David and Goliath: capital and revenue lessons from Morton
The Full Federal Court’s decision in Commissioner of Taxation v Morton [2026] FCAFC 31 (Morton) shows why proceeds from a large land development can still be capital. It also sets out what landowners should consider before selling or staging the development of long-held land. Morton was an appeal from Morton v Commissioner of Taxation [2025] FCA 336.
Introduction
On 27 March 2026, the Full Court unanimously dismissed the Commissioner’s appeal in Morton. It upheld the primary judge’s finding that proceeds from a large residential subdivision were capital, not income. The Commissioner has not sought special leave to appeal to the High Court.
Mr David Morton, a retired farmer, realised value from a long-held parcel of land by engaging a developer to plan, subdivide and sell it. The Commissioner assessed the net proceeds as income. Both Courts held that the receipts were capital. Mr Morton had simply realised a capital asset in an enterprising way; he did not carry on a land development business or a profit-making scheme.
Morton matters for landowners considering a sale or staged subdivision of long-held land where the line between capital realisation and revenue activity can be hard to draw.
Background and facts
Mr Morton owned a 10-acre parcel called “Dave’s Block” within a larger family holding at Tarneit in Melbourne’s west. His family had farmed the land since the 1950s. Mr Morton bought Dave’s Block in 1980 for $13,500, well before the start of the CGT rules in 1985. The land was rezoned to residential in 2010 as Melbourne expanded.
In 2012, Mr Morton and trusts linked to the Morton family signed development agreements with a specialist developer. The developer would plan, subdivide, service and market the broader estate. Dave’s Block formed one stage of 48 residential and 2 commercial lots.
Wyndham City Council issued planning permits in January 2016. Bulk earthworks and civil construction ran through 2017 and 2018, and the council issued a statement of compliance in January 2019. The parties registered the plan of subdivision covering Dave’s Block in February 2019. The residential lots settled in 2019, and the commercial lots settled in 2020 and 2021. The developer carried out the works and managed the sales process.
The arrangements had these key features:
Mr Morton would not provide development finance or allow the developer to use the land as security for its borrowings;
he granted the developer wide powers to plan, subdivide, market, and sell in his name, including acting under a power of attorney, while retaining title until settlement;
he would receive a fixed percentage of the proceeds from lot sales, rather than a residual profit dependent on the developer’s discretionary expenditure; and
he did not personally manage construction, marketing, sales, or finance, and did not read monthly progress reports.
The Commissioner issued amended assessments for the 2019 and 2021 income years and treated the net proceeds from Dave’s Block as income. The primary judge allowed Mr Morton’s appeal, finding that the proceeds were capital and that the lots were not trading stock or part of a profit-making scheme. The Full Court then dismissed the Commissioner’s appeal.
What were the legal issues?
The appeal raised three questions:
Were the proceeds ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) because Mr Morton was carrying on a land development business, so that the lots were trading stock under section 70-10 of the ITAA 1997?
Were the proceeds statutory income under sections 6-10 and 15-15 ITAA 1997 as profits from carrying on or carrying out a profit-making undertaking or plan?
Were the sales the mere realisation of a capital asset despite the developer’s activity?
Cases such as Californian Copper Syndicate (Ltd and Reduced) v Harris (1904) 5 TC 159, Federal Commissioner of Taxation v Whitfords Beach Pty Ltd [1982] HCA 8, Statham v Federal Commissioner of Taxation [1988] FCA 463, Casimaty v Federal Commissioner of Taxation (1997) 37 ATR 358 and The Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation [1950] HCA 16 set out the principles that separate capital realisations from revenue activities.
These cases often compare a capital asset to a “tree”, and the income from its use to the “fruit”. The question is whether the taxpayer has simply sold the tree to best advantage or has started a business of harvesting and selling fruit.
What was the Full Court’s reasoning?
The Full Court asked whether Mr Morton had committed his land to a business venture or profit-making scheme or had instead sold his land to best advantage by enterprising means. Whitfords Beach and later cases frame that question, which looks at substance over form.
The Commissioner advanced two alternative arguments.
Business and trading stock: The Commissioner said Mr Morton carried on a business of developing and selling land, so the lots were trading stock under section 70-10 and the net receipts were ordinary income under section 6-5. The Full Court held that he did not carry on that business. His passive role, the developer’s independence and risk, and the contractual split of functions led the Full Court to reject any attribution of the development works to him. The lots were therefore not his trading stock.
Profit-making undertaking or plan: The Commissioner also argued that the proceeds were statutory income under sections 6-10 and 15-15 as profits from a profit-making undertaking or plan. The Full Court rejected that argument. Mr Morton’s limited role and risk, and the developer’s responsibility for the works, meant there was no such undertaking by him.
The Full Court rejected the Commissioner’s arguments and agreed with the primary judge that the proceeds were capital for these related reasons.
Acquisition and purpose: Mr Morton acquired Dave’s Block in 1980 as part of a family farming operation, with no purpose of resale at a profit. That purpose was not decisive on its own, but weighed against treating later receipts as income.
Catalyst for sale: External factors drove the decision to sell, including rezoning, urban encroachment, and the practical end of viable farming. That context showed how the family realised value from a long-held asset, not the start of a new property development business.
Role and risk: The developer, not Mr Morton, ran the development. The development agreements gave the developer wide rights to plan, obtain approvals, build infrastructure, market, and sell, including signing sale contracts in Mr Morton’s name under a power of attorney. The agreements said that there was no partnership or joint venture, that the developer acted in its own right, and that the developer bore the commercial risk. Mr Morton did not finance the works, did not allow the land to secure borrowings, and did not manage construction, marketing, or sales. These features were inconsistent with Mr Morton carrying on a land development business or a profit-making scheme.
Price structure: Mr Morton received a fixed percentage of gross sale proceeds from each lot, rather than a share of overall development profit. That structure left commercial risk and control with an experienced developer, was consistent with a landowner selling to best advantage, and supported a capital character.
Scale is not decisive: The development was substantial by area and number of lots. The Full Court treated size as relevant, but not decisive. On these facts, the size of the subdivision reflected the size and location of the asset and market conditions, and not Mr Morton carrying on a business. The Full Court relied on Statham and Scottish Australian Mining.
Repetition: The Commissioner argued that repetition matters less in a single large project. The Full Court accepted that this was a single, isolated disposal and treated the absence of repetition as neutral.
The “tree and fruit” metaphor
Cases in this area often ask whether the taxpayer has sold the tree (the capital asset itself) or has set out to extract and sell fruit in the ordinary course of business. The Full Court’s analysis fits that metaphor. Mr Morton sold the tree after preparatory steps to secure the best price, while a developer ran the commercial venture. The receipts kept their capital character, even though the parties structured the realisation and improved the land to meet planning and market requirements.
Practical implications
Morton has several practical implications for landowners, and their advisors, looking to develop and sell land.
Substantial subdivision can still be a mere realisation
Large earthworks, subdivision into residential and commercial lots, and installing services do not, on their own, turn a sale into income. The sale can stay capital if the landowner limits their role to a structured realisation, and a third-party developer runs the project in its own right and at its own risk. The Full Court treated size as relevant, but not decisive.
Control, risk, and commercial exposure are critical
The way a development deed allocates responsibilities matters. Clauses stating that the developer acts in its own right, that there is no partnership or joint venture, that the landowner does not finance or guarantee borrowings, and that the developer bears commercial risk all weigh against a finding that the landowner carried on a business or profit-making scheme. A fixed percentage of lot sale proceeds, with no exposure to cost overruns or net project losses, also supports a capital character.
Passive involvement supports capital, but passivity is not the only test
Mr Morton did not manage the development. He did not review reports or regularly attend monthly developer meetings, and he relied on others to keep him informed. That passive role supported a capital character, but the result turned on the overall substance of the arrangements, not on any single indicator.
Business and profit‑making scheme arguments are fact sensitive
The Commissioner relied on the size and sophistication of the project, the developer’s appointment as agent for some purposes, and the use of the Mr Morton’s name on sale contracts. Those features can point to a business or scheme in other cases. Here, the wider allocation of control and risk, together with the landowner’s original and continuing purpose, supported the opposite conclusion. Each arrangement requires careful analysis of all the facts.
Documentation should match the intended tax outcome
If a landowner wants to rely on capital realisation, the development deed, sale mechanics and finance arrangements should reflect that intention in substance and form. Provisions that avoid a joint venture or partnership, place commercial risk on the developer, and keep the land outside security packages all support a capital characterisation. The parties must also act consistently with that intention throughout the project.
Landowners can structure realisations without becoming developers
The Full Court accepted that a landowner may use enterprising means to realise a capital asset, including seeking professional help and agreeing to steps that improve saleability, without crossing into the conduct of a business. Courts have long recognised that principle, and Morton confirms it remains sound.
Trading stock arguments will turn on whether there is a business
Land can be trading stock if the owner holds it for sale in the ordinary course of a business. The business case failed here, and so the trading stock argument failed with it. The result may differ if the landowner controls development planning, financing, marketing and sales, bears commercial risk, and repeats similar projects.
Morton is not a safe harbour
Morton does not create a safe harbour for every staged subdivision. The Commissioner’s arguments relied on the project’s size and commercial character. Where the landowner takes a more active role or bears more risk, or where agreements and conduct blur the line between landowner and developer, the position can shift. Taxpayers should obtain advice early as property development activities are an area of ATO compliance focus.
Conclusion
Morton confirms that a landowner can take substantial steps to improve sale value, including a staged subdivision delivered by a specialist developer, without converting a capital realisation into income. The analysis focuses on purpose, control, allocation of risk, the landowner’s role and exposure, and how the parties document and carry out the development. Careful structuring can preserve capital treatment for owners of long-held land.
Cases like this are fact sensitive. The position is uncertain where the landowner bears meaningful development risk, helps fund the project, sets key commercial terms for sales, or carries out similar projects again.
Taxpayers considering a development agreement or sale of subdivided lots should obtain advice early on contract drafting, finance, agency arrangements, sale mechanics, and the revenue/capital distinction. Morton makes the point clear: documentation and conduct that align with a genuine capital realisation give the best protection against a revenue outcome.
Sladen Legal’s Federal Taxes and Dispute Resolution teams acted for Mr Morton at first instance and in the Full Federal Court. Sladen Legal’s Property team prepared Mr Morton’s development agreement.
For more information contact:
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au
Edward Hennebry
Special Counsel
T +61 3 9611 0113 | M +61 428 439 730
Eehennebry@sladen.com.au
Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au
James Gao
Lawyer
T +61 3 9611 0166
E: jgao@sladen.com.au
