ATO guidance could spur unintended consequences for property developers

The ATO's draft guidance set out in PCG 2026/D2 could cause unintended outcomes for taxpayers engaged in ordinary commercial property development arrangements, as the draft PCG overtakes the risk associated with many common commercial arrangements, The Tax Institute has warned.

In a recent submission to the ATO, the institute said the guidance does not adequately reflect the legal and commercial complexity of property development arrangements.

"The guidance risks treating certain features of ordinary commercial arrangements such as deferred payment terms as indicators of compliance risk without sufficient qualification," it said.

"The Draft PCG would benefit from further refinement to ensure that it achieves its objective of targeting contrived arrangements, without creating unnecessary uncertainty for taxpayers engaged in ordinary commercial activities."

The submission said that the framework does not provide adequate guidance for arrangements that fall outside the narrow ‘green zone’ and ‘red zone’, which The Tax Institute said would include the majority of property development arrangements.

The institute said that while the binary risk framework identifies low-risk and high-risk scenarios, it left a substantial middle ground where many commercial property developments are likely to sit, without clear guidance on how risk will be assessed.

"This approach places an evidentiary burden on taxpayers to demonstrate that their arrangements are not high risk, despite the absence of objective benchmarks or criteria," it said.

"As a result, taxpayers may face increased compliance costs and uncertainty even where arrangements are commercially driven and do not involve tax avoidance behaviour."

The Tax Institute said the ATO should introduce an intermediate risk category and provide clearer, objective criteria for arrangements that fall outside the green and red zones.

"This would improve certainty and ensure that ATO compliance resources are directed in a targeted and proportionate manner," the submission read.

The PCG should also provide clearer guidance and examples identifying when deferred payment terms, in combination with other factors, give rise to compliance concerns, the institute added.

"In particular, it should explain the types of additional factors or arrangements that would cause an arrangement to fall within the ‘red zone’," it said.

"The Draft PCG should also clearly confirm that commercial deferral arrangements do not, in isolation, indicate tax risk."

The Tax Institute said the PCG should also more clearly and prominently state that it is direct at contrived related-party arrangements involving timing benefits and loss utilisation, rather than ordinary commercial property development arrangements.

"The Draft PCG should elevate and emphasise the statements that arm’s-length arrangements, deferred payment terms, and one-off developments do not, of themselves, give rise to compliance concerns," the institute said.

"It should also clearly articulate, at an early point in the document, the intended scope of the guidance; and provide stronger examples of commercially driven property development arrangements that fall outside the compliance focus."