Selling Your Land for Development Profit or Capital

Morton v Commissioner of Taxation [2025] FCA 336 (Morton).

This case is currently under appeal by the Commissioner

Background

It could be said that the application of the respective taxation principles, as they apply to capital or revenue treatment on the disposal of property (real or intangible), or to other assets such as financial securities, are long held.

Regardless of that position, as in the case of Morton, the determination of the dichotomy between capital or revenue treatment is the subject of facts and circumstance in each case, and whilst taking account of general principles as applied, it reinforces the position that it will always be the subject of interpretation on a case by case basis.

The facts of Morton

The facts in Morton were as follows:

• The taxpayer (David Morton) acquired land was from his father in 1980 as farmland.
• Because of the spread of Melbourne’s urban growth area, the land was rezoned as residential in 2010 which resulted in various developers approaching the taxpayer in relation to the land.
• In 2012, the taxpayer entered into three development agreements with a developer (Dacland), one of which was for development of taxpayer’s portion of the land into residential lots.
• The entire property, comprised 384 acres, of which the taxpayer’s share was approximately 10 acres. The remaining land was held by the taxpayer and his brother as trustees for their respective family trusts. The case concerned the development of the 10-acre parcel of land held by Morton.

The arguments

Primarily, the taxpayer argued the following:

1. He had not acquired the property for the purposes of resale, as such the characterisation of the disposal should be capital (Federal Commissioner of Taxation v The Myer Emporium Ltd(1987) 163 CLR 199).
2. The taxpayer’s involvement in subdividing the land, and organising the sales of subdivided land, were factors consistent with the principle under which the sale proceeds arose from the realisation of a capital asset.
3. The scale of a development alone does not confirm an argument that there is a conversion from that of a capital characterisation to that of an undertaking of a profit making scheme and therefore a revenue characterisation (Statham v Federal Commissioner of Taxation(1988) 20 ATR 228).

The Commissioner argued:

Briefly, the Commissioner argued the following:

• As a matter of principle, the magnitude of the development is relevant to the determination of whether a property development is of a revenue or capital characterisation;
• The work undertaken by the taxpayer was not a mere subdivision; rather, it was a coordinated development on a massive scale, involving significant planning and consultation, and the construction of roads, parkland, services, and other improvements.
• The taxpayer was activated by a desire to achieve the maximum profit and to this end was actively involved in the development;
• The taxpayer maintained involvement and control of the project by requiring the developer to:
  • satisfy him that it had financial resources
  • provide him with an overall budget and milestone proposals, and
  • keep books of account, etc.

The decision

The Federal Court found the following:

1. The taxpayer did not acquire the land with the intention of profiting by its sale.
2. The taxpayer formed the opinion that the farming of the property would eventually become unviable, because of increased rates and land tax.
3. It was persuasive to the Court that the taxpayer continued to farm the property even after the announcement of the rezoning of the land in 2010.
4. The taxpayer played little active role in the development of the property. The taxpayer did not oversee the project, such matters were under the management of the developer.
5. The taxpayer was not involved in obtaining the finance required to undertake the development.
6. The Court was not persuaded that the scale of the development of the property ultimately changes the overall complexion of the taxpayer’s activities. The scale of the subdivision and sale was a product of the size and nature of the farm as an asset in its initial form.
7. The Court did not consider that the taxpayer’s activities were marked by repetition in the relevant sense. The taxpayer only ever developed and sold the land within one greater landholding.

A final matter of interest

Notably, in a similar factual case (Nerang Subdivision Pty Ltd & Ors v Hutson & Anor [2023] QSC 268 (Nerang) where the farm property was inherited and a substantial development was undertaken), but for GST purposes, and in determining whether a disposal of the property was on revenue account, a critical factual position was the entitlement of the taxpayer to income on the basis of a fixed percentage of sales proceeds.  In that case, the Court stated (at paragraph 89):

‘…….In that sense, by entering into and acting in accordance with the terms of the commercial arrangement struck with the Developer, the Owner has pursued an undertaking or scheme that, from the Owner’s perspective, satisfies the description “profit-making”.

It will be interesting to see whether the Commissioner presses this argument in the Full Federal Court.