Australia: Taxation of property development arrangement (Full Federal Court decision)
Following decision, ATO released draft practical compliance guideline (PCG) on application of GAAR to property development arrangements.
The Full Federal Court held in Commissioner of Taxation v Morton [2026] FCAFC 31 that a taxpayer that entered into a property development arrangement (PDA) with an independent third-party developer to develop the taxpayer’s land was not engaged in the business of land development or any other profitmaking enterprise, but instead simply recognized long-term capital gain.
Under the PDA, the developer undertook all substantive development activities and bore the development risk, while the taxpayer remained a passive participant and merely retained legal ownership until sale. Despite the scale and sophistication of the development, the court focused on the taxpayer’s purpose, role and conduct, rather than the mechanics of the development itself.
Following the court’s decision, the Australian Taxation Office (ATO) released draft PCG 2026/D2, which sets out the ATO’s proposed compliance approach for applying the general anti-avoidance rule (GAAR) (Part IVA of the Income Tax Assessment Act 1936) to PDAs involving long-term constructions contracts (spanning a period of greater than one year).
The draft PCG outlines arrangements that the ATO considers to fall within “red” and “green” risk zones. In broad terms, the red zone largely reflects the related party arrangements previously identified in Taxpayer Alert TA 2026/1, including structures involving the exploitation of project losses or income deferral lacking commercial justification. At the other end of the spectrum, the green zone is limited to arrangements in which taxpayers have effectively eliminated any timing benefit (e.g., through periodic payments, developer income recognition under a percentage of completion methodology, or treating the arrangement as a partnership). Importantly, the PCG appears to apply to both existing PDAs and new PDAs.
The ATO’s consultation on draft PCG 2026/D2 is open until May 15, 2026.
For more information, contact a KPMG tax professional in Australia:
Kristie Schubert | kschubert3@kpmg.com.au
Scott Farrell | spfarrell@kpmg.com.au
Cullen Smythe | cullensmythe@kpmg.com.au