Navigating the ATO’s Transfer Pricing Guidance for Property and Construction
The ATO has issued new guidance for private groups receiving funding from overseas related parties for property and construction projects, emphasizing ATO transfer pricing risks in property & construction. This initiative falls under the Private Wealth International Program, which targets international tax risks in privately owned and wealthy groups. The new guidance should be read alongside Practical Compliance Guideline (PCG) 2017/4, which provides the ATO’s compliance approach to taxation issues associated with cross-border related-party financing arrangements.
ATO’s Focus on Transfer Pricing Compliance and Risks in Property and Construction
The ATO wants private group related-party financing to reflect “arm’s length terms” to prevent excessive interest deductions and withholding tax avoidance. To address ATO Transfer Pricing Risks, the ATO has identified several red flags:
- Excessive debt with little equity contribution
- Subordinated or unsecured loans with high interest rates
- Loans with extended durations without justification
- Deferral or avoidance of interest withholding tax
- Lack of security over related-party loans
- Failure to monitor and review loan arrangements regularly
The ATO has highlighted that related-party loans should be appropriately secured, as independent lenders typically require security to mitigate risk. Loans priced as unsecured debt, despite security being available, may attract scrutiny.
Additionally, the ATO has introduced risk ratings to assess compliance risk. Low-risk financing arrangements typically feature:
- A mix of debt and equity consistent with market norms
- Interest rates comparable to independent financing
- Loan terms aligned with project timelines
- Proper documentation and disclosure of related-party loans
High-risk arrangements, on the other hand, often include:
- Excessive interest rates above market standards
- Loans structured as debt despite appearing more like equity
- Long-duration loans that extend beyond project completion
- Deferred interest payments without commercial justification
According to Benedicte Olrik, Andersen Australia’s Transfer Pricing Leader and Co-Regional TP Leader:
“Property development is high-risk, and securing external funding can be challenging. Many private groups turn to related-party financing to keep projects viable, but these arrangements must be commercially sound and well-documented to avoid ATO scrutiny.”
Other Tax Considerations for Property Developers
Beyond transfer pricing, property developers must address several other tax issues, including:
- Capital Gains Tax (CGT) – Understanding tax implications when disposing of property assets.
- GST Obligations – Ensuring compliance with GST on property transactions, including margin scheme applications.
- Interest Withholding Tax (IWT) – Managing compliance for interest payments to non-residents.
- Thin Capitalisation Rules – Ensuring debt levels align with regulatory limits for interest deductibility.
- Division 7A Compliance – Preventing unintended tax consequences for private company loans.
- Land Tax and Stamp Duty – Managing state-based tax obligations for property holdings and transfers.
What Private Groups Must Do?
- To stay compliant, private groups should:
- Justify funding choices with clear commercial reasoning.
- Keep proper documentation, including project details, loan agreements, and transfer pricing analysis.
- Ensure financing arrangements include appropriate security where applicable.
- Monitor financing structures throughout the project lifecycle to remain compliant with ATO Transfer Pricing Risks.
- Ensure interest withholding tax is paid and reported correctly.
- Evaluate risk ratings to determine the likelihood of ATO scrutiny.
- Refer to PCG 2017/4 to assess the compliance risk of financing arrangements and align with the transfer pricing risks in property and construction compliance standards.
Olrik emphasises:
“The best way to ensure compliance is to integrate transfer pricing into business planning. Funding decisions should be market-driven, reassessed regularly, and supported by strong documentation.”
Practical Steps for Compliance
Seek expert advice – Engage tax professionals early to mitigate risks.
Assess financing needs – Ensure debt levels are reasonable and supported by equity.
Benchmark related-party loans – Compare with independent financing terms.
Review loan terms annually – Adjust if business conditions change.
Ensure security aligns with market norms – Avoid pricing loans as unsecured when security is available.
Evaluate the ATO’s risk rating framework – Identify areas that may attract scrutiny.
Refer to PCG 2017/4 – Align financing structures with the ATO’s compliance approach.
Final Thoughts
The ATO is increasing its scrutiny of related-party financing, focusing on ATO Transfer Pricing Risks in Property & Construction. Private groups must ensure their arrangements are commercially justified, properly documented, and structured in a way that aligns with business realities. By embedding best practices into financial planning and following PCG 2017/4, businesses can minimize ATO Transfer Pricing Risks while securing sustainable and efficient funding for property and construction projects.
