McR turns 100
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Land development or realising a capital asset? The Morton decision explained

A farmer with an ipad and a red cap on walks through a field of lettuce

The Full Federal Court decision in Morton confirms that not every large‑scale subdivision will be taxed on revenue account.

Despite the subdivision of rural land into 50 lots and a coordinated development process, the Full Federal Court confirmed that the proceeds were not assessable as ordinary income. Instead, they reflected the mere realisation of a long‑held capital asset.

The ATO has since released a decision impact statement, noting that Morton is confined to its facts.

Even so, the decision provides useful guidance for landowners dealing with rezoned or development‑ready land.

Background

David Morton acquired Dave’s Block, part of the wider Morton family farm in Tarneit, from his father in 1980.  The land was continually used for primary production.

In 2010, the land was rezoned from rural to residential, and increasing land tax, together with broader pressures caused by rezoning and urban encroachment, meant farming would become unviable over time.

Mr Morton then entered three development arrangements with a professional developer, Dacland Pty Ltd.  Under those arrangements:

  1. a)     the developer carried out all planning, construction and marketing;
  2. b)     the land was not used as security for development funding; and
  3. c)     the family received a fixed share of sale proceeds.

The land was ultimately subdivided and sold between the 2019 and 2021 income years.

Mr Morton returned the proceeds on capital account. The Commissioner reassessed the proceeds as income, and Mr Morton’s subsequent objection was disallowed.   

Federal Court appeal

The primary judge found that Mr Morton had not embarked on a business of property development and had not entered into a profit‑making undertaking or plan.  Instead, the subdivision and sale of the land was characterised as a mere realisation of a long‑held asset.

In doing so, the Court placed weight on the following factors:

  1. the land was acquired and used for farming over a long period;
  2. the move to development was driven by rezoning and commercial pressure, rather than a profit‑making intention;
  3. the developer was responsible for, and carried out, all substantive development activities; and
  4. Mr Morton did not assume development risk or play an active role in the project.

The Commissioner then appealed to the Full Federal Court.

Why the taxpayer succeeded

The Full Federal Court again considered whether Mr Morton had moved beyond a passive landowner into a business of property development, and whether Mr Morton had ventured Dave’s Block into a profit‑making undertaking or plan.

On the facts, the Full Federal Court found neither.

Key considerations included:

  1. original purpose – the land was acquired and held for farming, not resale at a profit;
  2. continued use – farming continued even after rezoning;
  3. reason for sale – development was driven by external factors, including rezoning and rising holding costs;
  4. limited involvement – the developer controlled all aspects of the project;
  5. no development risk – Mr Morton did not finance or guarantee the development;
  6. no business activity – there was no repetition (which the Full Court treated as neutral), structure or history of development activity; and
  7. risk constraints — Mr Morton insisted that the land not be used as security and that he receive a fixed share of proceeds, demonstrating that he did not seek to maximise profit at any cost.

A key factor was Mr Morton’s adherence to two tenets: the land was not to be used as security and he would accept a fixed share of proceeds, which limited his exposure and pointed away from a profit‑making venture.

Taken together, these factors pointed to a simple realisation of an asset, rather than a commercial venture.

The Commissioner’s argument

The Commissioner argued that the developer was acting on behalf of Mr Morton, such that the development activities should be attributed to him. The Full Federal Court rejected that submission and emphasised that agency is not the relevant test.  It found that the developer acted in its own right, not as an agent. This was central. It confirmed that engaging a developer does not, by itself, mean the landowner is carrying on a business.

Practical takeaways

The ATO’s decision impact statement makes clear that its position is that the decision does not establish a bright-line rule. In particular, the Commissioner stated that the outcome turned on Mr Morton’s specific factual matrix.

For landowners, the following factors remain relevant:

  1. whether the land was acquired with a resale purpose;
  2. what prompted the decision to develop or sell;
  3. the level of involvement in the development;
  4. who bears the commercial risk; and
  5. whether there is any broader business activity or repetition.

The case also highlights the importance of structuring early, and decisions around:

  • who undertakes the development;
  • how the arrangement is documented; and
  • where risk sits,

will shape the tax outcome.

How McCullough Robertson can assist

Before entering into development arrangements, it is important to understand how the ATO is likely to characterise the activity.

McCullough Robertson can assist with:

  • reviewing proposed development structures
  • assessing whether a capital or revenue outcome is more likely
  • structuring arrangements to align with the intended tax position.