Development Company Structures and Why PCG 2026/D2 Is Wrong 

In my view the PCG is wrong. It misreads the substantive law. It assumes facts that are not true of the arrangements it targets. It offers an alternative postulate that is not an alternative postulate. 

This article sets out the structure that the PCG targets; identifies the tax features of that structure; sets out the Commissioner’s position and the assumptions on which it depends; and explains why each assumption is wrong. The full Cartland Law submission on PCG 2026/D2 is set out at the end of this article. 

The structure 

The structure is a separate development entity and a separate landholding entity. The landholding entity holds the land. The development entity carries on the business of construction. The two entities deal under a property development agreement. 

The structure is not novel. It is common. It is not the only way to do property development. A single corporate developer holding trading stock and selling it within the year of acquisition gets no benefit from the structure; the company tax rate is the simple answer. A large publicly held developer with all activities pooled gets no benefit from the structure either. The structure is used where the landowner and the developer are different commercial actors with different investors, different risk profiles, different funding arrangements; and where separation reflects real commercial dealing. 

The structure has commercial advantages independent of tax. The landholding entity is insulated from construction risk; the development entity is insulated from the land’s encumbrances and from claims against the landowner. Different funders can take security against different entities. Different equity participants can hold different positions; landowner investors hold one piece, developer investors another. The arrangement reflects how property developments are actually built and financed in the Australian market. 

The tax features of the structure 

The structure has tax features that follow from the substantive law. 

First; the developer derives income on a completion basis. This is not a choice. It is the consequence of the developer having no entitlement to payment until completion. Henderson v FCT and Arthur Murray (NSW) Pty Ltd v FCT are the authorities on derivation. TR 2018/3 confirms the application of the completion basis to contracts of this kind. 

Second; the developer carries its costs as deductions or as work in progress in accordance with the substantive law on each item of expenditure. The deduction profile follows the law; it is not the product of the structure. 

Third; the landholder holds the land on capital account if the land is held as a capital asset, and on revenue account if held as trading stock. The character follows the landholder’s purpose and dealings. The character is independent of the developer’s character. 

Fourth; the landholder and developer may be in different tax positions, on different rates, with different loss profiles. That is a function of who they are and what they own. It is not a function of the structure itself. 

The structure is therefore tax-efficient where the parties have different tax profiles and where the activities they each undertake produce different items of assessable income or deduction. None of that depends on tax avoidance. All of it depends on the substantive law applying to the parties as they are and to the things they actually do. 

The structure remains available. The Commissioner has not issued a binding ruling against it. A PCG is not a ruling. It is a statement of administrative attitude. It is the parking inspector announcing that he will look more closely at cars in this street. If your ticket is valid, you do not need to worry. The substance of this article and of the Cartland Law submission is that the Commissioner has not put forward a sufficient legal basis for asserting that any ticket is invalid. The PCG is a vague attempt to influence taxpayer behaviour that the Commissioner does not have a sufficient legal basis to attack directly. The reasoning of the PCG is, as set out below, flawed. 

The Commissioner’s position 

The Commissioner says three things. 

First; that under the standard arrangement the developer recognises income only at completion, and that this gives rise to a tax benefit. 

Second; that the dominant purpose of entering the arrangement was to obtain the deferral. 

Third; that the alternative postulate is a partnership between the landholder and the developer, with the land becoming partnership trading stock and development expenditure capitalising into that trading stock. 

Each proposition is wrong. 

No tax benefit 

The Commissioner’s tax benefit analysis assumes that income should be recognised on a profits-emerging basis throughout the project. It should not. 

The substantive law on derivation is Henderson v FCT and Arthur Murray (NSW) Pty Ltd v FCT. Ordinary income is derived when it has been earned and there is a present entitlement to receive it. Under many property development agreements, the developer has no entitlement to payment until completion; there is no progressive milestone entitlement; the developer carries the risk until handover. 

TR 2018/3 confirms this. The completion basis applies where there is no progressive entitlement to payment. 

If completion-basis recognition is the correct legal position, then no tax benefit is conferred by adopting it. There is no deferral against a counterfactual that the law requires. There is only the application of the law as it stands. 

No dominant purpose 

The Commissioner’s dominant purpose analysis assumes that the structure exists for tax reasons. It does not. 

The two-entity structure exists for financing reasons; landholders and developers commonly have different funders, different security positions, different priorities on default. It exists for asset protection reasons; the land asset is separated from the construction risk. It exists for risk allocation reasons; the developer takes construction risk, the landholder takes market risk, and the parties agree commercial returns reflecting that allocation. It exists for joint venture and equity participation reasons; co-developers and landowner investors are commonly different sets of people. 

Minerva Financial Group Pty Ltd v FCT confirms that the existence of commercial reasons for a structure is relevant to dominant purpose. Where the structure is driven by genuine commercial objectives, Part IVA does not apply merely because the structure also produces a particular tax outcome. 

The partnership alternative postulate is not an alternative postulate 

The Commissioner offers a partnership between the landholder and the developer as the alternative postulate. The Commissioner says: had the parties not entered the development arrangement they would have entered a partnership; on that postulate the land would be partnership trading stock; and the deferral disappears. 

The postulate fails. A general law partnership between the landholder and developer is not a different way of doing the same deal. It is a different deal. 

A general law partnership carries a default 50/50 profit share under the Partnership Acts; the development arrangement does not. A general law partnership produces joint and several liability of each partner for partnership debts; the development arrangement does not. A general law partnership may trigger CGT on contribution of the land – although not necessarily. A general law partnership may trigger stamp duty. A general law partnership creates mutual agency. A general law partnership exposes the landholder to the developer’s creditors. 

None of these features is what the parties contracted for. None of them can be added to the parties’ transaction merely to make a counterfactual run. An alternative postulate that requires the parties to enter a different commercial transaction is not an alternative postulate within the meaning of section 177CB(3) and FCT v Hart. 

Paragraph 50 misreads Harvey v Harvey 

The PCG goes further. At paragraph 50 the Commissioner asserts that on the partnership postulate the land becomes partnership trading stock. That assertion does not follow. 

There are two models of partnership where land is involved. The land may be contributed to the partnership and become partnership property. Alternatively, the land may be made available to the partnership without being contributed; on that model the land remains the landowner’s property and the partnership has only its agreed return on operations. Both models exist; both are legally available; the choice between them is a question of intention and evidence on the facts. 

That distinction is the subject of the next article in this series, which examines Harvey v Harvey (1970) 120 CLR 529 in detail. For present purposes it is sufficient to note that the Commissioner’s paragraph 50 reasoning collapses the distinction. The Commissioner asserts that a partnership finding produces partnership trading stock. It does not, unless the land has been contributed; and there is no basis in the facts of the arrangements the PCG targets for finding that the land has been contributed. The relevant entity holds title to the land. The development entity contracts to develop. There is no contribution. 

Land that is not partnership property cannot be partnership trading stock. The Commissioner’s substantive law step is missing. 

Conclusion 

PCG 2026/D2 in its current form should not be finalised. The Commissioner’s tax benefit analysis assumes a profits-emerging basis that the substantive law does not require. The Commissioner’s dominant purpose analysis ignores the commercial reasons for which the structure is genuinely used. The Commissioner’s alternative postulate is not an alternative postulate; it is a different transaction. The Commissioner’s paragraph 50 reasoning misreads Harvey v Harvey by treating a partnership finding as producing partnership trading stock without the intermediate step of contribution. 

The structure remains available. The PCG is a statement of administrative attitude, not a ruling. A taxpayer who has structured for genuine commercial reasons and who recognises income as the substantive law requires has nothing to fear from the substance of the Commissioner’s position; the Commissioner’s reasoning is, as set out above, flawed. The PCG is best understood as an attempt to influence behaviour that the Commissioner does not have the legal basis to attack directly.