Federal Court clarifies tax treatment of land development proceeds

Federal Court of Australia – Taxation | 11 April 2025

In Morton v Commissioner of Taxation [2025] FCA 336 (Morton), the Federal Court (Wheelahan J) delivered a significant decision concerning the tax treatment of proceeds from land development. The case is particularly relevant to landowners who engage in development agreements with third-party property developers and provides a degree of judicial clarity on the long-standing income versus capital dichotomy in taxation law.

Factual Overview

Mr David Morton, a retired farmer, owned a parcel of land in Tarneit, Victoria, known as “Dave’s Block”. The land had been held within the Morton family for several decades and had historically been used for agricultural purposes. Following its rezoning for residential use in 2010, Mr Morton entered into a development agreement with a third-party developer, Dacland Pty Ltd (Dacland), to facilitate the subdivision and sale of the land.

Under the terms of the agreement, Dacland assumed full responsibility for the development works, including obtaining planning approvals, constructing infrastructure, marketing the subdivided lots, and managing the sales process. Mr Morton retained legal ownership of the land until the lots were sold, and he retained a proportion of the gross sale proceeds after payment of a development fee.

The Commissioner of Taxation issued amended assessments for the 2019 and 2021 income years, asserting that the net sale proceeds constituted assessable income, either as ordinary income under s 6-5 or as income from a profit-making undertaking or scheme under s 15-15 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Mr Morton appealed under Part IVC of the Taxation Administration Act 1953 (Cth).

Key Legal Issues

The primary questions before the Court were:

1. Whether Mr Morton was carrying on a business of land development, rendering the land trading stock under s 70-10 of the ITAA 1997.
2. Whether the proceeds arose from a profit-making undertaking or scheme and were therefore assessable as statutory income.
3. Whether, in the alternative, the proceeds represented capital amounts derived from the realisation of a pre-CGT asset.

Judgment and Reasoning

Wheelahan J held in favour of the taxpayer, finding that the sale proceeds derived from Dave’s Block were of a capital nature and not assessable as income.

1. No Business Conducted by the Taxpayer

The Court rejected the proposition that Mr Morton was engaged in a business of land development. His Honour emphasised that:

• Mr Morton did not finance the development or assume commercial risk;
• All substantive development activities were undertaken by the developer.
• Mr Morton did not engage in regular or repetitive land dealings;
• There was no evidence of a business structure, such as record-keeping, financial planning, or active sales management.

The Court found that Mr Morton merely adopted an enterprising approach to realising a capital asset, a principle supported by Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 and Casimaty v FCT (1997) 37 ATR 358.

2. No Profit-Making Undertaking or Scheme

The Court further concluded that Mr Morton had not embarked on a profit-making scheme. Citing FCT v The Myer Emporium Ltd (1987) 163 CLR 199 and Whitfords Beach Pty Ltd v FCT (1982) 150 CLR 355, the Court observed that:

• The land had been acquired and held for farming, not resale.
• The decision to develop the land came many decades after the acquisition.
• Mr Morton’s actions were reactive to rezoning and practical challenges in continuing farming, rather than indicative of a commercial enterprise.

Although Mr Morton sought to maximise the value of his asset, the Court reiterated that such conduct is not inconsistent with the mere realisation of a capital asset: Statham v FCT (1988) 20 ATR 228.

3. Role of the Development Agreement

The Commissioner had placed considerable weight on the development agreement, suggesting that it gave rise to a business relationship or joint venture. However, the Court found otherwise. The agreement expressly denied the existence of a partnership or joint venture (cl 38), and the developer bore the entire burden of execution, financing, and marketing.

While the agreement contained agency and power of attorney provisions (cls 15.7–15.9), these were limited to administrative and executional functions. The developer’s activities were not conducted on behalf of Mr Morton in a manner that would recharacterise the arrangement as a business carried on by the landowner.

Implications for Landowners

This decision reinforces the principle that the mere development and subdivision of land, even on a significant scale, does not of itself transform a capital asset into income-producing trading stock.

The outcome in Morton turned on several critical facts:

• Long-term pre-CGT ownership of the land;
• Use of the land for farming for decades prior to development.
• Reactive and passive role in the development process;
• Delegation of all commercial activity to an independent developer.

Landowners considering similar arrangements should take care to:

• Structure agreements to reflect passive investment intentions.
• Avoid involvement in sales or development decisions beyond what is strictly necessary.
• Maintain clear documentation that delineates the roles of owner and developer.
• Seek professional tax advice to ensure the arrangement does not inappropriately give rise to assessable income under either s 6-5 or s 15-15 ITAA 1997.

Insights for Agricultural Landowners

Many farmers will empathise with the reasons Mr Morton decided to sell his farming property. The encroaching urbanisation brings with it new challenges, impacting farm profitability. Those challenges include the usual impacts of rising land values, with increased rates and barriers to expansion for economies of scale. There are also increased restrictions on the types of alternatives, and more intensive, farming activities that may be conducted on the property, which require buffer zones for neighbouring residents.  

Reducing profitability and soaring land values will lead many farmers on the urban boundary to consider how best to divest of their agricultural holdings.  

The judgment and reasoning in Morton demonstrate how a farmer can genuinely engage the services of an independent property developer to achieve the best price when realising a long-term capital asset, whilst not embarking on a business of developing the land themselves. 

Conclusion

Morton provides welcome clarification for landowners seeking to realise the value of long-held property through structured development arrangements. The decision underscores that where the landowner’s conduct is consistent with the mere realisation of a capital asset, even sophisticated development activity—if undertaken entirely by a third party—will not necessarily give rise to assessable income.

Nonetheless, the case also serves as a reminder that each arrangement must be assessed on its facts. The outcome in Morton was significantly influenced by Mr Morton’s limited involvement, his reactive and passive role in the development, and the character of the development agreement. Future taxpayers should proceed with caution and ensure robust legal and tax planning is in place.

Legislative References

• Income Tax Assessment Act 1997 (Cth):
  • s 6-5 – Income according to ordinary concepts
  • s 15-15 – Profit-making undertakings
  • s 70-10 – Trading stock definition
  • s 104-10(5)(a) – CGT event A1 for pre-CGT assets
• Taxation Administration Act 1953 (Cth):
  • s 14ZZP – Appeals against objection decisions

FOR MORE INFORMATION

For more information, reach out to your local RSM Adviser.