Your client uses a related developer for asset protection. Builders collapse mid-project. Construction disputes drag on for years. The developer ring-fences that risk. Deductions claimed progressively. Income recognised on completion.
The ATO calls that a Part IVA risk. Draft PCG 2026/D2 is open for comment.
What PCG 2026/D2 Targets
The ATO says PDAs are common and unproblematic [4]. The concern arises where a related developer claims deductions progressively but does not recognise income until completion. The landowner values trading stock at cost under s 70-45(1)(a) ITAA 1997. Neither party returns income until the project completes. The developer carries losses in the interim.
The ATO's focus is what happens to those losses. Trust income directed to the developer to absorb them [40]. Ongoing project losses offset against completed project income [46]. The structure replicated across multiple developments with the developer inside a consolidated group [52].
Two zones. Green - income recognised progressively by the developer or by the landowner through the trading stock provisions [18]. Red - related parties, interposed developer, progressive deductions with deferred income, cost election, and losses used across the group [19]. All features required. No amber zone.
The Overreach
Three problems.
First. Section 70-45(1) gives taxpayers a choice - cost, market selling value, or replacement value. Parliament enacted that election. s 177C(2) excludes from “tax benefit” any amount attributable to an election expressly provided by a taxation law - unless the scheme created the circumstances enabling the election. A landowner holding trading stock does not need a scheme to access the cost election. The ATO is treating a Parliamentary choice as a tax benefit.
Second. The PCG ignores non-tax reasons for the structure. Asset protection. Insolvency ring-fencing. Construction risk quarantine. In an industry where builders regularly go into administration, these are not theoretical. s 177D(2) requires the Commissioner to consider all relevant circumstances. A guideline that omits non-tax drivers is incomplete.
Third. Paragraph 13 - the PCG applies to arrangements entered before and after its date of issue. Taxpayers who structured years ago had no opportunity to fall within the green zone. The compliance risk is new even if Part IVA is not.
The Practitioner Takeaway
Check where the losses end up. If they stay in the developer, the arrangement is harder to attack. If they flow into a consolidated group or are absorbed by trust distributions - red zone.
Document the non-tax commercial reasons now. Comments close 15 May 2026.
Is the ATO using Part IVA to override the trading stock rules?
FOLLOW-UP COMMENT (Trading Stock Assumption)
One more thing. The PCG assumes the landowner holds trading stock and elects cost under s 70-45(1)(a). Every example is built on that assumption [25, 28, 41, 47].
But is the land always trading stock? If the landowner is passive and the developer does the substantive work, the landowner may not be carrying on a business at all. If no business, the land is not trading stock under s 70-10. It may sit on revenue account as ordinary income under s 6-5 on Myer Emporium principles - income recognised on sale, no annual valuation, no s 70-45 election.
If there is no election, the s 177C(2) protection does not arise. But neither does the PCG's trading stock framework. The ATO has built a compliance guideline around an election that may not apply in many of the structures it targets.
REBUTTAL COMMENT (Vincent Licciardi - Partnership Indicia)
Interesting post Vincent. The indicia of partnership argument appears at paragraph 48 of the PCG. The ATO acknowledges the parties do not consider themselves in a partnership but relies on indicia from contract terms and conduct.
The High Court in Personnel Contracting [2022] HCA 1 held that where parties have committed their relationship to a written contract, characterisation proceeds by reference to the contractual rights and obligations - not a wide-ranging review of conduct.
In Morton [2026] FCAFC 31, the Full Federal Court upheld a PDA where clause 38 stated nothing in the agreement constitutes a partnership or joint venture. The developer was an independent party assuming all risks and conducting the development in its own right.
If a Full Federal Court upheld that characterisation in a PDA this year, Williamson (1928) 14 TC 335 - a UK decision from nearly a century ago - is a difficult foundation for an Australian partnership argument in 2026.
General information only. This note was written as at 6 April 2026 and the law may have changed since. It is not legal or tax advice, does not take account of your circumstances, and must not be relied upon as a substitute for advice on your own matter.