This session examines draft PCG 2026/D2, the ATO’s compliance framework for the application of Part IVA to related-party property development arrangements involving long-term construction contracts. The Guideline is the natural companion to TA 2026/1, discussed in January, and targets structures that separate land ownership from development activity to create timing mismatches and exploit losses across an economic group. The session will focus on two questions the PCG does not adequately resolve: whether Part IVA can properly be applied to these structures given their commercial foundations, and where the land is not contributed to the partnership but remains the property of the landowner, what is the legal nature of the accretions to that asset produced by partnership activity and what are the accounting and tax consequences that follow?
Discussion Focus
- The Part IVA characterisation problem. The PCG identifies the red zone features but does not seriously grapple with the difficulty of applying Part IVA to structures that have genuine commercial foundations. We will examine whether the dominant purpose test is satisfied where the separation of land ownership and development activity is commercially driven; the difficulty the ATO faces in identifying a credible counterfactual scheme against which the tax benefit is measured; and whether the tax benefit itself is properly characterised given that the timing mismatch may reflect nothing more than the ordinary application of the substantive provisions to the structure as it actually exists.
- Whether a partnership exists on the facts, and what the ATO’s examination of that question under paragraph 50 of the PCG means for the parties’ exposure.
- The land-not-contributed scenario and Harvey v Harvey. Participants should read the judgments with particular attention to the division between Barwick CJ on the one hand and Menzies and Walsh JJ on the other as to whether land made available to a partnership for the purpose of improvement becomes a partnership asset in equity, and to the majority’s treatment of what becomes of accretions to the value of land that remains outside the partnership. The majority’s conclusion — that those accretions belong to the landowner, not the partnership — is the better scenario in the present context and produces a materially different tax outcome to the one the PCG assumes.
- Legal, accounting and tax treatment of the accretions. If the increase in value of the land is not a partnership asset, what is its character in the hands of the landowner? When is it recognised, on what basis, and under which provisions? These are the questions the PCG does not engage with and which are most likely to be in contest in any audit of these structures.
Conclusion
The PCG’s red zone criteria may be easier to satisfy on paper than Part IVA is to apply in practice — and the partnership asset question it assumes away may be where the most important planning and compliance insights are found.
Please see below link to case materials which is assumed reading in order to participate in the discussion:
Harvey v Harvey (1970) 120 CLR 529
Discussion led by Adrian Cartland.