Subdivided Property: Is Your Sale Taxed on Revenue or Capital Account?

If you’re considering subdividing and selling land, one of the biggest tax questions – is whether the proceeds will be treated as a capital gain or as a revenue gain. The answer can significantly affect your bottom line.  

The Morton v Commissioner of Taxation [2025] decision illustrates how difficult the distinction can be. The Commissioner has now appealed the decision to the Full Federal Court.

In this article, we look at the issues the Court was addressing and break down of the the key implications to help landowners avoid an unexpected tax outcome.

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The Tax Consequences of Subdividing and Selling Land

From an income tax perspective, the sale proceeds from the development, subdivision and sale of land are categorised as either:

1. on revenue account (due to either ‘carrying on a business’ of land development, or as an isolated profit-making undertaking or scheme); or
2. on capital account (as a mere realization of a capital asset).

There is often a significantly better tax outcome where a sale is on capital account. For example, where CGT is applicable you:

• may qualify for 50% CGT discount (if held over 12 months).
• may access small business tax concessions.

• may pay no tax at all (if the land is a pre-CGT asset acquired before 20 September 1985).

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Case Study Explained: Morton v Commissioner of Taxation [2025] FCA 336

Morton v Commissioner of Taxation [2025] FCA 336 considers when the development, subdivision and sale of land are on revenue account.  

Briefly, the facts are as follows:

1. Mr Morton (the Taxpayer) owned a parcel of land in Tarneit, Victoria (now a suburb of Melbourne) (Dave’s Block);
2. the Taxpayer’s father had farmed Dave’s Block from the 1950s until his death in 1996;
3. the Taxpayer acquired Dave’s Block in 1980 (making Dave’s Block a pre-CGT asset);
4. in 2010, a significant extension of Melbourne’s metropolitan boundaries occurred, causing Dave’s Block to be rezoned as residential land;
5. the Taxpayer maintained the farm from 1996 to 2015. The farm became increasingly unviable because of property damage, dangerous driving, and eventually increased rates and land tax arising from the urban rezoning of Dave’s Block;
6. the Taxpayer subsequently entered a development agreement with a property development group (the Developer) to develop, subdivide and sell Dave’s Block;
7. following an audit, the Commissioner issued amended taxation assessments for 2019 and 2021, treating the proceeds from sales of allotments on Dave’s Block as assessable income;
8. Morton objected to the assessments, arguing that the sale proceeds were not on revenue account, and were the mere realization of a capital asset in ‘an enterprising way’);

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ATO approach: Subdivided Land Sale Counts as Revenue

The Commissioner argued that the sale was on revenue account, because either:

• Dave’s Block became trading stock for the Taxpayer.
  
  • This was on the basis that the activities occurring on the land amounted to a business being carried on by the Taxpayer; or

• the activities occurring on the land were part of an isolated profit-making undertaking or plan, and thus the profits were assessable.

• the two key issues before the Court were therefore:
  
  • did the activities occurring on the land amount to a business being carried on by the Taxpayer? (i.e. did the land become trading stock); and
  • if no, were the activities occurring on the land part of an isolated profit-making undertaking or plan?  
    Or were they simply the Taxpayer getting the best price on the disposal of a capital asset? (mere realization)

Issue One: Was Dave’s Block trading stock?

Ultimately, the Court determined that Dave’s Block was not trading stock and that the Taxpayer was not carrying on a business. Broadly, this is for the following reasons:

1. the Taxpayer continued farming operations after Dave’s Block was rezoned, and the development agreement was executed;
2. the terms of the development agreement were that the overwhelming majority of the ‘risk/reward’ lay with the developer, rather than the Taxpayer;
3. the Taxpayer was inactive in the development activities of Dave’s Block. Per the development agreement, his involvement was limited. For example, the Taxpayer was not required to mortgage the property (something which occurs under many development agreements);
4. the Taxpayer did not have a business organization, or conduct activities of a commercial nature;
5. the development and sale of Dave’s Block was a once-off isolated disposal and did not constitute the badge of trade marked by repetition;
6. while the development was large, the fact that a development is large scale does not mean that its disposal must be a business” (Statham v Federal Commissioner of Taxation (1988) 20 ATR 228).

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Issue Two: Was Morton’s land development a profit-making undertaking?  

Ultimately, the Court determined that the activities concerning the disposal of Dave’s Block was also not a profit-making undertaking. Broadly, this is for the following reasons:

1. Dave’s Block had been farmed by the Taxpayer’s family for decades. Morton did not acquire Dave’s Block with a profit-making motive;
2. the sale of Dave’s Block ultimately came about due to the growth of Metropolitan Melbourne, essentially making farming activities in the area unviable
3. while the Taxpayer sought to maximise the value of Dave’s Block, he did so in a ‘limited’ way that has been accepted in the Court’s in other decisions as being a mere realisation of a capital asset, done in an enterprising way (such as Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188, Casimaty v FC of T 97 ATC 5135 and Statham v Federal Commissioner of Taxation [1988] FCA 463).

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Implications

Morton’s case represents a win of landowners considering disposing of their long-held land in an enterprising manner, particularly where that involves a development agreement under which the developer bears the majority of the risk.  

However, it is worth noting that:

1. cases of this nature are highly fact-dependent. The outcome may have been different if the landowner was less passive under the development agreement, or perhaps was acquired 25 years ago (not 75 years ago);
2. the case does not consider GST. In recent years, case law has made it clear that it is possible for a subdivision and sale to be on capital account for income tax purposes, yet subject to GST (as an enterprise);
3. a development agreement may have significant transfer duty implications, particularly in Victoria. The development agreements in question were entered into prior to the introduction of the ‘economic entitlement’ provisions; and
4. while the outcome for the Taxpayer is ultimately positive (barring a successful appeal to the Full Federal Court) – it still required a drawn-out dispute with the Commissioner of Taxation.  

Taxpayers with longer term land holdings who are considering selling should seek appropriate professional advice upfront – ideally years before any development and sale.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.