Full Federal Court confirms capital treatment for subdivided farmland
28/04/2026
Engaging a developer to subdivide and sell long-held farmland does not, by itself, mean the landowner is carrying on a business or running a profit-making scheme. The Full Federal Court's decision in Commissioner of Taxation v Morton [2026] FCAFC 31 reinforces that, on the right facts, sale proceeds can remain capital — not assessable revenue gain.
Background
Mr Morton was a retired farmer who owned land in Tarneit, Victoria, known as ‘Dave’s Block’. The land had been used for farming continuously for many years before it was rezoned from rural to residential use in 2010, making farming increasingly unviable. Mr Morton and his family wanted to get the best value for their land, so they hired a developer to divide it up, prepare it, and sell it as a residential estate.
They signed contracts with the developer, who was given broad control over financing, dividing the land, earthworks, marketing, and selling the land. The developer was responsible for all the costs and activities and was paid a fee based on a percentage of sales. Critically, Mr. Morton insisted that his land not be used as security for any development finance.
The land was subdivided into residential and commercial lots, and settlements occurred between 2019 and 2021. The Commissioner issued amended assessments, treating the sale proceeds as assessable income, on the basis that Mr Morton was either carrying on a property development business or had ventured the land into a profit-making scheme.
Mr Morton disagreed, arguing that the sales represented a one-off gain from selling something he owned, not regular income from business.
Legal issues
The Commissioner argued that the proceeds were assessable income on two alternative grounds under the Income Tax Assessment Act 1997:
- Mr Morton carried on a business of residential development, deeming the land trading stock
- the proceeds arose from a profit-making scheme under section 15-15.
Mr Morton argued that he had done no more than realise a long-held capital asset, by enterprising means.
The decision
The Full Court unanimously dismissed the Commissioner's appeal, affirming the primary judge's conclusion that Mr Morton was merely realising a capital asset.
The Court placed weight on the following factors:
No original profit-making purpose
Mr Morton acquired the land from his father in 1980 to farm, not to develop or sell. The decision to subdivide was driven by external forces — rezoning, rising rates and land tax, and the declining viability of farming.
Limited and passive involvement
Mr Morton played little active role in the development. He did not oversee the project, contribute to planning applications, organise finance, or manage construction. He did not even read the monthly reports the developer provided under the agreement.
Developer bore the commercial risk
The developer was solely responsible for all development costs and financing. Mr Morton's land was not used as security — a condition he had insisted on from the outset. The Court found this to be a highly significant factor distinguishing realisation from business activity.
Developer acted independently, not as Mr Morton's agent in a general sense
While the development agreement contained agency-type and power of attorney provisions, the Court found these were facilitative only and limited to enabling the developer to fulfil Mr Morton's legal obligations, such as executing contracts of sale. They did not convert the developer’s activities into activities carried on by Mr Morton himself.
Scale alone is not determinative
The Court affirmed the well-established principle that the magnitude and the sophistication of a realisation alone does not convert it into a business or profit-making scheme.
Importantly, the Court looked beyond the legal form of the development agreement to its commercial substance — particularly who bore risk, who controlled the project, and whose business the development truly was.
Practical implications
The Morton case is a useful reference point for landowners and advisors navigating the capital/revenue boundary where subdivision is involved. It highlights that outcomes in subdivision cases remain highly fact-dependent. In particular, advisors should focus on:
- who bears financial risk, including funding and security arrangements
- the degree of the landowner’s control and involvement
- the commercial substance of the development agreement
- the landowner’s purpose at acquisition and at the time of subdivision.
The decision sits comfortably alongside earlier cases distinguishing mere realisation from development activity. It reinforces that even modern, large-scale subdivisions can remain capital on the right facts, for example where the landowner lacks development expertise, does not assume financial exposure, and does not exercise significant control over the project. The structure and substance of development agreements should be closely scrutinised.
How SW can help
The Morton decision confirms that tax treatment of land subdivision depends heavily on the specific facts and the terms of the development arrangements. Early and careful structuring of these arrangements is essential.
SW can assist by reviewing development agreements, assessing the risk and control profile of proposed arrangements, and advising on the appropriate tax treatment before transactions are committed to. Please contact your SW advisor to discuss further.
