Morton: When a 50-Lot Subdivision is Still a “Mere Realisation”

The Full Federal Court decision in Commissioner of Taxation v Morton [2026] FCAFC 31 highlights that even a large-scale land subdivision may still constitute the mere realisation of a capital asset, with factors such as the taxpayer’s role, level of control, and the terms of the development arrangement potentially being significant.

The case involved the subdivision of 10 acres of farmland into 48 residential lots and 2 commercial lots. The Court held that the proceeds were not assessable as income, either:

• as ordinary income under section 6-5 of the Income Tax Assessment Act 1997; or
• as profits arising from the carrying on or carrying out of a profit–making undertaking or plan under section 15-15.

Mr Morton acquired 10 acres of farmland on the outskirts of Melbourne from his father in 1980 to continue farming the land as his family had for many years. In 2010, the land was rezoned, and increasing costs such as rates and land tax meant that continued farming was no longer viable. Mr Morton engaged a developer to subdivide the land and sell it as residential and commercial lots. The development was substantial, involving earthworks, the installation of sewerage and utilities, landscaping, and the construction of roads, kerbing, street signage, bridges, footpaths, and street lighting.

The Court examined the development agreement in detail. Under its terms, the developer was engaged as an independent contractor and assumed all risks associated with the project. It was responsible for undertaking the necessary legal, planning, and regulatory processes to develop and subdivide the land, and was paid a development fee on the sale of the lots. Mr Morton, by contrast, simply retained ownership of the land throughout the process and sold the subdivided lots to purchasers.

Despite the large scale and commercial nature of the development, the Full Federal Court concluded that the transaction amounted to the “mere realisation” of a capital asset.

The outcome can be contrasted with the one reached by the High Court in the well-known case of FCT v Whitfords Beach Pty Ltd [1982] HCA 8 in which undeveloped bushland was acquired by the taxpayer company to secure access to the shareholders’ fishing shacks. Years later, the company’s shareholding changed and its constitution was amended to reflect its new purpose – that the land be developed, subdivided and sold. The land was eventually subdivided into residential lots. The High Court held that this was more than the mere realisation of an asset, it constituted the carrying on of a business of land development.

In both cases:

1. the land was not initially acquired for the purpose of development;
2. at some point, the taxpayer’s intention for the land changed; and
3. the scale of development was substantial.

The Full Federal Court (for the most part) agreed with the primary judge’s reasoning as to why Mr Morton was not carrying on a business of developing land or entering into a profit-making scheme. The most significant factors appeared to be:

1. Mr Morton did not acquire the land with the intention of profiting from its sale.
2. The decision to sell the property was not of his making. The unviability of farming was due to rezoning and increased ownership costs.
3. Mr Morton did not undertake any sophisticated commercial analysis in deciding to sell the land through development.
4. In negotiating with the developer, Mr Morton’s primary concern was not to maximise the sale price, but to ensure that the land could not be used as security for finance and that he would receive a fixed percentage of the proceeds rather than a share of the profit.
5. Most significantly, the taxpayer in Morton played no active role in the development activities and was not involved in obtaining finance. The developer was independently responsible for all works.

Despite the large scale of the development, it did not outweigh the limited nature of Mr Morton’s activities.

In reaching its decision, the Court undertook a detailed examination of the interaction between the asset owner and the developer, whereas TR 92/3 only refers to this very briefly as one of a number of relevant factors in the Commissioner’s view on when profits from isolated transactions are assessable as income.

A large-scale development with a commercial flavour may attract the ATO’s attention, but whether the proceeds are income will ultimately be a question of fact. The fact that these matters continue to be litigated and appealed to higher courts demonstrates that analysing the relevant factors is not straightforward. This creates real difficulty for advisers in guiding clients, particularly before the development agreement has been drafted. The takeaway from Morton is that the structure of the arrangement may be decisive in supporting a “mere realisation” outcome even in large-scale transactions. This is particularly so where the written agreement allocates control, risk, and responsibility to an independent developer.