benefit.

Developers

One common feature in the ATO’s high risk examples is a thinly capitalised developer with little real function that exists mostly on paper.

For taxpayers setting up a development vehicle, thought should be given to its substance and whether it has responsibilities and active involvement in the development (eg project management services, bearing financial risk etc.) or whether it is merely a conduit between a landowner and builder.

The ATO's view as initially expressed in TA 2026/1 is that simply interposing an SPV developer between landowner and builder, without a solid non-tax reason, is a strong indicator of tax avoidance purpose. To counter that perception, a developer should be prepared to point to commercial justifications for its involvement in a structure, such as isolating legal liability, satisfying a joint venture agreement with third parties, or to meet particular regulatory requirements.

Groups with multiple property developments

The Guideline signals that the ATO's focus is clearly on connected party structures with a pattern of loss utilisation and income recognition deferral.

Groups that have replicated a related party development structure across multiple projects, and that are systematically utilising developer losses represent the category of highest risk under the draft Guideline. These arrangements will attract the greatest level of ATO scrutiny and should be reviewed with particular urgency.

Investors and financiers

Parties providing capital to, or taking security over, property development arrangements involving related party developers and landowners should be aware of the heightened regulatory environment and the potential for ATO audit activity to affect the commercial and economic outcomes of those investments.

An arrangement that falls into the red zone can ultimately reduce the after tax return on investment. The ATO may recharacterise income as having been derived (and taxable) earlier than planned, deny the use of losses, and impose interest or penalties. In practical terms, investors could see distributions delayed or clawed back if a development vehicle’s tax deferral strategy is unwound by the ATO mid project.

Boards and audit committees

Where group structures include property development activities involving related parties, boards and audit committees should ensure that tax governance frameworks capture these arrangements, that appropriate professional advice has been obtained, and that contemporaneous documentation is maintained in sufficient detail to support the entity's position in the event of an ATO review.

The level of evidence the ATO may seek in respect of a review or audit will depend on whether an arrangement falls within the green or red zone, with red zone arrangements requiring extensive evidence not only to substantiate the arrangement but also to demonstrate how it is practically implemented and operated.

The ATO includes in the Guideline a specific 'evidence requirements' appendix. Types of evidence listed in the Guideline as being things the ATO want to see include:

• contracts and agreements between parties to the project, including PDAs, building contracts and 'other contracts involving the landowner, developer, builder or other stakeholders';
• financing documents, including bank loan applications, borrower details, guarantees and security arrangements and internal financing records; and
• financial information including profit and loss statements, tax reconciliation statements and relevant general ledgers.

This is another recent instance where the ATO has included a specific appendix in a PCG outlining a list of evidence expectations (see PCG 2024/1).  However, this is the first time that it frames the appendix as a 'requirement'.

Some of the ATO's more recent PCGs have referred to lists of evidence that it would like to see. For example, paragraph 156 of PCG 2025/2 (restructures and the thin capitalisation and debt deduction creation rules) and paragraphs 99 to 101 of PCG 2025/3 (capital raisings funding franked distributions) contain lists of documents and information the ATO indicates would assist taxpayers in demonstrating the application of tax laws to their circumstances. Further, in PCG 2024/1 an evidence appendix was included although it was framed as an 'expectation'.  None of these PCGs was the evidentiary section so prominent or titled as a 'requirement'.

Taxpayers should be wary of the ATO using this list as a checkbox exercise and asserting that arrangements lack commercial substance where all of the information listed cannot be provided. It will be interesting to see how this plays out in practice.

Next steps

Taxpayers and their advisers should take the following steps in the near term:

• Review existing arrangements – conduct a structured review of any related party property development arrangements, including those already in progress, to assess alignment with the risk framework in the Guideline.
• Assess income recognition positions – examine whether income is being recognised progressively at either the developer level (under TR 2018/3) or the landowner level (under the trading stock provisions) in a manner consistent with the green zone.
• Assess partnership risk – where the conduct of related parties and the terms of their agreements suggest a general law partnership may have been created, obtain advice on the implications for the correct application of the trading stock provisions and for income recognition more broadly.
• Preserve and organise documentation – ensure that all contracts, financing documents and financial records relating to property development arrangements are readily accessible. The ATO expects taxpayers to be able to provide supporting evidence, typically beginning with financial statements and group structure information, and extending to detailed project level documentation where a risk is identified.
• Engage with the consultation process – the ATO has invited comment on the draft Guideline. Submissions are due by 15 May 2026 to the nominated contact officer. Taxpayers and industry participants with a material interest in the outcome of the finalised Guideline should consider making a submission, either directly or through industry bodies, to ensure that the final instrument reflects the commercial realities of the sector.
• Seek specialist advice – any taxpayer whose arrangements may fall within or near the red zone should obtain specialist tax advice as a matter of priority, both to assess the current risk position and to consider whether voluntary disclosure or prospective restructuring is appropriate.

Please contact us if you would like to discuss.