ATO issues decision impact statement after loss in land development case

The ATO has issued a decision impact statement after the Full Federal Court ruled in favour of the taxpayer in Commissioner of Taxation v Morton [2026] FCAFC 31.

The Court found that David Morton, a retired farmer, did not embark on a business of developing land, nor did he venture his land into a profit-making scheme. Therefore, none of the proceeds from the sale of a 10-acre parcel of land in Tarneit, known as Dave’s Block, were considered assessable income.

Dave’s Block was part of a larger family farm that had been bought by his family in the 1950s. The taxpayer, Morton, acquired Dave’s Block from his father in 1980 and continued to use it for farming and grazing until the mid-2010s.

In 2010, the Morton Farm was rezoned from rural to residential land, resulting in increased rates and land tax that led the taxpayer to form the view that farming Dave’s Block would eventually become unviable.

The taxpayer and his family then entered into three property development agreements with a property development group, Dacland, for the Morton Farm to be developed, subdivided and sold as individual allotments as part of a residential estate. The taxpayer retained ownership of Dave’s Block until the lots were sold.

In his negotiations with the developer, Morton proceeded on the basis of 2 key “tenets” – that the land should not be used as security for loans taken out by the developer to fund the development, and that the Morton family should receive a fixed percentage of the proceeds from each subdivided lot, so that the developer could not artificially inflate expenses so as to reduce the entitlements of the family.

The developer undertook all planning, construction, and marketing activities for the land.

Dave’s Block was subdivided into 48 residential lots and 2 commercial lots. Settlement for the residential lots occurred in the 2019 income year. Settlement for the first commercial lot occurred on 19 October 2020, and settlement for the second commercial lot occurred on 2 July 2021.

The Commissioner of Taxation issued amended assessments to the taxpayer for the 2019 and 2021 income years, which brought proceeds from the sales of the allotments on Dave’s Block into account as assessable income. The taxpayer lodged objections to the assessments, which were disallowed.

In the Full Court decision, the Commissioner of Taxation contended that the developer was appointed to carry out the development ’on behalf’ of the taxpayer as his agent and that he therefore ventured Dave’s Block to a business venture or to a profit-making undertaking or plan. The Court did not accept this.

The Court found that there were many factors that pointed to the taxpayer’s realisation of Dave’s Block as being motivated by factors other than those normally to be expected in a business context. This included that the:

• Land was not acquired with the intention of profiting from its sale by subdivision, the circumstances of sale being motivated because farming on Dave’s Block was not commercially viable;
• Taxpayer did not seek to achieve the maximum available proceeds at any cost and adhered strictly to his 2 ’tenets’, and;
• Taxpayer had little or no involvement as a practical manner in the development of the land, which tends against the notion that he was engaged in any business of property development.

The Full Court agreed with the primary judge’s conclusion that the taxpayer merely realised a capital asset and he therefore did not embark on a business of developing land nor did he venture Dave’s Block into a profit-making scheme.

In its decision impact statement, the ATO said the decision did not change the relevant legal principles concerning whether a taxpayer is carrying on a business and undertaking a profit-making undertaking or plan.

"The decision does not represent any departure from our long-standing approach to property development issues, as articulated in the existing ATO guidance, which continues to provide the relevant analytical framework," it said.

The ATO said this guidance includes Taxation Ruling TR 97/11 and Taxation Ruling TR 92/3.

"We consider that this case turned on its own facts and circumstances and the Court’s acceptance of the credibility of the taxpayer," the Tax Office said.

"Of significance was the fact that the taxpayer strictly adhered to his 2 ’tenets’, firstly that the land could not be used as security for loans taken out by the developer to fund the development and secondly, that the taxpayer should receive a fixed percentage of the proceeds from each subdivided lot, so that the developer could not artificially inflate expenses so as to reduce the entitlements of the family."

The Court determined that this demonstrated that the taxpayer was not willing to take every step possible to maximise the profits received from the development, which led to their finding that the taxpayer did not carry on a business of developing land or venture Dave’s Block into a profit-making scheme.

"We do not consider that the case establishes a principle that where a taxpayer has taken steps to mitigate risk resulting in less profit is being obtained, a conclusion can always be drawn that the activities are a mere realisation," the ATO said.

"Each case will turn on their own facts. The Court considered the relevant facts and formed a view that because the taxpayer had merely realised their asset, they therefore, did not carry on a business of developing land or venture Dave’s Block into a profit-making scheme."

The ATO stated that there are three separate tests and that each one requires its own inducement analysis.

These include whether the taxpayer was carrying on a business of property development under section 6-5, and whether the profit is assessable income under section 6-5, section 15-15, or as trading stock under Division 70.

"We will continue to apply the established legal principles to other cases by undertaking a fact-specific assessment of whether a taxpayer’s activities amount to the carrying on of a business, an isolated profit-making transaction, or the mere realisation of a capital asset," it said.

"This will involve a holistic evaluation of all relevant facts and circumstances, consistent with the law and TR 97/11 and TR 92/3."