Draft Practical Compliance Guideline PCG 2026/D2

Submission Date: 7 May 2026

The Taxation Committee of the Business Law Section of the Law Council of Australia (the Committee) provided comments on Draft Practical Compliance Guideline PCG 2026/D2 “Application of Part IVA to property development arrangements involving long-term construction contracts—ATO compliance approach” (the Draft PCG).

Key points

The Draft PCG proceeds from the premise in Taxation Ruling TR 2018/3 that tax outcomes for long-term construction work should reflect economic progress and that a taxpayer cannot defer derivation by choosing not to bill where the contract allows progressive billing.¹

The difficulty lies in the breadth and structure of the Draft PCG. It collapses four distinct questions into a single line of analysis:

1. derivation of the developer’s income;
2. application of the trading stock provisions;
3. possible partnership characterisation; and
4. the separate operation of Part IVA of the Income Tax Assessment Act 1936.

That collapsed analysis overstates the reach of the ATO’s position in three situations:

1. where the contract itself defers entitlement;
2. where the landowner relies on the statutory election of cost in section 70-45 of the Income Tax Assessment Act 1997; and
3. where the legal character of the arrangement is not a simple bilateral services model.²

The Committee welcomes the attempt in the Draft PCG to identify high-risk arrangements. However, the Committee has concerns about the rigid green/red framework of the Draft PCG, the uncertainty left for arrangements outside the narrow green zone, the breadth of the evidence appendix, and the proposal to apply the final Practical Compliance Guideline (PCG) to existing arrangements.

The Committee recommends that the ATO address those concerns before finalising the PCG.

^{1 Draft PCG, paragraphs 1–6 and 18–19; TR 2018/3, paragraphs 1 and 4–9.
2 Subsection 70-45(1) of the ITAA 97; Draft PCG, paragraph 21 and Examples 4, 5 and 7.}

Last Updated on 13/05/2026

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