[Tax Case] A large-scale land subdivision can be capital gain rather than revenue -- taxpayer wins

A recent case, Commissioner of Taxation v Morton [2026] FCAFC 31, is a significant taxpayer victory and reinforces that even a large-scale subdivision can remain a mere realisation of a capital asset where the landowner remains essentially passive and leaves the development business and risk to an independent developer. The Court's focus was not simply on the size of the project, but on the taxpayer's purpose, conduct, and assumption of risk..

No.1

Case Overview

The Full Federal Court dismissed the Commissioner's appeal and held that proceeds derived by Mr Morton from the subdivision and sale of long-held farming land were capital receipts, not assessable income. The Court found that Mr Morton had merely realised a capital asset in an enterprising way rather than carrying on a business of property development or embarking upon a profit-making scheme.

The decision is now one of the leading authorities on the distinction between:

• a mere realisation of a capital asset; and

• a land development business or profit-making undertaking.

No.2

Facts

Mr David Morton was a retired farmer who owned land known as "Dave's Block" in Tarneit, Victoria. The land had been acquired and used for farming for many decades and was not originally purchased for resale or development.

In 2010, the land was rezoned from rural to residential use. Farming became increasingly uneconomic, and Mr Morton sought to obtain the best value from the land. Rather than undertaking the development himself, he entered into a development agreement with a professional property developer, Dacland.

Under the agreement:

• Dacland controlled the development process.

• Dacland arranged finance.

• Dacland undertook subdivision, planning, marketing and sales activities.

• Mr Morton retained legal ownership of the land until sale.

• Mr Morton did not provide development finance or use the land as security.

• Mr Morton had limited involvement in day-to-day development decisions.

The Commissioner issued amended assessments on the basis that the sale proceeds were ordinary income or statutory income from a profit-making undertaking.

No.3

Issues

The Court considered whether:

1. Mr Morton was carrying on a business of property development;

2. The land had become trading stock;

3. The proceeds were assessable under s 6-5 of the Income Tax Assessment Act 1997 as ordinary income; or

4. The proceeds were assessable under s 15-15 as profits from a profit-making undertaking or scheme.

No.4

Commissioner's Argument

The Commissioner argued that the scale and sophistication of the subdivision project showed that Mr Morton had gone beyond merely selling land and had effectively participated in a commercial land development venture.

The Commissioner contended that:

• the development activities were extensive;

• the subdivision generated substantial profits;

• the land had been committed to a profit-making enterprise; and

• the proceeds should therefore be taxed as income rather than capital gains.

No.5

Mr Morton's Argument

Mr Morton argued that:

• the land had been acquired and held for farming purposes for decades;

• rezoning forced him to reconsider how to realise its value;

• he did not undertake the development himself;

• he deliberately avoided development risk;

• he never intended to become a property developer; and

• the subdivision was simply the most effective method of selling the land.

No.6

Court's Reasoning

1. Long-Term Ownership Was Important

The Court emphasised that the land had not been acquired with a profit-making purpose.

For many years it was used as a farming property and constituted a long-term capital asset. This strongly supported the conclusion that the subsequent subdivision was a realisation of an existing investment rather than a commercial venture.

2. Mr Morton Was Not a Property Developer

The Court accepted findings that Mr Morton was unfamiliar with the technical and commercial aspects of property development and played only a limited role in the project.

The judges noted that the development expertise, management and risk were assumed by Dacland rather than Mr Morton.

3. Allocation of Risk Was Critical

A significant feature of the case was that Mr Morton refused to expose himself to development risk.

The Court repeatedly referred to evidence that:

• he would not allow the land to be mortgaged;

• he would not personally finance the project;

• he insisted on receiving a defined share of sale proceeds; and

• he left the commercial risk to the developer.

The Court observed that Mr Morton was not prepared to "bet the farm" on the success of the development.

4. Development Agreement Terms Mattered

The Commissioner argued that the practical effect of the arrangement made Mr Morton part of the development enterprise.

The Court rejected that submission and emphasised that the contractual terms expressly stated:

• no partnership existed;

• no joint venture existed; and

• the developer acted independently.

The Court held that where contractual provisions are genuine and not a sham, they must be given substantial weight in characterising the relationship.

5. Maximising Sale Price Does Not Equal Carrying on a Business

The Court reaffirmed the established principle from cases such as Whitfords Beach that a landowner may take substantial steps to maximise the value of land without necessarily entering a business venture.

The question is whether the owner has committed the land to a commercial undertaking or has merely realised it to best advantage. On the facts, Mr Morton fell into the latter category.

No.7

Decision

The Full Court held that:

• Mr Morton was not carrying on a business of property development.

• The land was not trading stock.

• The subdivision did not constitute a profit-making undertaking or scheme.

• The proceeds were capital receipts derived on the realisation of a capital asset.

  
  

Accordingly, the Commissioner's appeal was dismissed and the taxpayer succeeded.

No.8

Significance

The decision provides important guidance for landowners whose rural or investment land is rezoned and later developed.

The case confirms that the following factors strongly support capital treatment:

• land acquired for long-term ownership rather than resale;

• absence of an original profit-making intention;

• limited involvement by the landowner in development activities;

• use of an independent professional developer;

• avoidance of development finance and commercial risk; and

• contractual arrangements showing that the developer acts independently.

Conversely, a taxpayer is more likely to be treated as carrying on a development business where they personally manage the project, arrange finance, assume development risk, or actively participate in the development process.

References: Commissioner of Taxation v Morton [2026] FCAFC 31, RSM, KPMG, Barristerai