Farmer wins Federal Court case to claim tax-free profits from large-scale land subdivision

The Federal Court in Morton v FCT [2025] FCA 366 (click here) allowed a taxpayer’s appeal against assessments that sought to tax on revenue account the gains made from the subdivision and sale of a family farm. Shortly after the farmland was zoned residential, the taxpayer engaged an external developer to undertake a project which resulted in the sale of 50 lots. As the land was acquired by the taxpayer in 1980, the taxpayer’s gains were treated as the sale of pre-CGT assets and free from income tax.

The Court’s decision was significantly influenced by findings that the taxpayer played little active role in the development and took minimal financial risk. The Court also emphasised that the activities of the developer were not taken to be attributed to that of the landowner and that the mere fact that the development was large in scale did not mean that the taxpayer began to hold the land on revenue account. The Commissioner has appealed the decision to the Full Federal Court. This decision is important for taxpayers considering developing long-term landholdings for sale, or for those taxpayers who may have assessed their gains on revenue account in respect of past transactions.

Why is this case important?

The decision in Morton does not consider any unique tax issues and may be seen as just yet another application of the capital/revenue dichotomy to a particular set of facts. However, this case will be of interest to many taxpayers as the case applies longstanding principles to common landowner and developer arrangements that have been prevalent in recent years.

The ATO have long held a view and have published website guidance material indicating that entering into a development agreement of the kind that the taxpayer did can result in land being held as either trading stock or as a revenue asset. The ATO have assessed many taxpayers on this basis.

Due to the number of developments of farming land that have occurred in the last decade or two, the majority of which have been developed in accordance with a development agreement, the facts in the decision will share many similarities to others who have subdivided and sold land.

Many of the comments in the judgment would appear to conflict with some views expressed by the Commissioner in guidance published related to construction and property development issues. In particular, Wheelahan J’s lack of willingness to attribute the activities of the developer to the owner of the land may be at odds with the Commissioner’s public views to date. Taxpayers who may be impacted by the decision should monitor the outcome of the appeal currently before the Full Federal Court.

What were the facts of the case?

Background

The Morton family owned land in Tarneit in Melbourne’s west which they farmed since the 1950s. The taxpayer, David Morton, and his brother Peter acquired the land from their parents in 1977 which they held as trustees for their respective family trusts. David also acquired a 4.17Ha neighbouring parcel of land from his father in 1980, referred to as “Dave’s Block”. The land continued to be farmed by the family up until 2015.

Following the Victorian government planning update in 2008 expanding its urban growth boundary to bring the farm within the boundary, the Morton family engaged in informal discussions with property developers. The land was rezoned in 2010 as residential land and soon after the Morton family were introduced to a property developer group, Dacland. The Morton family decided to sell the land as farming had become less profitable. Following negotiations with Dacland, three development agreements were executed in November 2012, covering each of the relevant landholdings, one of which included Dave’s Block.

Development agreement

The development agreement that covered Dave’s Block provided for the Developer to undertake all necessary works for a development fee equal to 51.9% of the sales proceeds of the subdivided land. The calculation of the fee was subsequently amended so that the percentage became a sliding scale from 57.9% to 51.9% as the total sales from the development increased.

Budgets for each stage of the development had to be approved by the taxpayer and no works were to commence until sufficient pre-sales were achieved. The taxpayer negotiated so as to not provide a mortgage over his land as security to enable the Developer to finance the project.

The development agreement stated that the Developer would have no interest in the land, the Owner had no interest in the Development and that the agreement would not create any partnership, joint venture or employment relationship between the parties. The Owner appointed the Developer as agent and granted a power of attorney for certain purposes (e.g. to engage with regulatory authorities and execute sales contracts).

Development and sale

The Developer obtained a planning permit in early 2016 and commenced works on Dave’s Block, which was one of 31 stages in the broader development. Contracts of sale were executed in June 2016. Earthworks and civil construction were undertaken between August 2017 and November 2018.

A plan of subdivision was registered in February 2019 covering 48 residential and 2 commercial lots, being land for a petrol station and childcare centre.

Settlement of the residential lots occurred in 2019 income year with the commercial lots being settled in the 2021 income year.

Commissioner’s amended assessments

The Commissioner amended the taxpayer’s assessments to include an additional $3.1 million of taxable income for the 2019 year and $0.66 million for the 2021 year representing the profit made by the taxpayer in respect of the development, subdivision and sale of Dave’s Block.

The Commissioner contended that the taxpayer commenced a business of developing, subdividing and selling land such that the taxpayer derived income according to ordinary concepts from the sale of trading stock of his property development business. Alternatively, the Commissioner argued that amounts in issue were profits arising from the carrying on or carrying out of a profit-making undertaking or plan and assessable as statutory income under section 15-15 of the Income Tax Assessment Act 1997. In either case, it was argued that the taxpayer’s sales were more than a mere realisation of a capital asset as the land came to be held on revenue account once the taxpayer embarked upon the development.

What were the key factors the court considered?

In determining if the taxpayer sold the land on capital or revenue account, Wheelahan J considered nine features of the development that were said to significant in reaching a conclusion in the taxpayer’s favour. These are summarised below:

1. Intention at time of acquisition – The taxpayer clearly acquired the land (in 1980) for the purposes of farming (rather than for resale at profit) and was not an established developer.
2. Difficulties in continuing the farm – Farming the land had become increasingly difficult and unprofitable by 2010. The doubt about the future viability of the farming business made it natural for the taxpayer to consider selling his investment in the land with as little risk as possible.
3. Continuation of farming – The taxpayer continued using the land (even after rezoning occurred) for farming purposes up until 2015 at which time the Developer required the farming activities to cease in order for it to commence construction.
4. Little active role – Although the Development was significant, taxpayer was found to have played little active role in it. He did not oversee or direct the development works. He received monthly reports but likely did not even read them and took no active interest in them. While the taxpayer did negotiate the development fee to ensure he received a fair market value, the desire to achieve a fair price is common to taxpayers who hold assets on revenue or capital account.
5. No involvement in financing – Wheelahan J found it “very significant” that the taxpayer did not take on additional financial risk. He neither borrowed money nor provided a mortgage over his land to the Developer’s financiers. Limiting risk in this way was said to be a factor in favour of finding the sale of the land was a mere realisation of a capital asset than the establishment of a business.
6. Scale of development – Although the scale of the development was significant, it did not result in a change in the character of the taxpayer’s overall activities. It was held that the mere magnitude did not convert the realisation of an asset into a business. It is notable that Wheelahan J’s comments were made in relation to the scale of the entire broader development. The case was only concerned with Dave’s Block (50 lots) which was relatively small in comparison to the broader Morton Farm which culminated in the creation of about 1,632 lots. The gain from the sales from the land surrounding Dave’s Block was not in dispute in this case
7. No relevant repetition – Despite the taxpayer ultimately selling some 50 subdivided lots, he had only sold land as part of one greater landholding and had never undertaken other land development projects. The development in this case was essentially an isolated disposal.
8. Agency and power of attorney did not alter outcome – While the taxpayer established an agency relationship with the Developer and granted it a power of attorney for limited purposes, this did not result in the conduct of the Developer being attributed to the owner. The judgment involves a detailed analysis of this issue with Wheelahan J emphasising how the taxpayer’s activities were separate from that of the Developer’s and not to conflate the two. The authority to act as agent and power of attorney were limited in scope and only granted for certain purposes under the Development Agreement (i.e. to fulfil certain obligations owed by taxpayers under the agreement). The Developer was not otherwise an agent of the Developer in a general sense. Ultimately the Developer was not found to have been engaged to conduct a business on the taxpayer’s behalf.
9. Planning approvals for subdivision of broad acres necessitates multiple steps – The sale of a large parcel of land by subdivision was said to inevitably involve activities such as the construction of footpaths, road and infrastructure as an essential condition of obtaining council approval, rather than an indicator of undertaking a business to maximise profits.

What was the ultimate conclusion?

The Court allowed the taxpayer’s appeal against the tax assessments with the result that none of the profits from the development were taxable.

The Commissioner has since lodged an appeal to the Full Federal Court against the decision.

Although it was not necessary to decide, the Court also considered what date the land would start to be held on revenue account if the decision that it was always held on capital account was incorrect. The Court found that this would have occurred in November 2012 when the development agreements were entered into.

This would be a relevant consideration in determining what “market value step-up” the taxpayer would obtain. The earlier the date the land begins to be held on revenue account is likely to mean a lower market value cost that can be taken into account when calculating the taxable profit that resulted from the sales. Any gain up to that particular point in time would have been on capital account, and in this particular case, disregarded as a gain from the disposal of a pre-CGT asset.

The taxpayer also disputed the November 2012 value of the land that the Commissioner relied upon in making his amended assessments, but this issue was not considered in the case as it was unnecessary to decide.

What are the key takeaways from the case?

While the decision is on appeal it may be premature to draw any significant conclusions from the case. Further, the outcome of capital/revenue cases are highly dependent on an overall consideration of the totality of unique facts, and it can be dangerous to simply draw analogies between some of the facts in a previously decided case and a separate situation.

Nevertheless, taxpayers who are undertaking land subdivisions should be familiar with this decision and consider the reasons in the judgment carefully when considering if, and when, their land may come to be held on revenue account and whether they can access CGT concessions (including the 50% CGT discount, small business concessions or pre-CGT exemptions) in respect of its sale. The decision is particularly relevant for those who have held faming land and decide to subdivide and sell some or all of the land following its rezoning as residential land.

Finally, it is worth noting that the Development Agreement in this case would likely trigger stamp duty liabilities in Victoria under the economic entitlement rules if entered into today as the Developer was remunerated in a way that let them participate in the proceeds of sale of the land. Different outcomes may also occur under the economic entitlement provisions, depending on how the fee is calculated (e.g. cost plus or profit basis). This can add another layer of complexity when considering these arrangements in Victoria.

GST considerations

The case may also be relevant when considering any GST implications. While these issues were not considered in the case, if the taxpayer was not registered for GST, the conclusion that the land was on capital account may be relevant in determining whether the sales constituted turnover for GST purposes and ultimately whether this required him to remit any GST from the sales proceeds. Note however that the outcomes under income tax may differ from GST outcomes, as was expressed by the Administrative Appeals Tribunal in Collins Retirement Fund v FCT [2022] AATA 628.

What are the next steps?

Clients should contact their Pitcher Partners representative to review their existing arrangements and determine what action is required in light of this court decision.