Property development can be complicated, especially when multiple businesses or people are involved.
Most arrangements are legitimate, but some are contrived property agreements – set up mainly to reduce tax rather than reflect real business activity.
These are the kinds of arrangements the Australian Taxation Office (ATO) is watching closely – and for good reason.
What Is a Contrived Property Agreement?
A contrived property agreement, however, usually involves related parties and the artificial insertion of a developer entity that performs no substantive commercial role. In many cases, the developer has limited staff, assets, or decision-making authority and exists largely to manage contracts and accounting outcomes rather than real development risk.
A contrived agreement, however, often involves related businesses and a “developer” that exists mostly on paper. It usually involves related parties, and the artificial insertion of a developer entity that performs no real commercial role in the process. This developer might have few staff or no real decision-making power, but is set up to:
• Delay reporting income from the project;
• Claim deductions for project costs while income is postponed;
• Create losses that reduce tax for the wider business group.
Basically, the project might make money overall, but the way income and costs are split can give an artificial tax advantage.
Why the ATO Is Taking a Closer Look
The tax office isn’t against all property development arrangements – only those that split a single project into multiple businesses just to avoid tax.
This may cause the ATO to apply general anti–avoidance provisions to the business if the structure doesn’t reflect the real business reality. The tax office can cancel tax benefits, adjust past tax returns, and impose penalties if it views the arrangement as tax avoidance.
The Risks for Taxpayers
Entering into a contrived property agreement carries significant risk. If challenged, taxpayers may face:
• Denial of deductions previously claimed;
• Re-timing of income recognition;
• Interest charges on unpaid tax; and
• Administrative penalties, which can be substantial.
Importantly, these risks can arise years after a project commences, creating cash flow pressure and uncertainty at critical stages of development.
What You Should Do
Taxpayers involved in property development – particularly where related parties are used – should take a proactive approach. This includes reviewing existing structures to ensure they have genuine commercial substance, documenting the business rationale for each entity’s role, and confirming that income and risk are aligned.
Professional advice is essential before entering into, or continuing with, complex development arrangements. Early review can help identify potential red flags and reduce the likelihood of costly disputes down the track.
While tax efficiency is a legitimate consideration, arrangements that are overly artificial or lack commercial reality can expose taxpayers to serious consequences. When it comes to property development, substance matters – and structures should always stand up on more than just tax outcomes alone.
If you’re unsure whether your property development arrangements are structured correctly, or want to make sure your tax position is secure, get in touch with us today. We can review your agreements, provide clear guidance, and help you plan your projects with confidence – so you can focus on growing your business without unnecessary risk.
Disclaimer
The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.