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In Commissioner of Taxation v Morton [2026] FCAFC 31, the Full Federal Court delivered a significant ruling on the tax treatment of land development proceeds, clarifying the distinction between a mere realisation of a capital asset and the carrying on of a business or profit-making scheme.
The case, decided on 27 March 2026 by a three-judge panel, arose from an appeal by the Commissioner to an earlier decision of the Federal Court detailed in a prior tax update, finding that a retired farmer’s sale of subdivided farmland caused a pre-CGT capital gain rather than assessable income.
Whilst the case turns on its facts, the outcome provides valuable guidance for landowners, accountants, tax advisers, and legal professionals on how certain property transactions may be characterised for income tax purposes. The decision underscores that a one-off, enterprising but essentially passive sale of a long-held property – even if subdivided to maximise value – may in certain circumstances be treated as a capital realisation rather than an active property development business.
Background of the case
David Morton, the taxpayer in this case, is a retired farmer who owned a parcel of farmland in Melbourne’s western suburbs.
Known as “Dave’s Block,” his 10-acre plot was part of a larger family farm (Morton Farm) that had been in his family since the 1950s. Mr. Morton acquired Dave’s Block from his father in 1980 (prior to the introduction of CGT) and continued to use it for farming and grazing until the mid-2010s.
Significant changes in the land’s status set the stage for this dispute. In 2010, Dave’s Block was brought within Melbourne’s Urban Growth Boundary and rezoned from rural to residential. This rezoning increased property taxes and made traditional farming economically unviable on that land. Around the same time, Mr. Morton and his family were approached by property developers, and they concluded that subdividing the farm into residential lots and selling them individually would yield the best return.
In November 2012, Mr. Morton entered into a comprehensive development agreement with Dacland (through its subsidiary Tarneit East Development Project Pty Ltd, referred to as “the developer” in the case) to handle the subdivision, development, and sale of Dave’s Block.
Under this agreement, the developer undertook all planning, construction, and marketing activities for the housing estate, while Mr. Morton retained ownership of the land until lots were sold. Key terms of the contract included: the developer’s exclusive right to subdivide and sell the land, the owner’s obligation not to interfere with or duplicate development activities, and explicit clauses stating no partnership or joint venture was created by the agreement. Notably, Mr. Morton assumed no financial risk or burden for the development – he did not finance construction, and the land itself was not used as security for loans. Instead, the developer recouped its costs and generated a profit via a “Development Fee” equal to a percentage of each lot’s sale price.
By 2019-2021, the subdivided lots were sold, generating significant proceeds for Mr. Morton. The Australian Taxation Office (ATO) viewed these proceeds as ordinary income from a property development business (or at least from a profit-making scheme) and issued amended assessments taxing the full amounts as income. Mr. Morton objected, arguing that the proceeds were not income from carrying on a business but rather a one-off, extraordinary capital gain from selling a long-held asset (the family farm land) that had simply been realised in an “enterprising” manner to maximise its value.
The dispute eventually reached the Federal Court. At first instance in 2025 (Morton v Commissioner of Taxation [2025] FCA 336), the primary judge agreed with Mr. Morton’s position. The judge answered a series of specific questions in the taxpayer’s favor – finding that Mr. Morton was not carrying on a business of property development, the land was not trading stock for tax purposes, and the sales did not amount to a profit-making scheme. Instead, the primary judge characterised the arrangement as an innovative but permissible strategy to get the best price for a capital asset – i.e., a mere realisation of a capital asset rather than a business operation. Consequently, the court ordered the tax assessments for 2019 and 2021 to be set aside to remove the subdivision profits from Mr. Morton’s assessable income.
The Commissioner of Taxation appealed this decision to the Full Federal Court, leading to the 2026 FCAFC 31 judgment. The Commissioner argued that the primary judge had erred, contending that the development agreement’s terms and the overall conduct of subdividing and selling indicated that Mr. Morton was effectively carrying on a commercial land development venture or at least a profit-making scheme – making the proceeds taxable as income under either section 6-5 or 15-15 of the Income Tax Assessment Act 1997 (Cth). Mr. Morton maintained that the primary judge was correct: his actions never rose to the level of a business or profit scheme, and the funds remained capital proceeds from selling a principal asset.
Full Federal Court’s reasoning and decision
In the Full Court’s decision, Justice O’Callaghan (with whom Derrington and McEvoy JJ agreed) conducted a thorough review of the facts and applicable law, ultimately dismissing the Commissioner’s appeal and siding with the taxpayer. The Court agreed that Mr. Morton’s profits were on capital account (not assessable as ordinary income) because his activities did not amount to running a property development business or undertaking a discrete profit-making scheme.
- Lack of Business Intention & History: Mr. Morton did not acquire the land with any intent of resale at a profit. He purchased “Dave’s Block” from his father in 1980 for farming purposes, not as a development venture. For 35 years he operated a farm on the property, and only decided to sell due to factors like rezoning and rising costs that made farming unsustainable. These non-commercial motivations for selling (responding to external changes rather than seeking development profits) signaled a capital realisation rather than a preconceived profit scheme.
- One-Off Project & Absence of Repetition: The sale of Dave’s Block was an isolated transaction – part of selling a single, long-held family farm that happened to be very large (over 1,632 residential lots after subdivision). The Court acknowledged the massive scale of the development but cautioned that “mere magnitude of a realisation” does not automatically transform a capital sale into a business or scheme. Unlike a typical property developer, Mr. Morton did not repeatedly buy and sell multiple properties; his only development activity was to prepare and sell this one property. The absence of a pattern of similar transactions or an on-going development operation weighed against finding a business was being carried on.
- Role of the Developer vs. Owner’s Involvement: Under the development agreement, the third-party developer (Dacland) performed virtually all development activities and bore the risks, while Mr. Morton’s role was largely passive. The contract explicitly stated that it did not create a partnership or joint venture, and that the developer would act as an independent contractor in its own right. Mr. Morton had no day-to-day management of the project — he did not arrange financing, oversee construction, or handle marketing; he even continued farming the land until notified to vacate for development work. His limited duties (such as formally signing subdivision documents or approving budgets) were minimal formalities arising from his position as the landowner, not evidence of running a business. The Court emphasised that hiring professionals to assist in selling a property, even through extensive development, does not by itself turn an owner into a property developer.
- No Financial Risk or Trading Stock: A particularly important factor for the Court was that Mr. Morton did not assume financial risk or obligations typical of a developer. He refused to borrow money or allow his land to be used as collateral to fund the subdivision; all development costs were borne by the developer, which would be compensated only from the sale proceeds. The Full Court, echoing the trial judge, noted that when a landowner personally takes on debt or finances improvements to land hoping to sell at a profit, it is more indicative of a business venture rather than a mere asset sale. In this case, however, Mr. Morton’s avoidance of financial risk and reliance on the developer’s independent business pointed to a capital transaction. Furthermore, the land and lots were never treated as “trading stock” on Mr. Morton’s books, reinforcing that he was not operating a trading enterprise with the land.
- External Requirements vs. Profit Motive: The Court also observed that many of the activities undertaken (such as obtaining planning permits, building roads and utilities, setting aside open spaces, etc.) were mandatory steps to subdivide and sell the land in compliance with local government requirements – not necessarily evidence of a profit-driven scheme by the owner. In other words, fulfilling council conditions for subdivision was simply part of “the process of realising a capital asset” and did not transform Mr. Morton into a property developer by itself.
- Agency and Substance Over Form: While the development agreement did appoint the developer as Mr. Morton’s agent for certain limited purposes (e.g. signing sale contracts on the owner’s behalf), the Full Court agreed that this did not mean all of the developer’s extensive activities should be attributed to Mr. Morton for tax characterisation. The Court looked at the substance of the arrangement: aside from necessary acts to transfer title and comply with legal formalities, the developer’s work (planning, construction, marketing) was carried out in the developer’s own business, not as operations of Mr. Morton’s business. The limited agency for specific tasks did not equate to Mr. Morton running a development business in substance. This analysis affirmed that the mere presence of an agency or contractual arrangement does not automatically turn a seller into a “business” operator – one must examine the actual role and risk undertaken by the owner.
Having weighed all these factors, the Full Court concurred with the primary judge that Mr. Morton “merely realised a capital asset” and did not undertake a business or profit-making scheme.
The judges emphasised that profits from selling property are not taxable as ordinary income if the activity amounts to no more than a prudent sale of a longstanding investment, rather than a commercial enterprise. Consequently, the Commissioner’s appeal was dismissed and the original orders (removing the development proceeds from Mr. Morton’s assessable income and awarding him costs) were affirmed.
Legal significance and implications
The decision offers some clarity on the boundary between capital gains and ordinary income in the context of property development by non-developers. The distinction centers on the taxpayer’s purpose and activities:
- Mere realisation of a capital asset: If a taxpayer is simply selling a capital asset (like land) in an isolated transaction, even if they take steps to enhance its value (such as subdividing or improving the land to obtain the best price), the proceeds may be treated as capital rather than income. The Court noted that enterprising actions to maximise value do not, by themselves, change the character of the gain. In Mr. Morton’s case, the property was a family farm of many years, sold due to changed circumstances, and the steps taken (through a developer) were viewed as part of a one-off realisation of that asset.
- Carrying on a business or profit-making scheme: By contrast, if the taxpayer is found to be conducting a business or embarking on a profit-making undertaking, the profits may be taxable as income (either as ordinary income or under specific provisions). Indicators of such business or commercial activity include a pre-existing profit motive at acquisition, conducting the venture in a business-like and systematic manner, repeated or continuous transactions of a similar nature, and the taxpayer’s direct participation in management, financing, and decision-making for the project. The Court referenced established “badges of trade” tests from prior cases (e.g. Whitfords Beach, Statham, Puzey, Crow, etc.) which similarly look at factors like repetition, organisation, and purpose to distinguish business income from capital gains.
In Commissioner v Morton, the Full Court concluded that virtually none of the typical business indicators were present for Mr. Morton:
- He never planned to be a property developer or profit-maker at the time of acquiring or throughout decades of owning the land.
- The subdivision and sale were a response to external events (rezoning, urban development pressures) rather than a proactive commercial venture.
- He delegated all development work to an experienced developer, did not control or manage the process, and was “unwilling to be involved in any active way” in the development activities.
- He took on no entrepreneurial risk – he did not finance the project (indeed, he prohibited using his land as loan security) and was guaranteed a fixed proportion of sale proceeds regardless of the developer’s costs.
- The arrangement was clearly structured to avoid partnership or joint venture; the developer’s business was separate, and its remuneration depended on project success (bearing its own risk).
The result is a reassuring precedent for property owners and tax practitioners: engaging in a one-off development agreement to enhance the value of a property prior to sale will not automatically render the sale on income account, as long as the owner’s overall conduct more closely resembles asset disposal rather than a business operation.
As the Court succinctly put it, “the mere realisation of an asset at a profit does not necessarily render the profit taxable”; the profit is only income if it “arise[s] from the carrying on of a business or a profit-making undertaking or scheme”. The case demonstrates that scale alone is not determinative – even a large subdivision into 1,600+ lots can be a capital sale if it is essentially an involuntary or one-time realisation of an inherited asset rather than part of a continuous development enterprise.
Tax advisors and property owners should, however, exercise caution.
Each case will turn on its facts, and the ATO will undoubtably pay close attention to situations where a landowner engages in significant development activities. If the facts show the owner actively undertook a commercial venture – for example, by continually engaging in land development projects, arranging financing, or otherwise behaving like a developer – the outcome could differ.
The Full Court acknowledged that a taxpayer can carry on a business even with the help of contractors or agents, and even a single project can be a taxable profit-making scheme if it has the commercial character of a business deal. The decisive question may be one of overall impression: did the owner’s actions amount to “committing the land to a business venture or profit-making scheme” or simply selling the land “to the best advantage”?
In Commissioner v Morton, the Court’s clear answer was that Mr. Morton’s case fell on the capital side of that line. For practitioners, this judgment highlights the importance of evaluating intention, arrangement, and level of involvement when advising clients on property sales and development.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
