The ATO just fired a warning shot at property developers — and if you're using related-party structures, you need to pay attention.

On 14 January 2026, the ATO released Taxpayer Alert TA 2026/1, targeting what it calls "contrived property development arrangements between related parties that defer recognition of income and exploit tax losses." In plain English: if you've set up a structure where a special purpose developer entity sits between your landholding company and your builder — and that entity is generating losses year after year — the ATO wants to have a conversation with you.

This isn't about legitimate property development agreements. The ATO has been clear on that. What they're targeting is a specific pattern of behaviour where related parties artificially separate what is, in substance, a single economic activity to gain a tax advantage.

Why This Matters Right Now

Property development agreements (PDAs) between related parties are extremely common in Australia. Family groups, trusts, and corporate structures routinely use them to manage risk, allocate resources, and develop property across multiple entities.

The problem? Some of these structures have been designed — or have evolved — to exploit timing mismatches between when costs are deducted and when income is recognised. The ATO has been watching, and TA 2026/1 is their signal that the review period is over and enforcement is beginning.

As Jenny Wong from CPA Australia described it: this is "a clear warning shot to property groups using related-party" structures. And the ATO has confirmed a draft Practical Compliance Guideline (PCG) is coming soon, which will draw clearer lines between low-risk and high-risk arrangements.

If you're involved in property development through related entities, the time to review your structure is now — not after the ATO comes knocking.

The Arrangement the ATO Is Targeting

Here's how the typical structure works — and why it's caught the ATO's attention.

The Three-Entity Setup

The arrangement under scrutiny involves three related parties:

Entity	Role	Tax Position
Landowner	Holds the property being developed	Doesn't recognise development income until completion
Developer (Dev Co)	Special purpose entity interposed between landowner and builder	Claims deductions for costs upfront, defers income recognition
Builder	Performs the actual construction work	Receives payments progressively from Dev Co

The landowner engages Dev Co under a property development agreement. Dev Co then subcontracts the actual construction to a related builder entity. Dev Co is the key — it's where the tax benefit lives.

How Income Gets Deferred

Dev Co enters into what's structured as a long-term construction contract spanning multiple income years. Here's the tax timing trick:

Dev Co incurs construction costs progressively — paying the builder throughout the project
Dev Co claims tax deductions each year for these costs as they're incurred
Dev Co doesn't recognise assessable income until the project is complete and the development is sold or handed over
The losses generated in Dev Co are distributed to related entities in the group, offsetting their taxable income from other activities

The result? The group claims deductions year after year while deferring the matching income indefinitely. And when one project is about to complete — triggering a large income event — the group starts a new project, generating fresh losses to offset the incoming gain.

As RSM Australia put it: the developer "acts as a conduit only" — it has minimal employees, minimal assets, and outsources everything. The separation is artificial.

The Perpetual Deferral Machine

This is what really concerns the ATO. In the words of the alert itself, the arrangement enables "the economic group perpetually deferring paying tax on group profits."

Here's a simplified timeline:

Years 1–3: Project A generates losses in Dev Co → offset against family trust distributions
Year 3: As Project A nears completion (triggering a large income event), Project B launches
Years 3–5: Project B generates fresh losses → again offset against group income
Repeat indefinitely

Each new project resets the clock. The group never actually pays tax on the development profits because there are always fresh losses available from the next project in the pipeline.

What Makes an Arrangement "Contrived"?

The ATO isn't going after all related-party property development structures. They've been careful to distinguish legitimate commercial arrangements from contrived ones. Here are the red flags:

High-Risk Indicators

Dev Co lacks genuine commercial substance — no employees, no assets, no independent decision-making capacity
All construction is outsourced to a related builder — Dev Co is just a pass-through
No assessable income is recognised until project completion, despite substantial costs being claimed annually
Losses are systematically distributed to related entities to offset their unrelated income
The structure is cyclical — new projects perpetually replace completing ones, maintaining a permanent loss position
The arrangement wouldn't exist between arm's length parties — no independent landowner would engage a developer with no capability

What Legitimate Structures Look Like

Not every related-party PDA is a problem. Legitimate structures typically have:

Commercial rationale beyond tax — genuine risk separation, regulatory compliance, financing requirements
Developer capability — actual employees, project management capacity, independent resources
Arm's length terms — pricing and terms that would be accepted between unrelated parties
Income recognised progressively — matching revenue with costs across the project lifecycle
No systematic loss distribution — losses aren't channelled to offset unrelated group income

The ATO's test is essentially this: would these entities operate the same way if they weren't related? If the answer is no, and the dominant purpose of the structure is to obtain a tax benefit, the arrangement is at risk.

Part IVA: The Anti-Avoidance Hammer

The ATO's big stick here is Part IVA of the Income Tax Assessment Act 1936 — Australia's general anti-avoidance rule. This isn't a minor compliance issue. Part IVA gives the Commissioner extraordinary powers.

What Part IVA Does

Part IVA applies where a taxpayer enters into a "scheme" with the sole or dominant purpose of obtaining a "tax benefit." When the ATO successfully invokes Part IVA:

Tax benefits are cancelled — the deferred income is brought to account and taxed
Deductions are disallowed — losses claimed in prior years can be reversed
Shortfall interest charges apply — calculated from when the tax should have been paid
Administrative penalties — up to 50% of the shortfall amount (or 75% in cases of intentional disregard)
Amended assessments — the ATO can go back and reassess prior years

The Purpose Test

Part IVA doesn't require the ATO to prove the taxpayer intended to avoid tax. The test is objective — would a reasonable person conclude that the dominant purpose of entering into the arrangement was to obtain a tax benefit? For structures where Dev Co has no employees, no assets, and exists solely to create a timing mismatch between deductions and income, this is a difficult test to pass.

The Burden Is on You

Here's the part many taxpayers don't realise: once the ATO raises Part IVA, the onus shifts to the taxpayer to demonstrate the provision shouldn't apply. You need to prove the arrangement had a genuine commercial purpose beyond the tax benefit.

Beyond Part IVA: Other Consequences

The ATO has flagged additional enforcement tools:

Promoter Penalties

If an adviser or promoter designed and marketed these arrangements, they face penalties under Division 290 of the Taxation Administration Act 1953. The ATO specifically mentioned this in its announcement — a clear signal that they're looking at the advisers who set these structures up, not just the taxpayers who use them.

Tax Practitioner Board Referrals

Registered tax agents involved in implementing these structures may be referred to the Tax Practitioners Board for investigation. This could result in sanctions, conditions on registration, or deregistration.

Competitive Advantage Argument

The ATO made an interesting point in its announcement: these arrangements give non-compliant groups "a competitive advantage by intentionally doing the wrong thing." This framing suggests the ATO views this as more than just aggressive tax planning — it's treating it as a fairness and market integrity issue.

Common Mistakes to Avoid

Mistake #1: "Our structure has been in place for years — the ATO would have said something by now"

Taxpayer alerts often precede a wave of compliance activity. The ATO reviews arrangements, identifies patterns, and then issues an alert before commencing audits. The fact that you haven't been contacted yet doesn't mean you won't be.

Mistake #2: "We have a genuine PDA, so this doesn't apply to us"

Having a documented PDA doesn't make the arrangement legitimate. The ATO is looking at substance, not form. If your Dev Co has no employees and all construction is subcontracted to a related builder, the PDA is just paper.

Mistake #3: "We'll restructure when the PCG comes out"

The alert applies now. The forthcoming Practical Compliance Guideline will clarify risk indicators, but the ATO has already stated it's actively reviewing arrangements. Waiting for the PCG before taking action means you're behind the curve.

Mistake #4: "Part IVA only applies to big corporate tax avoidance"

Part IVA applies to any scheme — including family group structures — where the dominant purpose is obtaining a tax benefit. Family trusts with interposed developer entities are squarely within scope.

What You Should Do Now

1. Audit your existing property development structures

Why: If you have a related-party PDA in place, you need to understand whether it exhibits the features the ATO has flagged — particularly if Dev Co lacks genuine commercial substance. When: Immediately. Don't wait for the PCG.

2. Document the commercial rationale for your structure

Why: If Part IVA is raised, you'll need to demonstrate that the arrangement has a genuine commercial purpose beyond tax benefits. Start building that evidence now — board minutes, risk assessments, financing arrangements, and independent advice. When: Before the ATO engages with you. Retrospective documentation is far less convincing.

3. Assess your Dev Co's commercial substance

Why: The single biggest red flag is a developer entity with no employees, no assets, and no independent capability. If Dev Co is just a conduit, consider whether it can be given genuine commercial substance — or whether the structure needs to change. When: As part of your immediate structure review.

4. Engage your tax adviser — and get a second opinion

Why: If your current adviser designed the structure, they may not be the best person to assess its Part IVA risk. Consider independent advice from a firm not involved in the original structuring. When: Now. The ATO has specifically flagged promoter penalties and TPB referrals — your adviser needs to be across this too.

5. Monitor the forthcoming Practical Compliance Guideline

Why: The draft PCG will establish the ATO's risk framework, including indicators for low-risk versus high-risk arrangements. This will be the roadmap for compliance. When: Expected in the coming months. RSM Australia and other major firms have committed to providing analysis when it's released.

The Bottom Line

TA 2026/1 isn't targeting property developers who use related-party structures for genuine commercial reasons. It's targeting the ones who've designed structures — or been advised into structures — that exist primarily to defer tax indefinitely through artificial loss generation.

The distinction between legitimate tax planning and contrived tax avoidance has always been a matter of degree. But when your developer entity has no employees, outsources everything to a related builder, and generates perpetual losses that conveniently offset your family group's other income — the ATO's view is that you've crossed the line.

The smart move? Review your structure now, document your commercial rationale, and get independent advice. The cost of restructuring is a fraction of the cost of a Part IVA assessment with penalties and interest.

Sources & Further Reading

Disclaimer: This article provides general information only and does not constitute tax, legal, or financial advice. The application of tax law depends on individual circumstances. Always consult a qualified tax professional before making decisions about your property development structures.

ATO Alert TA 2026/1: Property Development Crackdown