Morton’s Case and Mere Realisation

The Federal Court recently handed down its decision in Morton v Commissioner of Taxation [2025] FCA 336 (Morton’s Case). [Note: the Commissioner has now appealed this decision.]

Essentially, the taxpayer (David Morton) owned and farmed pre-CGT land in what is now the Melbourne suburb Tarneit, and with the growth of Melbourne’s urban footprint, entered into an agreement with a developer who developed the property into residential subdivision lots for sale.

The entire property, referred to as Morton Farm, comprised 384 acres, of which David’s property (Dave’s Block) was approximately 10 acres with the balance of land held by David and his brother Peter as trustees for their respective family trusts. David acquired Dave’s Block from his father in 1980 and David’s parents transferred the balance of the land into the trusts in 1977. David farmed the land with his father, and after his father death in 1996, he continued to farm the land himself up until 2015. As part of Melbourne’s urban growth plans, the land was rezoned as residential in 2010 which resulted in various developers approaching David in relation to the land. Eventually, in 2012, David entered into three development agreements with a developer (Dacland), one of which was for development of Dave’s Block. Key components of the development agreements were that:

• David did not allow the developer to use the land as security for the development;
• David was seeking a fixed percentage of the sales proceeds;
• David appointed the developer as his agent and provided them with a power of attorney, essentially to facilitate an efficient process for completing documentation, etc relating to the development;
• there was no partnership, no joint-venture, or an employment relationship between David and the developer;
• the developer was required to undertake the development and carry out the development works (including the day to day management and administration of the development) in a proper and business like manner to a standard not less than an experienced property developer, but otherwise those actions were done at the discretion of the developer; and
• the developer could not sell any portion of the land ‘englobo’.

The development works included planning applications; organise project finance; construction of land improvements including earthworks, landscaping, infrastructure construction (roads, water, sewerage, draining, footpaths, lighting and utilities; supervision of contractors; administration; setting sale prices, marketing and sales contracts.

The total property was developed across 31 stages into 1,632 lots, with Dave’s Block representing stage 15 and comprising 48 residential lots and two commercial lots.

Broadly, David agreed to pay a Developer’s Fee at a fixed percentage of the sale proceeds (approx. 58%), resulting in David retaining a fixed percentage from the sale proceeds of each lot (approx. 42%).

David lodged his tax returns for the 2019 and 2021 income years (the years in which sales of the lots from Dave’s Block were settled) on the basis the sale proceeds were the mere realisation of a pre-CGT asset. The Commissioner issued amended assessments on the basis the sale proceeds were assessable income, either from carrying on a business or profit making scheme undertaking or scheme. David’s objections to the assessments were disallowed, resulting in an appeal to the Federal Court.

David’s Position

David’s primary submission was that no income tax was payable because the sale proceeds represented the proceeds of the realisation of a pre-CGT capital asset, as:

• he was not carrying on a business, and so the property was not trading stock;
• he never entered into a profit making undertaking or scheme;
• he simply realised the value in an enterprising way such that all proceeds of sale were capital sums derived from realising his long-standing landholding.

David relied on five main propositions:

1. That he had not acquired the property for the purposes of resale, which was in favour of characterising the sale proceeds as the mere realisation of a capital asset, relying on the decision in Myer Emporium.
2. That the realisation was not motivated by factors normally expected in a business context, relying on the decision in Crow.
3. While David sought professional advice and sought to maximise the return from the asset’s realisation, these activities were not inconsistent with realising a capital asset, relying on the decision in Statham.
4. That David’s lack of involvement in subdividing the land, and organising sales of subdivided land, were factors in favour of the sale proceeds arising from the realisation of capital asset, relying on the decision in Casimaty.
5. That the scale and magnitude of a development alone does not convert it into a business or profit making scheme, referring to the decision in Statham.

[Note: other than the decision in Crow v Federal Commission of Taxation (1988) 19 ATR 1565, the above cases (and their references) and the badges of trade, are referred to in the ATO’s Miscellaneous Tax Ruling MT 2006/1, regarding the meaning of entity carrying on an enterprise, and which includes the Commissioner’s view on isolated property transactions and mere realisation of a capital asset.]

David also noted that other factors supporting his position included that:

• he had no interest in the development and this was reflected in the terms of the agreement;
• his involvement was ‘merely passive’;
• the business-like fashion in which the developer carried out activities could not alter the proper characterisation of his actions or intention;
• the developer’s actions could not be seen as relevantly carried out on his behalf;
• the developer was acting to its own commercial advantage;
• in the context of carrying on a business, his activities lacked the badges of trade: a profit motive, acting in a business-like way, keeping books and accounts, and repetition; and
• he was not carrying out a profit making scheme, based on the same five propositions as referred to above.

In relation to the alternative argument, David submitted that even if he was considered to be carrying on a business of property development, or undertaking a profit making scheme, the land did not become trading stock nor ventured into a profit-making scheme in 2012 when he entered into the development agreement for Dave’s Block, but at a substantially later point in time. David noted that the land had not been acquired for the purpose of resale, the land was the principal asset of a farming business which he continued to carry on, he could not carry on a farming business and a development business at the same time, and that neither the developer nor David had taken any steps in relation to preparing the land for sale when the agreement was executed.

Commissioner’s Position

The Commissioner’s submission was that David was carrying on a business or a profit making scheme, noting that:

• the activities of persons appointed by David to carry out those activities would be relevant;
• as a matter of principle, the magnitude of the development is also relevant – stating, the larger the development the more likely that the development will be marked by the badges of trade;
• David was actuated by a desire to achieve the maximum profit and to this end was actively involved in the development;
• by not allowing the property to be used as security reflected David’s assessment of the financial risk to himself;
• David maintained involvement and control by requiring the developer to:
  • satisfy him that it had financial resources;
  • provide him with an overall budget and milestone proposals;
  • ensuring the developer could not sell any of the land ‘englobal’, and
  • keep books of account, etc.
• David had appointed the developer to be his agent and granted a power of attorney for the purposes of the development; and
• While David do not attend meetings, etc, he had appointed others (a friend and his nephew) to attend meetings on David‘s behalf reflecting David taking an active role.

The Decision

The court decided in David’s favour, providing the following nine observations supporting its decision:

1. David did not acquire the land with the intention of profiting by sale.
2. David’s decision to engage with property developers was prompted by changes affecting Dave‘s Block that spelt the end of the viability of his farming business (encroaching urban sprawl, increased traffic, etc), and that David did not pursue a course of conduct to achieve the maximum available proceeds nor at any cost. He stuck to his two tenets: precluding the land from being used as security, and obtaining a fixed percentage of the sale proceeds.
3. David continued to farm Dave’s Block up to 2015, even after the announcement of the rezoning of the land in 2010 and entering onto the development agreement in 2012.
4. The means by which Dave’s Block was developed is significant and ‘what the owner himself did, as well as what was done’ is relevant. Importantly, the judge referred that whatever business-like organisation, books, and accounts existed were not controlled by David, or maintained on his behalf, and that the development agreement provided that there was no partnership, joint-venture, or an employment relationship between David and the developer. It also provided that the agreement did not empower the developer to act as David’s agent otherwise than in accordance with the terms of the agreement. David played little active role in the development of Dave’s Block – he did not: oversee the project; contribute in substance to planning applications; organise project finance; manage the bulk earthworks, landscaping, or construction of roads, footpath, lighting and utilities (these were activities done by the developer).
5. David was not involved in obtaining finance to take on the development and this was a very significant factor in the conclusion that David was not carrying on a business of property development.
6. The scale of the development did not persuade the judge that it ultimately changed the overall complexion of David’s activities. While the development of the Morton Farm occurred on an extensive scale, it was a product of the size of the farm as an asset. The judge did not accept that without more the acreage or the number of lots involved indicated that David was engaged in a business of land subdivision and development. Referring to Statham, magnitude does not convert an undertaking of realisation into a business.
7. David’s activity was not considered to be marked by repetition in the relevant sense.
8. The court was not persuaded that the arrangements between David and the developer, including those relating to agency and power-of-attorney altered the position. While it was beyond doubt that an agency relationship existed, the development agreement placed struct limits on the scope of the agency relationship, emphasising that the developer was not otherwise an agent of Davd’s in any general sense. Further, it was noted that there can be no doubt that a business can be carried on through a manager, but there is a distinction between doing that and contracting to permit an independent business to ply its trade in relation to another person’s property. The judge noted this distinction (at paragraph 168) as follows:

‘A property-owner who engages a person of business to ply his or her trade on the property-owner’s property does not thereby embark upon a new business. To mention some trivial examples, a householder who engages a plumber to fix some pipes before a house is sold does not embark upon a business of plumbing. A car owner who engages a detailer to clean the car before sale does not embark on the business of car detailing. More analogously to this case, although still too simply, a householder who engages a real estate agent to prepare, market and sell a single house does not embark upon a business of real estate agency, or of trading in residential property. … Of course, this case is more complex. The point remains that caution and specificity ae needed before the business like nature of Dacland’s property-development business can be deployed to show that Mr Morton himself was engaged in such a business, rather than engaging the services of that business to assist him in realising a capital asset.’

It was also noted that clauses in the development agreement represented a plain expression of intention that the developer should conduct the development on its own account and not as a manager for David, suggesting the developer was not acting on David’s behalf. The developer bore commercial risk on its own behalf in carrying out the development.

1. The court was not persuaded that evidence concerning planning applications weighed in favour a conclusion that David was carrying on a business. The judge noted:

‘In any event, the sale of a sufficiently large parcel of land by subdivision inevitably involves obtaining planning approvals, and the construction of roads, footpaths, provision for open space, and other infrastructure. Indeed, the Council required these steps to be take as a condition for approving the subdivision of the Morton Farm. The fact that they were carried out is thus not indicative of a desire on the part of Mr Morton to maximise his profits by venturing his property into a scheme to improve and sell it.’

Given the above, the court concluded that at no stage did David embark on a business of developing land, and he never ventured Dave’s Block into a profit-making scheme. As a result no part of the sale proceeds was assessable income and the amended assessments were excessive.

In relation to the alternative submissions regarding the timing of when David would be considered to have commenced carrying on a business (and therefore when the land became trading stock), the court noted that given the decision was that David was not carrying on a business, it is difficult (if not impossible) to determine this. However, they nevertheless addressed this and concluded that:

• if it assumed David’s activities amounted to carrying on a business, the relevant time at which the land became trading stock was when he entered into the development agreement in 2012, as this was the time he frmed the requsitive intention to sell the land;
• if it assumed David’s activities amounted to a profit-making scheme, the relevant time at which the land was ventured into this scheme was also when he entered into the development agreement in 2012.

In addition to the cases already referred to above, the decision referred to a number of other long-standing decisions dealing with property development activities and mere realisation, including

• Californian Copper Syndicate;
• Hudson‘s Bay Co;
• Scottish Australia Mining;
• Williams;
• Stevenson; and
• Whitford’s Beach.

Conclusion

It is often noted that the tax outcome will depend on the specific facts and circumstances of each case. While this is true in Morton’s Case, there are aspects of this decision that will assist taxpayers when considering whether their activities amount to the mere realisation of a capital asset. Particularly, the approach to financial risk (including actions taken regarding obtaining finance for a development, including using the property as security for such finance) and that the actions of an independent entity engaged by a landowner to assist with a development are not, without more, treated as actions done by the landowner.

However, as the Commissioner has lodged an appeal to this decision, we will need to wait until the judicial process completes its course before we see the Commissioner updating MT 2006/1. In the meantime, landowners in a similar position to David Morton will take heart from this decision.

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