ATO cracks down on tax avoidance in the property sector

The ATO has increased its focus on private group funding practices involving international related parties in the property and construction industry.  

In its latest guidance, the ATO targets inbound related party financing arrangements, highlighting concerns around funding practices and taxpayer behaviours within this industry group.
 
This heightened scrutiny signals a stronger enforcement stance to curb tax avoidance among privately owned and wealthy groups with international operations, making it crucial for taxpayers operating in the property sector to ensure compliance and avoid potential adjustments and penalties. 

Key actions for private groups 

To manage risk and align with the ATO’s expectations, private groups in the property and construction industry should: 

• Document the funding options that were realistically available at the time of entering into related party arrangements and the commercial rationale for selecting a particular funding option; 
• Ensure related party financing arrangements reflect market conditions and are properly documented; 
• Maintain documentation to support arm's length interest rates and the quantum of related party debt, including the mix and type of debt, and equity used; 
• Understand and comply with interest withholding tax obligations; and  
• Regularly review and align related party financing arrangements with arm's length terms and conditions as projects develop or market conditions change. 

About the program 

This crackdown is part of the ATO’s Private Wealth International Program, which focuses on privately owned and wealthy groups that have international operations. This includes: 

• companies and their associated subsidiaries with annual turnover exceeding $10m that are not public groups or foreign owned; or 
• Australian resident individuals who, together with their business associates, control net wealth over $5m. 

With the Tax Avoidance Taskforce receiving $1.2b in additional funding in the May 2024 Federal Budget, its enforcement efforts have been extended to 30 June 2028, increasing the likelihood of audits and compliance reviews.  

Risks identified by the ATO 

The ATO has raised concerns around certain taxpayer behaviours in the property and construction industry, including: 

• Non-arm's length terms: Financing arrangements not conducted using terms and conditions expected between independent parties. 
• Funding structure: No or limited equity contributed by the investor resulting in excessive related party debt amounts. 
• Interest rate: Use of interest rates that do not reflect market conditions or raise viability concerns. 
• Deferral of interest payments: Deferring interest payments or crediting to avoid withholding tax. 
• Documentation and evidence: Insufficient documentation to support the transfer pricing positions taken, including interest rates applied and quantum of debt. 
• Failure to repay loans or refinance: Related party loans not repaid after the property sales or when a project has generated sufficient cash flow, or refinanced when practical and better funding opportunities arise.  

Taxpayers with significant related-party financing arrangements, low tax performance, or thinly capitalised Australian operations face the highest risk of being reviewed by the ATO.  

Next steps 

With increased ATO scrutiny, private groups in the property sector should proactively review related party financing arrangements to ensure compliance with arm's length terms and conditions. Maintaining robust transfer pricing documentation and regularly monitoring financing arrangements will be key in managing tax risks and avoiding penalties. 

To discuss how this guidance impacts your business and steps needed to comply, please get in touch.