ATO consultation on PCG 2026/D2
The Tax Institute welcomes the opportunity to make a submission to the Australian Taxation Office (ATO) on the consultation on draft Practical Compliance Guideline PCG 2026/D2: Application of Part IVA to property development arrangements involving long-term construction contracts - ATO compliance approach (Draft PCG).
In preparing this submission, we consulted closely with our National Small and Medium Enterprise (SME) Technical Committee to develop a considered response that reflects the views of the broader membership of The Tax Institute.
We acknowledge the ATO’s objective of addressing arrangements that inappropriately defer income recognition or exploit losses through contrived related-party structures. We also recognise the importance of providing practical guidance to help taxpayers assess compliance risk in the context of long-term construction and development arrangements.
While the Draft PCG is a useful step in identifying certain high-risk arrangements, we consider that, in its current form, it creates uncertainty and may have unintended consequences for taxpayers engaged in ordinary commercial property development arrangements (PDAs). In particular, the Draft PCG does not sufficiently distinguish between arrangements that are contrived for tax outcomes, and those that are commercially driven and consistent with established tax principles.
Preliminary observations
Our overarching concern is that the Draft PCG adopts a framework that may overstate the risk associated with common commercial arrangements, and does not adequately reflect the legal and commercial complexity of PDAs.
In particular:
- the Draft PCG appears to conflate the operation of substantive tax provisions (including derivation and trading stock rules) with the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936);
- the guidance risks treating certain features of ordinary commercial arrangements (such as deferred payment terms or the use of the cost method under section 70-45 of the Income Tax Assessment Act 1997 (ITAA 1997) as indicators of compliance risk without sufficient qualification; and
- the framework does not provide adequate guidance for arrangements that fall outside the narrow ‘green zone’ and ‘red zone’, which we expect will include the majority of PDAs.
We also note that the Draft PCG is intended to operate in conjunction with Taxpayer Alert TA 2026/1: Contrived property development arrangements between related parties that defer recognition of income and exploit tax losses (TA 2026/1) and Taxation Ruling TR 2018/3: Income tax: tax treatment of long-term construction contracts (TR 2018/3). This further supports the need for clear alignment between administrative guidance and the underlying legal principles.
Summary of key concerns
Our key concerns with the Draft PCG may be summarised as follows:
- The binary risk framework creates uncertainty
The ‘green zone’ and ‘red zone’ framework leave a significant range of arrangements without clear guidance, creating uncertainty and increasing the compliance burden for taxpayers whose arrangements fall in the middle ground.
- Lack of clarity on deferred payment terms and loss utilisation
The Draft PCG does not clearly identify when deferred payment arrangements or the use of project losses give rise to compliance concerns, and when, or if, they are acceptable, creating uncertainty for common commercial structures.
- Insufficient distinction between substantive provisions and Part IVA
The Draft PCG does not clearly separate the analysis of derivation, trading stock, and partnership characterisation from the distinct requirements of Part IVA, including the need to establish a ‘tax benefit’ under section 177CB and a dominant purpose under section 177D.
- Inconsistent treatment of income derivation scenarios
The Draft PCG treats different contractual arrangements as equivalent, particularly in relation to entitlement to income, which is inconsistent with the principles outlined in TR 2018/3.
- Risk of treating statutory choices as avoidance indicators
The Draft PCG seems to suggest that the election to value trading stock at cost under subsection 70-45(1) of the ITAA 1997 is indicative of higher risk, despite being an explicit legislative choice.
- Uncertainty regarding partnership characterisation
The Draft PCG does not adequately address the legal framework for determining whether a PDA gives rise to a partnership, including the implications of Harvey v Harvey (1970) 120 CLR 529 (Harvey).
- Broad evidentiary expectations and compliance burden
The Draft PCG’s approach to evidentiary requirements may create a de facto compliance checklist, increasing compliance costs and expectations beyond what is proportionate to risk, without providing corresponding certainty.
- Retrospective application of the PCG
This approach may create uncertainty and perceptions of unfairness for taxpayers who entered into arrangements in good faith under the existing law, particularly where the PCG introduces new or expanded evidentiary expectations.
- Insufficient clarity on the scope and targeting of the PCG
The Draft PCG does not clearly or prominently articulate that it is directed only at contrived related-party arrangements, creating uncertainty as to whether commercial PDAs entered into with third parties may be subject to compliance activity.
We consider that 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.
Our detailed response and recommendations to improve the Draft PCG are contained in Appendix A.