Federal Court of Australia

Morton v Commissioner of Taxation [2025] FCA 336

ORDERS

THE COURT ORDERS THAT:

1.    By 3.00pm on 14 April 2025, the parties are to confer and submit by email to the Chambers of the Hon Justice Wheelahan proposed orders to give effect to the reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

WHEELAHAN J:

1    The applicant, Mr David Morton, is a retired farmer who was previously the owner of a parcel of land known to his family as “Dave’s Block” in Tarneit, which is now in Melbourne’s west. For many years, Mr Morton — like his father before him — farmed Dave’s Block and adjoining land as one property, to which I will refer as the “Morton Farm”. In 2010, as the urban boundaries of metropolitan Melbourne expanded, the Morton Farm was rezoned as residential land. Over the following years, Mr Morton and his family organised for the Morton Farm to be developed, subdivided, and then sold as individual allotments as part of a housing estate.

2    The respondent Commissioner issued amended assessments of taxation to Mr Morton for the 2019 and 2021 tax years. Those assessments brought proceeds from the sales of the allotments on Dave’s Block into account as assessable income. Mr Morton lodged objections to the assessments, which were disallowed.

3    Mr Morton now appeals to the Court under Part IVC of the Taxation Administration Act 1953 (Cth) from the disallowance of the objections, claiming that the assessments were excessive. Mr Morton bears the onus of showing that the assessments were excessive. In essence, Mr Morton’s claim is that the proceeds from the sales of the allotments that comprised Dave’s Block were capital receipts derived upon the realisation of an asset, and are therefore not assessable as income. Mr Morton claims that the development, subdivision, and sale of Dave’s Block constituted no more than an enterprising means of achieving the best price when realising his capital asset. Mr Morton claims in the alternative that, on the assumption that the proceeds of the sales are assessable as income, the value of Dave’s Block used to calculate his assessable income in the amended assessments is incorrect on grounds to which I will advert later.

4    In response, the Commissioner contends that the amounts in issue are assessable as income on two bases. The first is that in developing, subdividing, and selling the land Mr Morton carried on a business, and therefore Dave’s Block was trading stock for the purposes of Part 2-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), and the amounts in issue are income according to ordinary concepts for the purposes of s 6-5 of the Act. Alternatively, the Commissioner contends that the amounts in issue are assessable as statutory income under s 6-10 of the Act on the ground that, for the purposes of s 15-15, the amounts were profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

5    By order made on 8 December 2023, I fixed six separate questions for an initial hearing. A further two questions concerning the value of Dave’s Block have been deferred to a date to be fixed, as the need for their determination would be contingent upon the answers to one or more of the six initial questions. The six questions now before the Court for determination are –

(1)    Were the sales made in the course of Mr Morton carrying on a business of developing, subdividing and selling Dave’s Block?

(2)    Was Dave’s Block, or any or all of the lots, trading stock of Mr Morton pursuant to s 70-10 of the ITAA 1997?

(3)    If Dave’s Block or any or all of the lots were trading stock of Mr Morton, on which date or dates did Dave’s Block or the lots become trading stock?

(4)    Did Mr Morton enter into a profit-making undertaking or scheme in respect of Dave’s Block?

(5)    If Mr Morton entered into a profit-making undertaking or scheme, on what date was Dave’s Block ventured into that undertaking or scheme?

(6)    Were the sales made pursuant to the profit-making undertaking or scheme into which Mr Morton ventured Dave’s Block?

Background

6    To a substantial degree, the primary facts were not disputed. The issues in the proceeding turn on questions of characterisation and conclusions to be drawn from the primary facts.

The Morton Farm

7    Mr Morton’s father, Colin Morton, was a life-long farmer who purchased around 344 acres of land in Tarneit in the mid-1950s. Along with 40 acres held by Mr Morton’s mother, Alison Morton, which was known as “Alison’s Block”, this land constituted the Morton Farm. The Morton Farm was bisected by a north–south road named Derrimut Road. For the purposes of the eventual development, the land to the west of Derrimut Road was known as “Morton West”, and the land to the east of Derrimut Road was known as “Morton East”.

8    Dave’s Block was a parcel of land of about 4.17 hectares, or 10 acres, in size. Colin Morton subdivided it from his larger holding in 1973, and in 1980 sold it to Mr Morton for $13,500. Dave’s Block abutted the western side of Derrimut Road, making it part of the Morton West development.

9    It is relevant to the Commissioner’s case that Dave’s Block was situated with other blocks that were held by Mr Morton and his brother, Peter Morton, on trust for the beneficiaries of their respective family trusts. These other blocks were referred to as the “Home Block” and the “East Block” and together were referred to in submissions as the “Trust Land”. Those blocks were transferred in 1977 from Mr Morton’s parents to Mr Morton and Peter Morton as trustees of their respective family trusts. The position immediately before the development of the Morton Farm appears to have been that Mr Morton held Dave’s Block both legally and beneficially, and that Mr Morton and Peter Morton held the balance of the Morton Farm as trustees of the family trusts.

10    All of the Morton Farm had been farmed by Mr Morton’s father, Colin Morton, as one property from the 1950s. Initially, Mr Morton’s father ran sheep on the Morton Farm, and from the 1970s he grazed cattle. Mr Morton assisted his father on the farm from childhood. In the early 1990s, Mr Morton increased his involvement with work on the farm as his father grew older. Mr Morton was at this time living in Swan Hill, but travelled regularly to Melbourne.

11    In 1996, Mr Morton’s father passed away. Between 1996 and 2015, Mr Morton continued to work and maintain the farm, which was used for grazing, and from about 2006 for the farming of crops, such as wheat and barley. At this time, Mr Morton was still living in Swan Hill, but he continued to travel regularly to Melbourne and used local subcontractors to help him with the work on the farm. Mr Morton said that he experienced many difficult times running the farm during this time, and that farming became increasingly difficult because of theft, dangerous driving, and property damage in the area.

Overview of the agreements governing the development of the Morton Farm

12    It was in this context that the Victorian government in 2008 published a planning update that foreshadowed changes to the Urban Growth Boundary. Mr Morton formed the view that the western boundary would likely be moved so as to take in Dave’s Block, and the Morton Farm in general. The planning update also led Mr Morton to consider that, having regard to the difficulties he had been experiencing in farming the Morton Farm, the inclusion of the Morton Farm within the Urban Growth Boundary could cause the value of Dave’s Block to increase.

13    Soon after the publication of the planning update, several land developers sought to contact Mr Morton or members of his family to offer their services in relation to the Morton Farm. At around the same time, Mr Morton and Peter Morton discussed how to get the best return from a sale of the Morton Farm. Mr Morton formed the view at this time that subdividing the Morton Farm and selling individual lots would achieve the best possible sale price.

14    In 2009, Mr Morton, Peter Morton, and Peter Morton’s son, Anthony Morton, undertook some informal discussions with developers who had approached them to discuss developing the farm. Nothing came of those discussions at that point. From Mr Morton’s perspective, that was because he was unwilling to make the titles to the properties available to any developer to use as security for the developer’s financing.

15    In 2010, Dave’s Block was brought within the Melbourne Urban Growth Boundary and was rezoned. The rezoning of Dave’s Block resulted in increased rates and land tax that affected the profitability of the farm, which led Mr Morton to form the view that farming Dave’s Block would eventually become unviable.

16    In September 2010, Mr Morton was introduced to Mr John Dwyer of a property development group known as Dacland. Negotiations took place between the Mortons and Dacland in relation to the disposition of the Morton Farm, which led to the preparation of a draft terms sheet, a draft heads of agreement, and finally development agreements. Unexecuted copies of a terms sheet and heads of agreement were tendered. The evidence does not enable me to make a finding as to whether they were executed. In any event, formal development agreements were entered into. I will identify the development agreements briefly, and address more particular features of the development agreement for Dave’s Block later.

17    There were three development agreements, which were varied during their term by three deeds of variation.

18    The first development agreement was subtitled “Property: West – ‘Dave’s Block’, Tarneit”. This agreement was executed on 23 November 2012. It identified the land to which it applied as “[t]he land in certificate of title volume 8973 folio 034, known to the parties as ‘Dave’s Block’, Tarneit, Victoria”. The parties to this agreement were Mr Morton and Tarneit Development Project Pty Ltd, a Dacland company. This company eventually changed its name to “Tarneit East Development Project Pty Ltd”, to which I will refer as “Tarneit East”. To avoid any confusion, it is worth restating that Dave’s Block formed part of the Morton West development, despite its development agreement involving Tarneit East. Nothing turns on this incongruity.

19    The second development agreement was subtitled “Property: West – ‘Homeblock’, Tarneit”. This agreement was also executed on 23 November 2012. It identified the subject land as “[t]he land in certificates of title volume 8973 folio 033 and volume 8739 folio 786, known to the parties as ‘The Homeblock’, Tarneit, Victoria”. This development agreement thus related to the Home Block, which comprised the balance of Morton West. The parties to this agreement were Mr Morton and Peter Morton, as the owners of the land, and Tarneit West Development Project Pty Ltd, which was another Dacland company to which I will refer as “Tarneit West”.

20    The third development agreement was subtitled “Property: Corner Derrimut Road and Dohertys Road, Tarneit”. This agreement was executed on 21 March 2012. It related to “[t]he land in certificate of title volume 10042 folios 477 and 478, located at the corner of Derrimut and Dohertys Road, Tarneit, Victoria”. That land sat on the east side of Derrimut Road and constituted the whole of Morton East. The parties to this agreement were Mr Morton and Peter Morton, as the owners of the land, and Tarneit East.

The Dave’s Block development agreement

21    The terms of the development agreements were material to the Commissioner’s case that Mr Morton was engaged in a business of selling land such that the profit on the proceeds of sale was assessable as income. It is therefore necessary to summarise the main features of the agreements, highlighting aspects on which the Commissioner relied.

22    The Dave’s Block development agreement commenced with recitals, which included the following recital R.4 –

R.4.    The Owner has resolved to dispose of the Land and for that purpose and to maximise the Sale Proceeds from the sale of the Land, has requested the Developer to develop the Land in accordance with this agreement.

23    The “Land” in question was Dave’s Block, and Mr Morton was the “Owner” referred to in the recital.

24    Clause 3.1 of the development agreement was a pivotal clause. It imposed on “the Developer”, Tarneit East, an obligation to develop Dave’s Block –

3.1    The parties agree that the Developer will undertake the Development by performing the Development Works.

25    The expression “Development Works” was the subject of the following extensive definition –

1.21.    Development Works means all works, services, undertakings and conduct required to undertake and complete the Development including but not limited to:

1.21.1.    preparation of applications and submissions in relation to the inclusion of the Land in a PSP and amendment to the Planning Scheme, which includes the Land;

1.21.2.    preparation of applications to obtain the Development Approval (including submissions relating to traffic, flora and fauna and any archaeological submissions including satisfying the requirements of the Aboriginal Heritage Act 2006) or other Approvals, or variations to the Development Approval or other Approvals, including negotiation with objectors;

1.21.3.    construction of any improvements on the Land in accordance with the Development Approval;

1.21.4.    earthworks (including removal of any Contaminant and any remediation works, to the extent necessary to undertake a residential development), landscaping, safety and security works, maintenance of works and incidental work reasonably necessary to complete the Development;

1.21.5.    satisfaction of any notices issued by a Responsible Authority in relation to the Land (including, without limitation, an[y] notice relating to a Contaminant);

1.21.6.    infrastructure for the Development, including (without limitation) roads, transport, water supply, sewerage, drainage, electricity, gas, telecommunication services and reticulation;

1.21.7.    supervision and engagement of contractors;

1.21.8.    determination of covenants or other restrictions over the Land;

1.21.9.    liaising with Responsible Authorities;

1.21.10.    certifying a Plan and obtaining statement(s) of compliance;

1.21.11.    preparation and registration of any plan subdividing and creating lots on the Land;

1.21.12.    development management and administration;

1.21.13.    preparation and letting of tenders or engagement of any other party to undertake any Development Works, including selling agents, landscaping and construction contractors land development consultants;

1.21.14.    preparation and submission of development plan applications;

1.21.15.    setting sale prices for Lots, preparation and negotiation of contracts of sale for the Lots and administering settlements of sale of Lots;

1.21.16.    preparation of marketing plan, brochures, signage, shop displays, advertising, and web site;

1.21.17.    preparation of proposals to prospective providers of Development Finance (including detailed construction costs estimates); and

1.21.18.    representation at any Victorian Civil and Administrative Tribunal or planning panel appearance in relation to the Development.

26    Clause 1.15 defined “Development” to mean “the development of the Land in accordance with the Development Approval and this agreement”. Schedule 1 provided that the “Development Approval” was the planning permit necessary for the development of the land in accordance with the relevant precinct structure plan. Clause 5.1 required Tarneit East to “use its best endeavours to obtain the Development Approval”.

27    Clause 6 dealt with Tarneit East’s right to develop Dave’s Block –

6.    RIGHT TO DEVELOP THE LAND

6.1.    In consideration of the Developer agreeing to undertake the Development in accordance with this agreement, the Owner grants to the Developer the exclusive right to subdivide, develop, market and sell, or arrange the subdivision, development, marketing and sale, of the Land during the Term.

6.2.    During the Term, the Owner must not permit the Land or any part of it to be subdivided, developed, marketed or offered for sale except by the Developer in exercise of its rights under this agreement.

6.3.    For the avoidance of doubt, other than its interest in the Land, the Owner has no interest in the Development.

28    The particular obligations undertaken by Tarneit East were the subject of cl  7 –

7.    DEVELOPER’S RESPONSIBILITIES AND RIGHTS

7.1.    The Developer will:

7.1.1.    undertake the Development;

7.1.2.    perform the Development Works and to do all things reasonable, necessary and desirable to ensure the efficient and economical conduct of the Development Works and the Development;

7.1.3.    negotiate the acquisition of any right, privilege, easements, licences, permits, grants or concessions from adjoining, neighbouring or other owners or occupiers of property, Responsible Authorities or any other person which may be necessary for the Development; and

7.1.4.    provide day to day management and administration of the Development.

7.2.    The Developer will undertake and complete the Development Works, with the intent of maximising the Development Fee, subject to the Developer achieving a reasonable return after deducting Development Costs.

7.3.    Subject to the terms of this agreement, the manner in which the Developer undertakes and completes the Development Works shall be at the discretion of the Developer.

7.4.    The Developer will in accordance with this agreement undertake and complete the Development Works and complete the Development in a proper and business like manner, to a standard not less than that of an experienced residential property developer usually undertaking developments such as the Development.

7.5.    The Developer may engage or enter into contracts with other persons to undertake and complete all or any of the Development Works required of the Developer pursuant to this agreement. The Developer will be responsible for the management and supervision of any persons so engaged or contracted.

…

7.9.    For the avoidance of doubt, nothing contained in this agreement grants or gives to, or creates in, the Developer a beneficial or equitable interest in the Land.

29    Clause 8 required Tarneit East to submit to Mr Morton an overall “Development Budget” and an individual “Stage Budget” for each stage. Clause 8.4 provided that Tarneit East was not to commence any Development Works in relation to a given stage unless Mr Morton had given written approval to the Stage Budget for that stage, or the budget had been determined pursuant to a specified assessment method.

30    Clause 25.3 required Tarneit East to provide Mr Morton with “monthly reports” in relation to matters including “the Development”, “satisfaction and work towards satisfying Milestones”, “statements of Development Costs incurred and comparisons of these to the Budget”, “sales of Lots and settlements”, and “receipt of Sale Proceeds” during the term of the agreement.

31    Mr Morton’s responsibilities and rights were the subject of cl 15 –

15.    OWNER’S RESPONSIBILITIES AND RIGHTS

15.1.    The Owner will provide to the Developer and the Developer’s representatives, agents, employees, contractors and prospective purchasers unfettered access to the Land at all times during the Term and the Developer shall have uninterrupted access to the Land for the purpose of the performance of this agreement.

…

15.4.    For the avoidance of doubt, the Developer will be responsible for all Outgoings in relation to the Land from the date of this agreement and the parties agree that such Outgoings will be a Development Cost.

…

15.6.    From the date of this agreement, the Owner must continue to manage the Land using prudent farm management practices until the Developer notifies the Owner that the Land (or a part of it) is required to be occupied by the Developer for the purposes of the Development.

15.7.    The Owner appoints the Developer as the Owner’s agent to do and perform acts in respect of the Development and the Development Works (which, without limiting the generality of the foregoing, includes the execution of infrastructure and service contracts with Responsible Authorities), for the purpose of undertaking the Owner’s obligations under the agreement.

15.8.    Subject to clause 15.9, the Owner appoints the Developer (and its officers or agents) to be its attorney under power to empower the Developer (or its officers or agents) to do anything requisite or expedient for the Development in the name or on behalf of the Owner which by law must be done by the Owner and cannot be done by the Developer, and the Owner will upon request by the Developer give to the Developer the Power of Attorney. The Owner must not revoke the Power of Attorney unless and until this agreement has been lawfully terminated.

15.9.    The Developer may only exercise a power pursuant to the Power of Attorney if the Developer has asked the Owner to exercise the power and the Owner fails to do so within a reasonable time after the Developer’s request.

…

32    It is worth dwelling upon the agency and power of attorney for which clauses 15.7–15.9 provided. An unexecuted copy of the power of attorney was appended to the development agreement as Schedule 3. The power of attorney was described as a “general power of attorney”: see Collier B and Lindsay S, Powers of Attorney in Australia and New Zealand (The Federation Press, 1992) at pp 7-10. Recital R.3 of the unexecuted copy of the power of attorney, which fairly reflected the effect of the operative part of the instrument, provided –

R.3.    The Owner desires to appoint the Attorney as its limited attorney for the purpose of undertaking the Owner’s obligations under the Agreement including the execution of various documents as are required under the Agreement.

33    Clause 17 of the development agreement required Mr Morton to do all things reasonable, and to execute documents needed for various applications in connection with the development. Without being exhaustive, cl 17 required Mr Morton to execute such documents as might be necessary to allow Tarneit East to obtain planning approvals and other permits.

34    Clause 38 is also notable. Essentially, it declared that the development agreement did not create a partnership, a joint venture, or any employment relationship between Mr Morton and Tarneit East –

38.    NO PARTNERSHIP OR JOINT VENTURE

38.1.    Nothing in this agreement constitutes a partnership or a joint venture or the relationship of employer and employee between the Owner and the Developer and nothing in this agreement authorises or empowers the Developer to act as agent for the Owner, otherwise than in accordance with the terms of this agreement.

38.2.    The Developer will carry out its responsibilities as an independent party and assumes all the risks of so doing.

38.3.    The Developer conducts the Development in its own right and nothing contained in this agreement grants or gives to, or creates in, the Developer a beneficial or equitable interest in the Land.

38.4.    Other than as permitted by this agreement, neither party may represent or warrant to a person that it acts for or on behalf of the other party.

35    The financial arrangements between Mr Morton and Tarneit East were the subject of several clauses. The central clause was cl 21, which provided –

21.     DEVELOPMENT FEE

21.1.    The Owner must pay the Development Fee to the Developer in accordance with Schedule 2.

21.2.    For the [a]voidance of doubt, the Development Fee is not payable in relation to the Excluded Disposals.

36    Schedule 2 dealt with the Development Fee, and how it was to be calculated, paid, and adjusted. Relevantly, cl 1 of Schedule 2 provided –

1.    PART A — DEVELOPMENT FEE: METHOD OF CALCULATION

1.1.    The Owner shall pay to the Developer the Development Fee.

1.2.    The Development Fee in relation to each Lot is to be calculated as follows:

Development Fee = 0.519 x SP

where:

SP     means Sale Proceeds in relation to that Lot, being a sum equal to the sale price (inclusive of GST) for the Lot;

and the Owner must pay any GST on the Development Fee.

37    Clause 32.4 provided that Tarneit East released Mr Morton and indemnified him against claims and liabilities arising out of or in respect of the agreement or the development.

38    Clause 18 provided that Tarneit East was “solely responsible for incurring and paying all Development Costs”. Clause 1.18 defined “Development Costs” to mean the costs and expenses incurred by Tarneit East in relation to the Development Works, including various enumerated items.

39    Clause 19 provided that Tarneit East would determine the terms of any finance relating to the development, and provided that Mr Morton was not required to borrow any money for the purposes of the development, or to guarantee any of Tarneit East’s obligations, and that Dave’s Block must not be used as security for Tarneit East’s finance.

40    Clause 22 dealt with the means by which the Development Fee would be paid to Tarneit East. Mr Morton was obliged by cl 22.1 to open and maintain a “Sale Proceeds Account” into which all sale proceeds were to be deposited. Clause 22.2 provided that Mr Morton and Tarneit East authorised “any person engaged by the Developer or the Owner to distribute the Sale Proceeds … as instructed by the Developer”.

41    Other clauses of the development agreement related to the process for selling subdivided lots on Dave’s Block. Clause 20 provided –

20.    SALE OF LOTS

20.1.    This clause is subject to any other term of this agreement, including without limitation clause 11.

20.2.    The Developer will determine the terms and conditions of the sale of any Lot, including the sale price of the Lot.

20.3.    The Developer is not required to obtain the Owner’s consent to the terms of any sale of a Lot (including the sale price for the Lot), whether prior to entering a contract of sale or otherwise.

20.4.    The Developer may do all things it considers necessary or desirable in its sole discretion to enter into and give effect to the sale of a Lot in the name of the Owner, by way of exercise of the Power of Attorney or otherwise.

20.5.    The Owner must without delay do all things reasonably required by the Developer to enter into and complete any contract of sale for a Lot.

42    Clause 11 provided –

11.    PRE-SALES

11.1.    The Developer must not commence any construction works for a Stage unless contracts of sale for Lots in that Stage with a cumulative value (based on the GST inclusive sale prices under those contracts) of no less than 110% of the Development Costs for that stage have been entered into.

11.2    The Developer must not request the Owner enter into a contract of sale for a Lot in a Stage (or exercise its power under a power of attorney for the Owner to enter into a contract of sale for a Lot) unless:

11.2.1.    the Developer has obtained and given to the Owner a Sale Valuation for the Lot (which may include Sale Valuations for more than one Lot); and

11.2.2. the price of a Lot pursuant to a proposed contract of sale for that Lot is not less than the Sale Valuation in relation to that Lot.

43    There were linked definitions in cl 1 that gave content to the concept of a “Sale Valuation”, but for present purposes it is enough to say that it was ultimately linked to the price that a given lot would realise if sold in particular circumstances.

Variations of the Dave’s Block development agreement

44    In July 2013, Dacland approached Mr Morton and raised concerns about the profitability for Dacland of developing the Morton Farm, in light of increased development costs. Dacland asked Mr Morton to agree to an increase in the Development Fee provided for under the development agreements. A revised Development Fee was negotiated in around November 2013.

45    On 26 March 2014, a deed of variation was executed between Mr Morton (in his capacity as owner of Dave’s Block), Mr Morton and Peter Morton (in their capacity as trustees of the Home Block and Morton East), Tarneit East, Tarneit West, and Dacland Pty Ltd. Clause 4.1 of this first deed of variation replaced clauses 1.2 and 1.3 of Schedule 2 to each development agreement with new clauses 1.2–1.5, which contained a new formula for calculating the Development Fee under each agreement –

1.2    The Development Fee in relation to each Lot is to be calculated as follows:

1.2.1    until the Developer Profit exceeds $30,000,000 – the Development Fee is 57.9% of Sale Proceeds;

1.2.2    when the Developer Profit is equal to or exceeds $30,000,000 but is less than $52,500,000 — the Development Fee is calculated as follows;

57.9% - (Developer Profit – 30,000,000 x 2/3)/2,500,000

1.2.3    when the Developer Profit is equal to or exceeds $52,500,000 – the Development Fee is 51.9% of Sale Proceeds,

noting that in all cases the Development Fee is a % amount (as set out by way of example in the table in clause 1.4).

1.3    The Owner must pay any GST on the Development Fee.

…

1.5    In this Schedule 2:

1.4.1    Approved Project Development Costs means the sum of all Approved Development Costs paid by a Project Developer pursuant to all Project Agreements;

1.4.2    Developer Profit means the sum of all Project Development Fees less Approved Project Development Costs;

1.4.3    Project Development Fees means the sum of all Development Fees paid to the Project Developer pursuant to the Project Agreements.

(Anomalies in numbering as per the deed.)

46    Clause 5 of the first deed of variation also inserted a definition of “Approved Development Costs” as Development Costs that had been both “included in a Development Budget or Stage Budget approved by the Owner” and “incurred or paid up to the amount included in an approved Development Budget or Stage Budget”.

47    On 26 August 2016, a second deed of variation was executed between the same parties to support Dacland obtaining finance. Clause 5.1 of this deed replaced clauses 1.2–1.5 of the development agreements with new clauses 1.2–1.4, which contained another new formula for calculating the Development Fee under each agreement –

1.2    The Development Fee in relation to each Lot is to be calculated as follows:

1.2.1    for the Sales Proceeds up to and including $464,000,000 – the Development Fee is 57.9% of Sale Proceeds for that Lot;

1.2.2    for the Sales Proceeds exceeding $464,000,000 up to $596,000,000 – the Development Fee is 30.9% of Sale Proceeds for that Lot;

1.2.3    for the Sales Proceeds exceeding $596,000,000 – the Development Fee is 51.9% of Sale Proceeds for that Lot,

noting that in all cases the Development Fee is a % amount. A table showing the method of calculation of the Development Fee is included in Annexure A1 and a worked example is included at Annexure A2.

1.3    The Owner must pay any GST on the Development Fee.

1.4    For the avoidance of doubt, the references to “Sales Proceeds” in this Part A of Schedule 2 does not include Sales Proceeds derived from or relating to the Chicken Farm (as defined in clause 8B3).

48    Clause 7 of the second deed of variation inserted a new cl 8C into each development agreement. This new clause provided that Dacland must not require the Morton family to sell any “Englobo Land” without prior written approval at the Morton family’s absolute discretion. “Englobo Land” was defined as land which was not subdivided land.

49    Civil construction works on the Morton Farm development commenced in September 2017, and proceeded in a stop–start fashion, due to Dacland’s difficulties in securing adequate funding for the project. With construction stopped, Dacland obtained funding from new financiers in November 2017.

50    On 22 December 2017, a third deed of variation was executed between the same parties. This deed essentially provided for Dacland to loan funds to Mr Morton and Peter Morton in relation to each of the development agreements, which would be secured against the relevant land. The deed provided that the loans could not be repaid while Dacland had certain finance outstanding. The purpose of this arrangement appears to have been to enable Dacland to lodge caveats over the land, which presumably was significant to Dacland’s financiers.

51    On the same day, a side deed was executed that permitted Dacland’s financiers to step into Dacland’s shoes in the event of a default by Dacland in relation to the development agreements. Again, the purpose of this deed appears to have been to assuage the concerns of Dacland’s financiers about the fact that the Morton Farm properties were not offered by the Morton family and Dacland as security for the project finance.

The development of Dave’s Block

52    To say that Dave’s Block was “developed” conveys only a vague impression of what actually happened to give effect to the development agreement. While some of what follows is addressed in the context of the Dave’s Block development agreement, it is necessary to be specific and concrete about what was actually done to “develop” Mr Morton’s land.

53    On 13 November 2014, the Minister for Planning’s approval of Amendment C188 to the Wyndham Planning Scheme was gazetted. This amendment applied to Dave’s Block, and required land use and development to proceed in accordance with the incorporated Tarneit North Precinct Structure Plan.

54    On 25 January 2016, the Wyndham City Council sent a letter to Urbis Pty Ltd, which had applied for a planning permit. The Council’s letter enclosed the planning permit in relation to application WYP8490/15, which applied to Dave’s Block. The permit contained extensive conditions, as well as references to the requirements of the Tarneit North Precinct Structure Plan. One of the conditions related to a broiler farm near the Morton Farm, and in high-level terms made it necessary for the farm to cease operation before the development could take place. Senior counsel for Mr Morton accepted that the planning permit imposed quite a number of obligations on Mr Morton as the owner, relevantly, of Dave’s Block. It appears from the face of the planning permit that many of these obligations were imposed as conditions precedent to the issuance of a statement of compliance, which would then permit the subdivision of the land.

55    The development of the Morton Farm was conceptually divided into at least 31 stages. The development of Dave’s Block was stage 15. Actual work began on stage 1 of the Morton Farm development on 11 January 2016.

56    By June 2016, conditional contracts for the sale of subdivided lots of Dave’s Block were being executed. Some of the contracts incorrectly described the vendor of the relevant land as Mr Morton and Peter Morton, but this was later corrected to Mr Morton alone by deeds of novation. It was a condition subsequent of the sale contracts that a plan of subdivision be registered within three years of the date of sale. The particular contract to which the Court was taken by senior counsel for Mr Morton was executed on behalf of Mr Morton by a Mr Mark Ackerman in the exercise of a power of attorney.

57    In August 2017, bulk earthworks began on Dave’s Block. Civil construction works on Dave’s Block commenced in September 2017. I have already referred to the stop–start fashion in which development work was carried out, and the variations that were made to the development agreements in order to facilitate Dacland’s obtaining finance.

58    Construction on Dave’s Block recommenced in January 2018, and was completed in November 2018. The work that was carried out as part of the “development” of the Morton Farm, in addition to preparatory design and regulatory work which Dacland organised, involved –

(a)    earthworks, and the installation of sewerage and drainage;

(b)    landscaping and the construction of parks;

(c)    the installation of utilities, including water, electricity, gas, and NBN internet access;

(d)    the construction of roads with line markings, kerbs, median strips, street signs, and bridges;

(e)    the construction of footpaths, driveway crossovers, and bin pads; and

(f)    the installation of street lighting.

59    It was for individual purchasers to build houses on their purchased lots. When doing so, purchasers were bound by a condition of the contracts of sale to comply with certain design guidelines. Those guidelines were promulgated with a view to ensuring that the completed development would be marked by coherent and high-quality design. The guidelines addressed things including the materials and styles that could be used to build a dwelling in the development. For example, the guidelines specified that mock period style features would not be permitted.

60    In this way, the development of the Morton Farm involved carrying out the required legal, planning and regulatory steps to enable the land to be subdivided, landscaped, and for various amenities to be constructed. Essentially, the development involved building the infrastructure needed for a new suburb, albeit without any dwellings.

61    On 18 January 2019, the Wyndham City Council issued a statement of compliance in relation to the subdivision of Dave’s Block. On 5 February 2019, a plan of subdivision covering Dave’s Block was registered.

62    Dave’s Block was subdivided into 48 residential lots and two commercial lots. Settlement on the residential lots for Dave’s Block occurred in February and March 2019. Settlement on a commercial lot set aside for a service station occurred on 19 October 2020. Settlement on a commercial lot set aside for a childcare centre occurred on 2 July 2021.

The amended assessments

63    On 2 August 2022, the Commissioner issued two notices of amended assessment to Mr Morton, relating to the years of income ending 30 June 2019 and 30 June 2021, respectively.

64    The amended assessment for the 2019 year of income assessed Mr Morton to tax on an amended taxable income of $3,301,212, revised from $147,676. The assessment was further amended by a notice issued on 15 June 2023, which provided for an amended taxable income of $3,836,183.

65    The amended assessment for the 2021 year of income assessed Mr Morton to tax on an amended taxable income of $829,713, revised from $169,311. This assessment was also further amended by a notice issued on 15 June 2023, which provided for an amended taxable income of $896,555.

66    It was common ground that the additional amounts upon which Mr Morton was assessed represented the sale proceeds received by him from the sale of subdivided lots of Dave’s Block, net of both the Development Fees paid to the developer and the market value of the land as judged by the Commissioner at the time Mr Morton entered the Dave’s Block development agreement in November 2012.

67    The additional amounts for the 2019 income year reflected the Commissioner’s position that the net proceeds from the sale of the residential lots on Dave’s Block in 2019 were income in Mr Morton’s hands. The additional amounts for the 2021 income year reflected the Commissioner’s corresponding position in relation to certain other lots. Questions of timing were not otherwise explored at the hearing, and I will not consider them further.

68    On 30 September 2022, Mr Morton objected to the amended notices of assessments. On 7 June 2023, decisions were made by the Deputy Commissioner of Taxation to disallow Mr Morton’s objections. As I have already explained, Mr Morton now appeals to the Court against the disallowance of his objection to the amended assessments, on the basis that the amended assessments were excessive.

Evidence

69    The evidence in the proceeding comprised –

(a)    an affidavit of Mr Morton with its annexures;

(b)    an affidavit of Mr Ross Donald Eva, who is an associate of Mr Morton; and

(c)    an index to a filleted version of the court book that was agreed between the parties, which was taken to include the documents referred to in it.

70    Mr Morton and Mr Eva were cross-examined.

Mr Morton

71    I have summarised relevant aspects of Mr Morton’s affidavit evidence in the background section of these reasons. Mr Morton’s account of events was not seriously challenged, and so it is enough to summarise the topics addressed during his cross-examination.

Cross-examination of Mr Morton

72    Mr Morton was cross-examined at length by senior counsel for the Commissioner.

73    Mr Morton was asked about his initial assessment of how to maximise the profit to be made from selling the Morton Farm. Mr Morton said that he had not made any independent inquiries as to the value of the land, but that he considered that the sale price of the land would be maximised if it were subdivided before being sold.

74    Mr Morton was taken to two documents evidencing early negotiations between Dacland and the Morton family that preceded the execution of the development agreements. The first, a draft terms sheet, stated that the projected target financial return to the Morton family was 37.4% of gross revenue from the sale of lots, which “based on the initial feasibility would be $143 million”. Mr Morton stated that this was a negotiated figure, and that he had not conducted his own analysis as to the market value of the Morton Farm. The second document was an unsigned heads of agreement that expressed an intention to include in the final agreement the terms contained in the terms sheet. This document specified that the financial return to the Morton family would be the proceeds from the sale of lots, after the subtraction of a Development Fee that would not exceed 61% of gross sales proceeds.

75    Senior counsel for the Commissioner pressed Mr Morton on whether various contractual documents, including the development agreements, were prepared by solicitors acting for the Morton family. Mr Morton gave evidence that the Dave’s Block development agreement was prepared by his solicitors in accordance with his instructions.

76    As for Mr Morton’s negotiations with Dacland, he explained that the key tenets to which he adhered while negotiating were that the Morton Farm properties should not be used as security for loans taken out by Dacland, and that the Morton family should receive a fixed percentage of the proceeds from each subdivided lot, so that Dacland could not artificially inflate expenses so as to reduce the entitlements of the Morton family. Mr Morton explained that the 51.9% figure that was ultimately included in the development agreements was reached after a negotiation process that followed Mr Morton’s tenets, and which started at a 50/50 split between Dacland and the Morton family. Mr Morton stated that he accepted this division on the basis of his own business sense, rather than any formal analysis.

77    Mr Morton was asked about the insertion of cl 8C in the development agreements, which related to Englobo Land. Mr Morton explained that this clause was inserted to address a concern he held that such land could be sold by the developer. Presumably, this concern reflected Mr Morton’s belief that his family would achieve the greatest financial return by selling the land once fully subdivided, rather than in larger parcels.

78    Mr Morton was also asked questions about the Sale Proceeds Account, for which cl 22 of the Dave’s Block development agreement provided. Mr Morton explained that the Sale Proceeds Account was held through HWL Ebsworth Lawyers, who were the solicitors for Dacland, and who were engaged by Dacland to prepare and implement the contracts of sale of the land. Mr Morton stated that he was not personally given ongoing and complete records of the entries into and out of that account, but that his nephew Anthony probably was.

79    Senior counsel for the Commissioner asked Mr Morton about the monthly reports which cl 25.3 of the Dave’s Block development agreement required Tarneit East to furnish to Mr Morton. Mr Morton stated that he was not sure whether Tarneit East complied with this obligation, and that he had not received the relevant monthly reports or attended monthly update meetings with Dacland. Mr Morton stated that his nephew had attended update meetings with Dacland, but he remained unsure whether his nephew had received monthly reports in accordance with cl 25.3. Mr Morton was taken to documents that appeared to be monthly reports of the kind specified in cl 25.3, one of which noted Mr Morton as an attendee of a meeting held on 25 January 2017 at the offices of Dacland. Mr Morton maintained that he could not recall attending such a meeting.

80    Mr Morton was taken in cross-examination to an email chain from a Senior Development Manager at Dacland to recipients including an email address that Mr Morton accepted to be his own. This email chain concerned a “Monthly Land Owner”, which I understand to be a reference to a meeting. During re-examination, Mr Morton was taken to a passage in his affidavit in which he stated that he was provided updates through landowner reports, but that he did not usually read them. Mr Morton clarified that he could not remember receiving them, but he accepted that he must have received them, though not read them.

81    Mr Morton was asked during cross-examination about arrangements made for the sale of a large lot for the purposes of establishing a service station. Mr Morton accepted that he and his wife had an interest in the company that was the purchaser of the land. Mr Morton was taken to the contract of sale that covered the service station land, and was asked questions about a statement in that contract that “the Land form[ed] part of the Development by the Vendor”. During closing submissions, senior counsel for the Commissioner accepted that this issue was “peripheral” to the case.

Assessment of Mr Morton’s evidence

82    Mr Morton impressed me as an open, honest, and frank witness. Mr Morton gave his evidence in a direct manner, and never struck me as attempting to avoid questions put to him by senior counsel for the Commissioner. I formed a favourable view of Mr Morton as a witness who was aware of his obligation to give honest evidence, and who was doing his best to assist the Court in its task.

83    There were some issues on which Mr Morton’s memory was less than perfect. That is entirely to be expected, given that some of the events that were canvassed during cross-examination took place nearly 15 years ago. For example, Mr Morton was unsure during cross-examination of the precise year during which negotiations with Dacland commenced. This uncertainty, and any others like it, simply reflect understandable limitations on Mr Morton’s memory of events that took place in 2009 or 2010.

84    Throughout cross-examination, Mr Morton conveyed that he was unfamiliar with technical aspects of the development process, including aspects relating to financial arrangements, sales data, planning law, and other legal issues. It was never put to Mr Morton that this picture of his involvement with the development was untrue. It is inherently plausible, given Mr Morton’s occupation and life experiences. I accept in general terms that the world of property development, project finance, and planning law lie outside Mr Morton’s ken.

85    Senior counsel for the Commissioner did not impugn Mr Morton’s credit. Indeed, very few aspects of Mr Morton’s account of events were challenged by senior counsel during cross-examination. Subject to testing that account against the objective evidence, so as to overcome any limitations in Mr Morton’s recollection, I accept Mr Morton’s account.

Mr Eva

86    Mr Eva’s affidavit was short, and addressed confined issues.

87    Mr Eva stated that he was the Managing Director of a company named Realm Residential Land, whose business is to connect landholders with developers, in exchange for a commission.

88    Mr Eva contacted Mr Morton after the State government’s announcement concerning the Urban Growth Boundary, to which I referred at [12] above. Mr Eva and Mr Morton first met in around 2010 or 2011, together with the representatives of a developer. Mr Eva stated that, at this time, Mr Morton communicated that he would not be providing his land as security for any development, and that he did not wish to go into business with a developer.

89    Between 2012 and 2014, Mr Eva remained in contact with Mr Morton, and the two became friends.

90    In around November 2014, Mr Morton asked Mr Eva to attend monthly meetings with Dacland on Mr Morton’s behalf. Mr Eva stated that it seemed clear to him that Mr Morton did not understand the development processes and why things were happening, or not happening. Mr Eva agreed to assist Mr Morton in his capacity as a friend.

91    Mr Eva stated that the first landowners’ meeting was held in January 2015. He also stated that he always attended the meetings, instead of Mr Morton. Mr Eva explained that his role was to ask questions and find out information from Dacland, and to relay that information to Mr Morton in a form that he could understand. Mr Eva also assisted Mr Morton with certain issues that arose over the course of the development, such as the selling of Englobo Land.

92    Mr Eva was briefly cross-examined, largely on the nature of the landowners’ meetings which he attended. Mr Eva stated that these meetings were run informally, and that attention was paid to other developments in the area for the purposes of pricing the subdivided lots on the Morton Farm.

93    Mr Eva’s evidence was not challenged. He struck me as an honest witness, and I accept his evidence.

The submissions of Mr Morton

94    Mr Morton submitted that the amended assessments were excessive to the extent that they included within assessable income the net proceeds of the sale of subdivided lots of Dave’s Block.

95    Mr Morton’s primary submission was that no income tax was payable on the sales, because the sale proceeds represent the proceeds of the realisation of a pre-CGT capital asset: see generally ITAA 1997, s 104-10(5)(a).

96    In particular, Mr Morton submitted that –

(a)    he was not carrying on a business, and so Dave’s Block was not “trading stock” as defined by s 70-10 of the ITAA 1997; and

(b)    he never entered into a profit-making undertaking or scheme so as to make the net proceeds from the sale of Dave’s Block assessable as statutory income.

97    Mr Morton submitted, instead, that he had simply realised the value of Dave’s Block in an enterprising way, such that all the proceeds of sale were capital sums derived from realising his longstanding land holding.

98    In the alternative, Mr Morton submitted that, if he was carrying on a business, then any land that became trading stock did so on a date later than the date assumed by the Commissioner’s amended assessments. Correspondingly, Mr Morton submitted in the alternative that, if he did venture any land into a profit-making scheme, then he did so on a date later than the date presupposed by the amended assessments. Mr Morton submitted that adjusting the relevant dates in this way would affect the market value of the land that was factored in to the amended assessments’ calculation of his net profit. Additionally, Mr Morton submitted that, in any event, the value of the land at any relevant time exceeded the value used by the Commissioner in calculating his taxable income.

99    Mr Morton relied on five main propositions to establish that the net proceeds from the sale of Dave’s Block did not represent the proceeds of a business or a profit-making scheme.

100    First, Mr Morton relied on Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 at 213 (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ) for the proposition that –

if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale … [t]hen, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization.

101    Mr Morton submitted that he had not acquired Dave’s Block for the purposes of resale, which told in favour of characterising the proceeds of doing so as proceeds of the mere realisation of a capital asset.

102    Secondly, Mr Morton submitted that a court will be less ready to find that a realisation of property has the nature of a business transaction in circumstances where the realisation is motivated by factors other than those normally to be expected in a business context: see Crow v Federal Commissioner of Taxation (1988) 19 ATR 1565 at 1573 (Lockhart J). Mr Morton submitted that his decision to sell Dave’s Block was prompted by his advancing years, encroaching urbanisation, his concerns about safety due to increasing traffic, and the anticipated change in the zoning applicable to the land.

103    Thirdly, Mr Morton submitted that it is not inconsistent with realising a capital asset that a taxpayer seeks professional advice, or seeks to maximise the return from the asset’s realisation: see Statham v Federal Commissioner of Taxation (1988) 20 ATR 228 (Statham). In this context, Mr Morton emphasised his unwillingness to finance the project or to be involved in any active way with the development of the land. He submitted that while he did seek to maximise his return from the sale of the land, this was simply a prudent course of action, rather than evidence that he was carrying on a business or involved in a profit-making scheme.

104    Fourthly, Mr Morton submitted that a taxpayer’s lack of involvement in subdividing land, and organising sales of subdivided land, indicates that the sale of land after subdivision amounts to the mere realisation of a capital asset: Casimaty v Federal Commissioner of Taxation (1997) 37 ATR 358 (Casimaty). In Mr Morton’s submission, he was not actively involved in the process of developing Dave’s Block.

105    Fifthly, Mr Morton submitted that the mere magnitude of a development, such as marked the development of the Morton Farm, does not convert it into a business or profit-making scheme: Statham at 233 (Woodward, Lockhart and Hartigan JJ).

106    Mr Morton also relied upon the terms of the Dave’s Block development agreement. In Mr Morton’s submission, the statement in cl 6.3 that Mr Morton had “no interest” in the development accurately reflected the operative terms of the agreement. In particular, Mr Morton relied upon clauses 7 and 15, and the means for calculating the Development Fee under the agreement from time to time. Mr Morton characterised his involvement in the development as “merely passive” and submitted that the business like fashion in which Dacland carried out its activities could not alter the proper characterisation of Mr Morton’s actions or intent. Mr Morton also submitted that the developer’s actions could not be seen as relevantly carried out on Mr Morton’s behalf, in light of the scheme of the development agreement that the developer was to act to its own commercial advantage.

107    Addressing the concept of a business more specifically, Mr Morton submitted that his activities lacked the “badges of trade” which are often relied upon to discern the commencement of a business, namely: a profit motive, acting in a business like way, keeping books and accounts, and repetition. Mr Morton submitted in this context, too, that the developer was not relevantly acting as his agent, such that its activities should be viewed as his own.

108    As for whether he had embarked upon a profit-making scheme, Mr Morton relied upon the same considerations as he raised in support of the submission that his activities amounted to the mere realisation of a capital asset.

109    Mr Morton also made submissions on issues (3) and (6) identified at [5] above. Those issues arose on the hypothesis that Mr Morton had carried on a business, or undertaken a profit-making scheme, and essentially concerned the time at which Dave’s Block became trading stock of that business, or at which Dave’s Block was ventured into the profit-making scheme.

110    Mr Morton submitted that, contrary to the position asserted by the Commissioner, he had not committed his land to the business of property development until substantially later than the date on which the Dave’s Block development agreement was executed. Mr Morton pointed to three reasons in support of that position: first, the land had not been acquired for the purpose of resale; secondly, the land was the principal asset of a farming business, and it was not possible for the land to be committed to farming whilst also committed to the business of property development; and thirdly, neither Dacland nor Mr Morton had taken any step in relation to preparing the land for sale when the agreement was executed. For these reasons, Mr Morton submitted that the earliest date on which the land could have been held as trading stock was when the lots were subdivided in 2019.

111    A key plank of Mr Morton’s submissions on this topic was that a range of steps had to be taken before Dave’s Block could be sold, which had not yet been taken when the development agreement was executed. It was only when these steps were taken, and the land subdivided, that the sales of the land became unconditional.

112    Mr Morton also identified three additional dates before which, in any event, Dave’s Block could not have been trading stock of his business. These dates were: 25 January 2016, when Wyndham City Council issued the planning permit; in 2015, when Mr Morton ceased farming the land; and 16 June 2016, when the first contract of sale was executed. No additional reasoning was advanced in support of these alternative dates.

The Commissioner’s submissions

113    The Commissioner submitted that the net proceeds from the sale of lots on Dave’s Block were assessable income in the hands of Mr Morton, because Mr Morton was engaged either in a business of developing, subdividing and selling his land, or in undertaking a profit-making scheme.

114    The Commissioner accepted, as a starting point, that Mr Morton acquired and used Dave’s Block for the purpose of farming. The Commissioner’s submissions thus focused on the proposition that the subsequent development, subdivision, and sale of the farm land as residential lots with associated amenities constituted the carrying on of a business or a profit-making scheme.

115    Like Mr Morton, the Commissioner submitted that the question whether Mr Morton was carrying on a business fell to be considered by reference to indicative factors, including “badges of trade” such as profit motive, business like organisation, the keeping of books and accounts, the scale of activities undertaken, and the capital employed. In this context, the Commissioner submitted that the activities of persons appointed by Mr Morton to carry out these activities would be relevant.

116    The Commissioner submitted that, as a matter of principle, the magnitude of a development is relevant in answering the question whether a sale of land is more than a mere realisation of a capital asset, because the larger the development, the more likely it is that the development will be marked by the indicative badges of trade.

117    The Commissioner submitted that the work undertaken on Dave’s Block 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 Commissioner characterised the development of Dave’s Block as a “staged part” of the broader development of the Morton Farm, and submitted that the character of the development of the Morton Farm was relevant to the nature of Mr Morton’s activities in respect of Dave’s Block. The Commissioner relied on the features of the development that I have set out at [58] as illustrating the character of the broader development. The Commissioner also relied on the extensive marketing and sales operation needed to dispose of the subdivided lots.

118    The Commissioner submitted that Mr Morton was actuated by a desire to achieve the maximum profit, and to this end was actively involved in the development of Dave’s Block. The Commissioner relied on various features of the development and Mr Morton’s activities as indicating that he was involved in a business, including the following –

(a)    Mr Morton’s decisions were guided by a desire to achieve the maximum available financial return for the land;

(b)    Mr Morton’s reluctance to allow Dave’s Block to be used as security for the developer’s finance reflected Mr Morton’s assessment of the financial risks to himself;

(c)    Mr Morton maintained involvement and some control over the development by taking certain steps, including:

(i)    requiring the developer to satisfy him that it had sufficient financial resources to meet its obligations;

(ii)    requiring the developer to provide him with an overall budget, and a budget for each stage, the latter of which required his approval;

(iii)    requiring the developer to provide him with milestone proposals;

(iv)    ensuring that the developer could not sell any lot for less than the sale valuation for the lot;

(v)    negotiating terms that permitted him not to pay any development costs, or to provide any development finance; and

(vi)    requiring the developer to take steps such as keeping books of account, and providing him with monthly reports.

119    The Commissioner also relied on various other features of the Dave’s Block development agreement, including the stipulation requiring the developer to undertake the development in a business like manner, to a standard not less than that of an experienced residential property developer, and for the purpose of maximising the sale proceeds.

120    The Commissioner emphasised that, pursuant to cl 15.7 of the development agreement, Mr Morton appointed Tarneit East to be his agent, and that Mr Morton granted Tarneit East a power of attorney for the purposes of the development. The Commissioner submitted that the developer’s activities, even when not carried out as Mr Morton’s agent, were nonetheless carried out for his benefit.

121    The Commissioner also submitted that, although Mr Eva was not authorised to act on Mr Morton’s behalf, Mr Eva’s attendance at landowner meetings in Mr Morton’s stead reflected Mr Morton taking an active role in the development.

122    On this basis, the Commissioner submitted that, in undertaking the development of Dave’s Block within the broader Morton Farm development, Mr Morton either engaged in a business or undertook a profit-making scheme. On either view, the Commissioner submitted, the proceeds from the sale of lots on Dave’s Block, taking account of expenses incurred by Mr Morton, ought to be reflected in Mr Morton’s tax liability for the 2019 and 2021 years of income.

123    On the premise that Mr Morton had carried on a business or undertaken a profit-making scheme, the Commissioner also made submissions concerning the date on which Dave’s Block became trading stock of that business, or was ventured into that profit-making scheme. The Commissioner referred to s 70-10 of the ITAA 1997, which provides that “trading stock” includes “anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a *business”. The Commissioner initially submitted that s 70-10 directs attention to the subjective state of mind of Mr Morton. The Commissioner also initially submitted that Dave’s Block became trading stock when Mr Morton formed a subjective intention to sell Dave’s Block in the ordinary course of his business. In closing submissions, however, the Commissioner submitted that s 70-10 in fact directs attention to an “objective intention”.

124    In the Commissioner’s submission, that intention was formed when Mr Morton executed the Dave’s Block development agreement on 23 November 2012. The Commissioner submitted that steps necessary to effect the sale of Dave’s Block in the form of subdivided lots might be relevant to the date on which Mr Morton began to carry on a business, but that assuming Mr Morton was carrying on a business at the relevant time, these events were not determinative of the time at which the requisite intention was formed. The Commissioner submitted that by the time Mr Morton executed the development agreement on 23 November 2012, he had committed the land to being developed, subdivided, and sold in accordance with the terms of the agreement. In this way, an intention to sell Dave’s Block in the ordinary course of his business could be discerned.

Consideration

General principles on mere realisation of a capital asset

125    The general principle upon which Mr Morton relied was stated by the Lord Justice Clerk in Californian Copper Syndicate (Ltd and Reduced) v Harris (1904) 5 TC 159 (Californian Copper) at 165–166 –

[i]t is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit … assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.

…

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

126    In The Hudson’s Bay Co Ltd v Stevens (1909) 5 TC 424 (Hudson’s Bay Co), the Court of Appeal considered a similar question, albeit on very peculiar facts involving a chartered corporation selling parcels of land as they were obtained, over time, under an arrangement with the Canadian and British governments. Cozens-Hardy MR relevantly said at 436 –

The real question is whether this money can be regarded as profits or gains derived by the Company from carrying on a trade or business. In my opinion it cannot. The Company are doing no more than an ordinary landowner does who is minded to sell from time to time, as purchasers offer, portions suitable for building of an estate which has devolved upon him from his ancestors. I am unable to attach any weight to the circumstance that large sales are made every year. This is not a case where land is from time to time purchased with a view to resale; the Company are only getting rid by sale as fast as they reasonably can of land which they acquired as part of a consideration for the surrender of their Charter.

127    More generally, Farwell LJ said at 437–438 –

It is clear, therefore, that a man who sells his land, or pictures, or jewels, is not chargeable with income tax on the purchase-money or on the difference between the amount that he gave and the amount that he received for them. But if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.

…

Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator.

…

It would be different if a landowner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land; or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader.

128    In The Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining), Williams J applied the distinction articulated in Californian Copper to a matter heard in the original jurisdiction of the High Court. The taxpayer company had been incorporated in 1859, with a principal and substantial object of carrying on mining operations. The company purchased certain lands from the Scottish Australian Investment Company, but sold these early in its history. Between 1863 and 1865, the company purchased the “Lambton Freehold Estate”, and proceeded to mine the land continuously until 1924. The company did make some “minor sales” before 1924 — including to enable homes to be built for miners. By 1924, the main coal seam on the Lambton Freehold Estate had been exhausted, and so the company set about subdividing the land. The company constructed roads, built a railway station, granted land to public institutions such as schools and churches, set aside land for parks, and sold a large area to the local hospital. Williams J found at 194 that the company had purchased the Lambton Freehold Estate in order to carry on coal-mining operations. Williams J said at 195 –

The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer business like to carry out.

…

A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset.

129    Williams J found that after 1924 the company “had the land on its hands and it was land which because of its locality and size could only be sold to advantage in sub-division”. Williams J endorsed and applied the statements of principle articulated in Hudson’s Bay Co by Cozens-Hardy MR at 436 and Farwell LJ at 437. He also referred to the Privy Council’s decision in Commissioner of Taxes v British Australian Wool Realization Association, Ltd (in liq) [1931] AC 224 at 252, where Lord Blanesburgh on behalf of the Board refused to entertain the proposition that “a realization … must be a trade because of the bringing into existence of a selling organization made necessary only by reason of the mere magnitude of the realization”. Williams J concluded at 197 that the taxpayer company had not “entered into the business of a land company”, and so the proceeds from the sale of the Lambton Freehold Estate did not represent the proceeds of a business.

130    In Federal Commissioner of Taxation v Williams (1972) 127 CLR 226 (Williams), Mrs Williams was assessed to tax on her share of the net proceeds of the sale of land, of which she was one of three tenants-in-common in equal shares. Mrs Williams’ husband had purchased the land with two others in 1959, knowing the land to be zoned as urban land. In 1962, Mr Williams transferred his interest in the land to Mrs Williams as a gift, on the advice of his accountant. In 1968 and 1969, the land was cleared and subdivided, and most lots were sold. The Commissioner assessed Mrs Williams on her share of the proceeds of sale, subtracting the value of the land as it was in 1962.

131    In the original jurisdiction of the High Court, Stephen J held at 229 that these net proceeds were not assessable income in Mrs Williams’ hands. The critical facts for Stephen J’s assessment included that Mrs Williams had accepted the land as an unsolicited gift, that she had seen the land only once, and that she had taken no active role in the management or development of the land. The development of the land had required subdivision and, to comply with planning requirements, had required street construction, water reticulation and the setting aside of land for a public park. Even taking account of Mr Williams’ actions on behalf of Mrs Williams, and these features of the case, Stephen J concluded that the case was one of mere realisation of a capital asset. Stephen J at 232 considered Mr Williams’ original purpose in acquiring the land to be irrelevant to this conclusion, as s 26(a) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) required an undertaking or scheme carried out by or on behalf of the taxpayer herself.

132    By majority, the Full Court of the High Court dismissed an appeal from Stephen J’s decision. The reasons of the majority essentially aligned with those of Stephen J, with Gibbs J relevantly stating at 249 –

An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage.

133    This statement of Gibbs J accords with Scottish Australian Mining, which was evidently approved by Menzies J at 246.

134    The precedential status of Scottish Australian Mining was left open by the High Court’s decision in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 (Whitfords Beach). In that case, the taxpayer acquired 1,584 acres of land in 1954 for the purpose of securing access for the company’s shareholders to their shacks on the beachfront. On 20 December 1967, all the company’s shares were sold to purchasers who bought them with the intention that the company would cause the land to be developed, subdivided, and sold at a profit. From 1969, the land was rezoned, subdivided, and sold. The principal question before the High Court was whether the proceeds of selling the subdivided lots constituted assessable income in the company’s hands, on the basis that the company had embarked on a profit-making undertaking or scheme.

135    Gibbs CJ at 367 posed the relevant question as follows –

Was what was done merely a realization of the taxpayer’s asset, or was it something done in what was truly the carrying on or carrying out of a business? In other words the question is whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a business of profit-making in land albeit on one occasion only …

(Internal quotations omitted.)

136    At 369–370, Gibbs CJ said that if the events of 20 December 1967 had not occurred, the situation of the taxpayer company would have been analogous to the taxpayer in Scottish Australian Mining. However, as a result of the change in shareholding the purpose of the company was transformed, and the profit-making purpose of the new shareholders was to be attributed to the company, which altered the complexion of the company’s activities, and impressed them with the character of a business venture.

137    After considering the interaction between ss 25(1) and 26(a) of the ITAA 1936, Mason J said at 383 that the “principal, if not the essential, question under the second limb of s 26(a) … is whether more is involved than the mere realization of an asset”. Applying the distinction made in Californian Copper, Mason J said that “it is enough to answer the statutory description that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business”. Like Gibbs CJ, Mason J attributed significance to the events of 20 December 1967, when the taxpayer company “committed the land in question to a profit-making undertaking”, when ownership and control of the company changed hands, when new articles of association were adopted, and when certain other companies were appointed general managers of the taxpayer company. Mason J reasoned at 384 that it was relevant to consider that the purpose of the new shareholders was to execute what, from their point of view, was a profit-making undertaking or scheme, as well as the fact that the shareholders would have been carrying on a business if they had purchased the land, rather than shares in the company.

138    At 384–385, however, Mason J added additional remarks that stood “apart altogether from this factor”. His Honour continued –

I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development.

139    On the facts of Whitfords Beach itself, Mason J held at 385–386 that the receipts in question were the product of the taxpayer company’s carrying on of the business of land development.

140    Wilson J considered Scottish Australian Mining at 398, expressing reservations as to the strength of the analogy between that case and Whitfords Beach. His Honour said –

Williams J. was clearly impressed by the fact that the cessation of mining on the Lambton lands had not changed the essential character of the company. It was still a mining company, not one formed for the purpose of dealing in land. It found itself possessed of land for which it had no further use, and in his Honour’s view set about selling it [in] an enterprising way.

141    For Wilson J, the “distinctive circumstances” of Whitfords Beach essentially related to the events of 20 December 1967, which were “of great significance”. Wilson J clarified that he did not “overlook the observation … that the mere extensiveness of the organization set up to realize an asset does not of itself cause the realization to become a business”, although he did consider it relevant to the question of characterisation. His Honour added at 400 –

I am inclined to question whether some of the earlier cases have not assumed too readily that the conversion of broadacres into residential allotments with all the services and facilities that are requisite to an urban environment is no more than the realization of a capital asset in an enterprising way. But that question need not be pursued here …

142    Accordingly, Wilson J concluded at 400–401 that the taxpayer company had ventured the land into a business, rendering the proceeds from the sale of subdivided lots assessable income.

143    It is not necessary for me to form any concluded view as to the precedential status of Scottish Australian Mining in the wake of Whitfords Beach; each decision turned on its facts. In any event, the decision was not overruled, and the High Court’s decision in Williams remains good authority for the general approach taken in Scottish Australian Mining. In Whitfords Beach, Gibbs CJ appeared to endorse its reasoning, while Mason J expressly disapproved it. If Wilson J disapproved Scottish Australian Mining, he did so obliquely. Murphy J’s brief reasons do not cast any light on the question. Senior counsel for Mr Morton accepted that he could not rely on Scottish Australian Mining “too heavily”.

Application to the development of Dave’s Block

144    Beyond these general principles, as senior counsel for Mr Morton submitted, there is a limit to the benefit that can be derived from closely analysing the facts of previous cases in this area of the law. Indeed, as the Full Court (Wigney, Wheelahan and Feutrill JJ) said in a different context in Landrey v Nine Network Australia Pty Ltd [2024] FCAFC 76; 305 FCR 246 at [74] –

This is a theme that runs through the law. Factual findings in other cases are not binding, and one should not reason from factual conclusions in one case to a factual conclusion in another. The scope and extent of a principle of law may be illustrated by showing the way it has been applied in other cases, but databases of decided cases “should not be ransacked and sentences apt to the facts of one case extracted from their context and treated as propositions of universal application”: Teubner v Humble (1963) 108 CLR 491 at 503 (Windeyer J), quoted in Bus v Sydney County Council (1989) 167 CLR 78 at 89 (Mason CJ, Deane, Dawson and Toohey JJ).

145    The point was made in this specific context by Wilson J in Whitfords Beach at 398 –

In any event, in this area of discourse, where the line between realisation on the one hand and the carrying on of a business on the other is difficult to draw and the decision in each case must depend on its own facts, one cannot do more than receive the way in which other courts have resolved different fact situations as illustrations, but no more than illustrations, of the operation of the basic principles.

146    Or more bluntly, as Gibbs CJ put it at 368, “[s]ince the question to be decided is one of fact, it will be unprofitable to examine the particular circumstances of the various cases in which the question has been discussed”.

147    The following features of the development of Dave’s Block within the broader Morton Farm development are significant to determining whether Mr Morton’s activities constituted either a business of land development, or the undertaking of a profit-making scheme.

148    First, Mr Morton did not acquire the land with the intention of profiting by its sale. Accordingly, his activities fall within the category of case where a landowner who has acquired an asset without a profit-making motive is said to embark upon a business at some later time. As Farwell LJ put it at 437 in Hudson’s Bay Co, the question is whether, “instead of dealing with his property as owner he [has] embark[ed] on a trade in which he use[d] that property for the purposes of his trade”. In this context, I refer to the persuasive observations of Deane J in his dissenting judgment in the Full Court of the Federal Court in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1979) 44 FLR 312 at 330 (noting that the Full Court was reversed on appeal to the High Court, and that the following passage was cited with approval by Ryan J in Casimaty at 374) –

A receipt can constitute the proceeds of sale of an item sold in the course of a business of the vendor and yet be capital. A receipt can be the proceeds of sale of something acquired quite out of the ordinary course of a business and yet, in whole or in part, be income as representing gross profits made in the ordinary course of that business. Thus a goldsmith who sells in his shop his patrimony of a single gold bar does not necessarily receive the proceeds of sale as income merely because he takes advantage of his shop to sell his capital asset more advantageously. On the other hand, the master goldsmith who labours to turn such a gold bar into finely wrought brooches which he displays and sells with his other gold wares, could not be said to receive the whole of the proceeds of sale of those particular brooches as capital merely because the gold from which they had been fashioned had not been acquired by him for the purposes of his business but had been received as a gift from his father. The project builder who acquires a parcel of land as a capital asset and sells it unimproved will not necessarily receive the proceeds of sale as income merely because he uses the selling facilities of his business to sell that single parcel of land. On the other hand, if he subdivides the land into a dozen blocks upon each of which he erects a residence, the profit resulting from the proceeds of sale of the improved lots (after making allowance for the value of the land) will be profit made in the ordinary course of his business as a project builder notwithstanding that the land was acquired as a capital asset for some quite different purpose.

149    The premise that underpins these observations is that one is dealing with an established goldsmith or project builder. Deane J was thus addressing cases in which the question is whether a particular receipt represents profits of an undoubted business; his Honour is not to be understood as suggesting that a person will embark upon a business as a goldsmith simply by turning an inherited gold bar into finely wrought brooches.

150    Secondly, before 2008, Mr Morton had experienced difficult times in farming Dave’s Block because of its increasing proximity to residential areas. It was in this context that Mr Morton had initial conversations with property developers after the Victorian government’s announcement regarding the expansion of Melbourne’s Urban Growth Boundary. Once Dave’s Block was included in the expanded Urban Growth Boundary in 2010, Mr Morton formed the view that farming Dave’s Block would eventually become unviable, because of increased rates and land tax, presumably in addition to the other difficulties he was already encountering. In other words, Mr Morton’s decision to engage with property developers was prompted by changes affecting Dave’s Block that spelled the end for the viability of his farming business. The Commissioner did not challenge the substance of Mr Morton’s account of these events and motivations. They were not of Mr Morton’s making.

151    The Commissioner nevertheless submitted that Mr Morton was actuated by a desire to achieve the maximum profit possible. It is necessary, however, to be careful and specific about the nature of Mr Morton’s desire to achieve the best return for selling his farm. Mr Morton did not pursue a course of conduct calculated to achieve the maximum available proceeds for Dave’s Block, or the Morton Farm more generally, at any cost. Mr Morton adhered to his two “tenets”, which precluded the land from being used as security for finance, and which provided for the Mortons to obtain a fixed percentage of the sale proceeds of subdivided lots. To put it colloquially but quite literally, Mr Morton was not willing to bet the farm on the commercial success of Dacland’s development. He instead wished to change the nature of his investment with as little risk to himself as possible, even if that meant a lower return. Mr Morton only wished to maximise the proceeds received for Dave’s Block and the Morton Farm within these parameters. Indeed, the fact that a sophisticated developer such as Dacland entered into the development agreements compels the inference that Mr Morton left profit on the table to be captured by Dacland, thus making the development worth Dacland’s while. This stands in contrast to a scenario where Mr Morton took on the responsibility of developing the Morton Farm himself, but thereby also gained for himself whatever profits Dacland expected to earn from the development.

152    Thirdly, it is relevant that Mr Morton continued to farm Dave’s Block even after the announcement of the rezoning of the land in 2010, and indeed all the way up to about 2015. Like Ryan J in relation to the arrangements in Casimaty, I consider it significant that Mr Morton continued to farm Dave’s Block even after the development agreements with Dacland had been entered into. Absent any suggestion that Mr Morton did so for the purpose of obtaining a tax advantage, this fact tends to suggest that Mr Morton remained committed to his farming of the land throughout this period. This conclusion does not exclude the possibility that Mr Morton had embarked on a new business of property development, but it does inform the nature of Mr Morton’s activities during this initial period.

153    Fourthly, the means by which Dave’s Block was developed are significant. As Jenkinson J said in Stevenson v Commissioner of Taxation (1991) 29 FCR 282 (Stevenson) at 290, “what the owner himself did, as well as what was done” is relevant to the question at hand. I respectfully agree with his Honour that this is implicit in the reasons of Woodward, Lockhart and Hartigan JJ in Statham, especially at 235–236. In that case, the Full Court considered it significant that the taxpayers relied on the municipal council “to itself carry out” various physical works, and that the taxpayers themselves had no business organisation, manager, office, secretary, or letterhead. While, as Jenkinson J accepted, this factor cannot be determinative or even of primary significance, it does still carry some weight to scrutinise who did what to develop the land in question. In Mr Morton’s case, Dacland was responsible under the Dave’s Block development agreement for undertaking the “Development Works”, which encompassed the wide range of activities identified at [25] above. Indeed, cl 6.1 of the Dave’s Block development agreement conferred upon Tarneit East the “exclusive right to subdivide, develop, market and sell” Dave’s Block during the term of the agreement. Whatever business like organisation, books, and accounts existed were not controlled by Mr Morton, or maintained on his behalf. Clause 38 of the development agreement provided that the agreement did not establish a partnership, a joint venture, or an employment relationship between Mr Morton and Tarneit East. Further, it provided that the agreement did not empower Tarneit East to act as Mr Morton’s agent, otherwise than in accordance with the terms of the agreement. The development agreement did not provide for Tarneit East, or any other Dacland company, to carry out works on Dave’s Block as agent for Mr Morton. It will be necessary to return to the topic of agency, which is a chameleonic concept.

154    In the event, Mr Morton played little active role in the development of Dave’s Block. Mr Morton did not oversee the project, contribute in substance to planning applications, organise project finance, or manage the bulk earthworks, landscaping, or the construction of roads, footpaths, lighting, and utilities that occurred during the development of Dave’s Block. While Mr Morton probably did receive monthly reports pursuant to the Dave’s Block development agreement, I accept that he did not read them, or take much of an active interest in the conduct of the development. Nor do I consider the Commissioner’s reliance upon cl 7.4 of the agreement, which required Tarneit East to complete the Development “in a proper and business like manner, to a standard not less than that of an experienced residential property developer”, to indicate that Mr Morton was engaged in a business. If the development were not undertaken in that fashion, Mr Morton would likely realise less for his land than if Tarneit East carried out the development properly.

155    I regard the provisions in the Dave’s Block development agreement concerning project budgets and milestones also to carry limited significance. Senior counsel for the Commissioner emphasised the obligation of Tarneit East under cl 8 of the development agreement not to commence any “Development Works” in relation to a given stage unless Mr Morton had given written approval to the “Stage Budget” (or the budget that had otherwise been determined using a specified assessment method). Under clauses 1.17 and 1.54, budgets for the development, and for each stage, were essentially an estimate of the relevant Development Costs. While Development Costs were relevant for several purposes under the development agreement, they were not directly factored into the calculation of the fee payable to Tarneit East under cl 1.2 of Schedule 2. This position changed under the revised calculations explained at [45]–[46], under which Development Costs did directly affect the proceeds Mr Morton would retain. In that context, it would be in Mr Morton’s interest to ensure Development Costs were not overstated or unnecessarily incurred. The second deed of variation outlined at [47]–[48] above, however, altered the position again so that Development Costs did not directly affect the relations between Mr Morton and Tarneit East. Clause 11, which dealt with pre-sales, is relevant as it prevented Tarneit East from commencing construction works for a stage unless lots with a value no less than 110% of the stage’s Development Costs had been pre-sold. In this context, Mr Morton would have an interest in ensuring Development Costs were not understated in the Stage Budget, since otherwise Tarneit East might not have sufficient funds to complete the stage, potentially leaving Mr Morton with unfinished construction works burdening his land. Overall, the budgets relied upon by the Commissioner do not reveal much of the workings of the development project. They do constitute one area in which Mr Morton had an opportunity to influence the conduct of the development — at least so as to prompt an independent assessment of development costs, which would be the consequence of Mr Morton refusing to approve a budget. But given the importance of the success of the development to Mr Morton’s attempts to realise the value of Dave’s Block, so much is to be expected. I accept that this shows Mr Morton in a more active light, and so that it supports the Commissioner’s position that Mr Morton was engaged in a business, but it is a weak indicator.

156    As for the mechanism in the Dave’s Block development agreement for setting the sale price of subdivided lots, I consider that this does not bear one way or the other on the question before the Court. Whether a person is merely realising a capital asset or conducting a business, it is important to ensure that subdivided lots are sold for a fair market value, especially where the vendor is not the one with primary responsibility for setting the sale price.

157    As I noted at [56] above, the contract of sale to which the Court was taken by senior counsel for Mr Morton was executed by someone other than Mr Morton in the exercise of a power of attorney. The evidence concerning which contracts, or other documents, were executed by Mr Morton personally was incomplete. The fact that Mr Morton, or his attorney, executed contracts of sale in respect of the subdivided lots of Dave’s Block is inherent in the subdivision and sale of the land, and does not bespeak the conduct of any business. I consider that Mr Morton had little personal involvement in organising or conducting the activities that were undertaken as part of the development of Dave’s Block, and that this tells against the conclusion that Mr Morton was carrying on a business of property development.

158    I also consider that the process followed by Mr Morton for engaging Dacland and negotiating the development agreements does not suggest that Mr Morton was engaged in a business. Mr Morton formed the view that subdividing Dave’s Block and the rest of the Morton Farm would secure the best financial result for him and his family. No sophisticated commercial analysis was necessary to lead Mr Morton to that conclusion, and indeed he did not conduct any. Mr Morton negotiated the development agreements on the basis of simple tenets, designed to avoid risk to his family’s patrimony. The initial figure of 51.9% of proceeds that was allocated to Mr Morton in the Dave’s Block development agreement was not the product of any formal analysis. It was simply a negotiated figure that Mr Morton agreed to on the basis of his common sense, and no weight should be given to Mr Morton’s turn of phrase that this was simply common “business” sense.

159    Fifthly, Mr Morton was not involved in obtaining the finance required to undertake the development. I consider this to be a very significant factor that tells against the conclusion that Mr Morton was carrying on a business of property development. In Statham, Woodward, Lockhart and Hartigan JJ at 235 identified as a significant factor the fact that the taxpayers in that case had not borrowed money to finance the project in question. The facts of Stevenson provide a useful contrast, illustrating how a taxpayer may undertake significant financial obligations to fund development activities. It is easier to characterise a particular development as revealing the establishment of a development business, rather than as the mere realisation of a capital asset, where the taxpayer has obtained finance, on commercial terms and at his or her own risk, to fund the project. Obtaining finance in this way, including finance secured over the land in question, can bespeak an intention to maximise the financial return of the project, even at the risk of the subject property. In such a case, the land may truly be said to venture into an enterprise the object of which is to make a “profit”, in the sense of a commercial return that exceeds identifiable commercial costs.

160    Mr Morton never sought to finance the development of Dave’s Block or the Morton Farm more generally. Indeed, he was at pains to stress that one of his core “tenets” was that the developer whom the Mortons engaged should not be able to put up the Morton Farm as collateral for their own financial arrangements. The events summarised at [44]–[51] above illustrate how Mr Morton’s refusal to allow Dacland to use the Morton Farm as collateral for its financial obligations posed real difficulties for the viability of the project, from Dacland’s point of view. The arrangement identified at [50] above does not gainsay this analysis, since it did not work to finance the project in any way.

161    Contrary to the submissions of the Commissioner, it was not indicative of Mr Morton engaging in a business that he negotiated terms that permitted him not to pay any development costs, or to provide any development finance. Taking on financial obligations to fund a development and otherwise accepting the financial risk of a development in exchange for financial reward are suggestive of a profit-making purpose and the establishment of a commercial enterprise. Framing Mr Morton’s reluctance to engage in these commercial activities as the product of “negotiating for himself” certain terms does not convert that reluctance into a badge of trade.

162    Sixthly, I am not persuaded that the scale of the development of Dave’s Block or the Morton Farm ultimately changes the overall complexion of Mr Morton’s activities. In what follows, I take the view of the case that is most favourable to the Commissioner, and consider the development of the Morton Farm as a whole. (I should add that the parties set little store by the distinction between the development of Dave’s Block and the Morton Farm in the way the case was conducted.) The development of the Morton Farm occurred on a very extensive scale, culminating in the creation of about 1,632 lots. The scale of the subdivision and sale of the Morton Farm was a product of the size and nature of the Morton Farm as an asset, in combination with forces prevailing in the market for residential property in Tarneit over the relevant period. I do not accept that, without more, the acreage or the number of lots involved indicates that Mr Morton was engaged in a business of land subdivision and development. As the Full Court said in Statham at 233, mere magnitude does not convert an undertaking of realisation into a business.

163    Seventhly, I do not consider that Mr Morton’s activities were marked by repetition in the relevant sense. It was common ground that repetition is one of the “badges of trade” that can be used to discern the existence or commencement of a business. The Commissioner submitted that “[w]here the activity is a fixed term project such as the land development of the scale carried out in this case, repetition holds less weight”, on the authority of Puzey v Commissioner of Taxation [2003] FCAFC 197; 131 FCR 244 (Puzey) at [47]–[48] (Hill and Carr JJ, French J agreeing at [1]). In my view, this is not the point made by the Full Court in Puzey at [47]–[48]. Hill and Carr JJ relevantly said at [47] –

It will be relevant in deciding whether a business is carried on that there is some repetition of acts and that the activities in question have “something of a permanent character” … What is required is that activities be engaged upon “on a continuous and repetitive basis” … However, perhaps not too much attention should be given to the concept of repetition where the activity is one, such as plantation operation, where the activity will continue over a relatively long period of time but where there will be significant periods of what may be referred to as inactivity. Business does not mean being busy.

(Emphasis added.)

164    The point was that, where the undertaking in question takes a long time and is marked by periods of inactivity, the qualities of continuity and repetition may be less important. The reference to periods of inactivity is especially relevant to what their Honours said regarding the “continuous” nature of the activity, which is wrapped up in the concept of repetition. Puzey is not authority for the proposition that repetition carries less weight where the undertaking in question is a fixed term project. That proposition incompletely and inaccurately states the more nuanced point that was made in Puzey. Indeed, I do not accept the Commissioner’s submission on this topic. To say that repetition carries less weight where the activity in question is a “one off project”, as the Commissioner described it, is tantamount to holding that repetition is only an indicative factor when it is present. The analytical function of repetition, and the other accepted badges of trade, is to indicate by their presence or absence the existence or non-existence of a business. Of course, particular circumstances may mean that repetition (or its absence) is less significant in a given case. But that proposition is far removed from the submission of the Commissioner. And, in any event, it was not explained why scale in itself should make a difference to that analysis.

165    The truth is that Mr Morton, in his own right and alongside Peter Morton, held substantial lands on the fringes of urban Melbourne, which they resolved to sell. When the question is whether Mr Morton had embarked upon a business of developing and selling land, it is salient that he only ever developed and sold the land within one greater landholding. Mr Morton did not conduct separate developments, even separate developments of other pieces of land he had acquired without the purpose of selling at a profit. That is to say, not only did Mr Morton not develop Dave’s Block and the Morton Farm as part of a business within which he also developed other pieces of land bought for that purpose, he did not even develop Dave’s Block and the Morton Farm as part of a broader undertaking of developing and selling other pieces of land acquired for farming or other purposes. The development at issue in this case really was an isolated disposal. The Commissioner did not expressly suggest that repetition as a factor may be less relevant to the analysis concerning an isolated profit-making scheme. Given that the parties conducted the case as though the factors relevant to the existence of an ongoing business were the same as those for discerning the existence of a profit-making scheme, I conclude that the absence of repetition is a significant factor telling against the ultimate conclusion that the proceeds of sale of Dave’s Block were assessable income in Mr Morton’s hands.

166    Eighthly, I am not persuaded that the arrangements between Mr Morton and Dacland — including the arrangements as to agency and powers of attorney — truly alter the position. Senior counsel for the Commissioner characterised the development of Dave’s Block as conducted “for the benefit of the applicant”. He pointed to the object of maximising sale proceeds, and to Mr Morton’s ability to compel the proper performance of Tarneit East’s obligations under the Dave’s Block development agreement. That characterisation is quite accurate, as long as one remembers that Dacland also sought to benefit from its involvement in the development. The fact that the development was carried out in part for Mr Morton’s benefit is the starting point for the inquiry as to the existence of a business, since a purpose of benefiting Mr Morton would also be inherent in a mere realisation of a capital asset.

167    More pointedly, a foundation of the Commissioner’s submissions was that various elements of Dacland’s business like conduct of the development colour the nature of Mr Morton’s own activities, so as to support the conclusion that Mr Morton himself was carrying on a business or a profit-making scheme. Senior counsel for the Commissioner took the Court to an example contract of sale of a lot on Dave’s Block and referred in particular to a clause providing that the purchaser acknowledged that the land in question “form[ed] part of the Development by the Vendor” — who was ultimately, after novation, Mr Morton. The contract defined “Development” to mean “the land in the Plan of Subdivision and any surrounding land to be developed by or on behalf of the Vendor”. Senior counsel also relied on other clauses that, for example, prevented the purchaser from interfering with the broader development. Additionally, senior counsel relied on clauses that described the “Vendor” as conducting marketing activities and holding the contractual power to enforce the design guidelines mentioned at [59] above. On this basis, the Commissioner submitted that the development was conducted by or on behalf of Mr Morton, with the result that the business like conduct of Dacland ought to be attributed to Mr Morton.

168    A property-owner who engages a person of business to ply his or her trade on the property-owner’s property does not thereby embark upon a new business. To mention some trivial examples, a householder who engages a plumber to fix some pipes before a house is sold does not embark upon a business of plumbing. A car owner who engages a detailer to clean the car before sale does not embark on the business of car detailing. More analogously to this case, although still too simply, a householder who engages a real estate agent to prepare, market and sell a single house does not embark upon a business of real estate agency, or of trading in residential property. That would remain the case, even if the householder stipulated for the rights to compel performance of the engagement, and to monitor and approve any disbursements. The point of these examples is to illustrate that the bare fact that a property-owner engages, for their own benefit and in relation to his or her property, the services of a person who is undoubtedly carrying on a business does not entail that the businessperson’s activities are to be attributed to the property owner. Of course, this case is more complex. The point remains that caution and specificity are needed before the business like nature of Dacland’s property-development business can be deployed to show that Mr Morton himself was engaged in such a business, rather than engaging the services of that business to assist him in realising a capital asset.

169    To this end, the Commissioner relied on authorities that address when a business is being carried on by a person through an agent.

170    I mentioned earlier that “agency” is a chameleonic concept. Lord Herschell said in Kennedy v De Trafford [1897] AC 180 at 188 that “[n]o word is more commonly and constantly abused than the word ‘agent.’” As expressed by Nettle and Edelman JJ in Northern Land Council v Quall [2020] HCA 33; 271 CLR 394 at [82] –

In its most precise description, the concept of “agency” should be used “to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties”. As suggested by the maxim qui facit per alium facit per se the acts of an agent are, in law, attributed to the principal.

(Citations omitted.)

171    The core of the concept of “agency” is thus the alteration of legal relations. The principal’s legal relations are altered by the acts of the agent.

172    It is beyond doubt that a relationship of agency existed between Mr Morton and Tarneit East in relation to Dave’s Block. At [31]–[34] above, I set out the relevant clauses that established and regulated the agency relationship between Mr Morton and Tarneit East. As a matter of characterisation, that agency relationship essentially authorised Tarneit East to take steps on behalf of Mr Morton to fulfil his obligations under the Dave’s Block development agreement, including by executing documents that it was necessary for Mr Morton, as the owner of the land, to execute. Examples include contracts of sale, and applications for planning and other regulatory approvals. Clause 38 of the development agreement placed strict limits on the scope of the agency relationship, emphasising that Tarneit East was not otherwise an agent for Mr Morton in any more general sense.

173    There is a distinction to be drawn, however, between attributing to a principal the acts of an agent that alter the principal’s legal relations (for example, the execution of a contract) and concluding that other acts of an agent should be attributed to a principal, where those acts have nothing to do with the principal’s legal relations. An employee who signs a contract for his or her employer may do so as an agent, in the precise sense. But when the employee completes other work, which is unrelated to the employer’s legal relations, the employee does so as the employer’s “agent” only in a more attenuated sense.

174    In truth, the question whether Tarneit East’s actions should be taken into account in deciding whether Mr Morton was carrying on a business of property development does not find a complete answer in the law of agency. Certainly, for the purposes of ascertaining whether Mr Morton was carrying on a business, the acts that Mr Morton effected through agents will be taken into account. That is because, in law, those acts are Mr Morton’s acts. But that simple result only follows in so far as the acts in question concern the affectation of Mr Morton’s legal relations. Beyond that, it will be a question of fact whether, and to what extent, the acts of Tarneit East should be taken into account in discerning the character of the proceeds of the sale of Dave’s Block in Mr Morton’s hands. To the extent that Garde J in Lotus Oaks Pty Ltd v Commissioner of State Revenue (Vic) [2021] VSC 388; 113 ATR 379 at [186] suggested otherwise, I respectfully take a different view.

175    There can be no doubt that a business may be carried on through a manager: see Howland-Rose v Commissioner of Taxation [2002] FCA 246; 118 FCR 61 at [101] (Conti J). But there is a distinction between doing that and contracting to permit an independent business to ply its trade in relation to another person’s property. That is the distinction I identified at [168]. The Court was not directed to authorities that provide practical guidance on how to distinguish, as a matter of substance, between these two scenarios. Nor were any guiding principles identified. The question ultimately asks about the capacity in which Tarneit East conducted the development: was Tarneit East acting as a manager of a business carried on by Mr Morton, or was Tarneit East acting on its own account?

176    I have already referred to the expression of intention in cl 38 that the Dave’s Block development agreement should not establish a partnership, joint venture, or relationship of employment, and should not authorise Tarneit East to act as Mr Morton’s agent except in accordance with the agreement’s terms. The Commissioner did not suggest that cl 38 was a sham, or otherwise ineffective. There is no reason why cl 38 should not be given effect: see Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; 275 CLR 165 at [43] (Kiefel CJ, Keane and Edelman JJ). It was no part of the Commissioner’s case to submit that Mr Morton went into partnership or established a joint venture with Tarneit East or Dacland more generally. Additionally, cl 6.3 of the development agreement provided that Mr Morton had “no interest” in the development. The practical effect of this clause, if there was any, was not explained. But in a context where the Commissioner did not call cl 6.3 into question, that clause represents a plain expression of intention that Tarneit East should conduct the development on its own account, and not as a manager for Mr Morton. Absent any other articulated means of assessing whether Tarneit East was acting as Mr Morton’s manager, such that its conduct of a business should be attributed to him, I consider this to suggest that Tarneit East was not acting on Mr Morton’s behalf.

177    As a matter of substance, the factors I have identified at [153]–[161] buttress this conclusion, as they indicate that the conduct of the development was not carried out at the direction of Mr Morton. Subject to some constraints, Tarneit East was entitled to, and did, act independently from Mr Morton’s direction in carrying out the development. Perhaps another indication of this emerges from the evidence concerning the broiler farm. It is not necessary to traverse that evidence in detail. As I have mentioned, the Wyndham City Council’s planning approval was contingent on a broiler farm ceasing operations. The evidence was that Dacland established a new subsidiary, which purchased the broiler farm. Mr Morton did not purchase the broiler farm or have any interest in it. Mr Morton relied upon this to show that the development was conducted by Dacland on its own account. While this whole issue is of limited significance, I accept it does point in the direction that Mr Morton identifies.

178    Nor do I consider it relevant that the contract of sale on which the Commissioner relied referred to the development as Mr Morton’s development. Because Mr Morton owned the land that was being sold, he was the contractual counterparty to the purchasers of subdivided lots. It was therefore natural for the purchasers to owe certain obligations to Mr Morton in relation to the development. Tarneit East may well have been able to require Mr Morton to take certain steps to exercise his powers under the contracts of sale, depending on the scope of the requirements on Mr Morton in the development agreement. Ultimately, these issues were not explored. The mere fact that the contracts of sale refer to the development as Mr Morton’s, however, does not affect the character of the legal relationship between Mr Morton and Tarneit East, which in this respect was governed by the substantive operation of the development agreement.

179    The ways in which proceeds from the development were divided likewise support this conclusion, since at all times the remuneration derived by the developer was linked to the success of the project. While not determinative, this tells in favour of Tarneit East carrying on a business on its own account, when compared with a scenario in which Tarneit East was simply paid an hourly rate for services rendered to Mr Morton. Put differently, Tarneit East bore commercial risk on its own account in the conduct of the development.

180    For these reasons, too, I reiterate that Mr Morton cannot be treated as though he in fact carried out the acts of Tarneit East in maintaining books of account, and otherwise carrying out the development of the Morton Farm in a business like fashion. Those acts are properly seen as Tarneit East’s actions, carried out on its own behalf, albeit as a contractual counterparty to Mr Morton. The mere fact that Tarneit East was contractually obliged to carry out the development, within its own business of property development, and in a business like fashion, does not mean that those acts were those of Mr Morton. Mr Morton was certainly vulnerable to the way the developer carried out the development and there are comprehensible reasons why he should wish the developer to carry it out properly, and to record the course of the development precisely. Doing so does not transform Dacland’s independent development business into a business of Mr Morton’s, managed on his behalf by Dacland.

181    Ninthly, I am not persuaded that the evidence concerning planning applications weighs in favour of the conclusion that Mr Morton was carrying on a business. The Commissioner submitted that the scale of the development necessitated extensive planning applications and documentation, which themselves imposed wide-ranging requirements on the development. As a starting point, the fact that these requirements were directed to Mr Morton in connection with Dave’s Block is not, in my view, relevant. He was the owner of the land, and as such the person to whom planning requirements might be directed. In any event, the sale of a sufficiently large parcel of land by subdivision inevitably involves obtaining planning approvals, and the construction of roads, footpaths, provision for open space, and other infrastructure. Indeed, the Council required these steps to be taken as a condition for approving the subdivision of the Morton Farm. The fact that they were carried out is thus not indicative of a desire on the part of Mr Morton to maximise his profits by venturing his property into a scheme to improve and sell it. I am conscious of what Mason J said in Whitfords Beach at 385 concerning the conditions that, even then, attended the subdivision of broadacres into marketable residential allotments. Nevertheless, I consider that, in relation to this case at least, the fact that many features of the development were essentially required before Mr Morton could subdivide and sell his land is relevant, even if in a small way, to the characterisation of Mr Morton’s intention, on which both parties made submissions.

182    Accordingly, I conclude that Mr Morton at no stage embarked on a business of developing land, and never ventured Dave’s Block into a profit-making scheme. In my view, therefore, no part of the proceeds of the sale of Dave’s Block was assessable income in Mr Morton’s hands, and he has made out that the amended assessments are excessive.

Alternative issue — on what date should Dave’s Block be valued?

183    It remains to consider when Mr Morton began to hold Dave’s Block as trading stock, or when he ventured Dave’s Block into a profit-making scheme, on the counterfactual premise that Mr Morton was carrying on a business or undertaking a profit-making scheme. To assess this question, I must proceed on the premise that Mr Morton did carry on a business or undertake a profit-making scheme. For the reasons I have already explained, I do not accept as a matter of characterisation that he did. Even on the basis of my findings of primary fact, it is difficult, if not impossible, for me to determine when Mr Morton commenced a business. That task requires me to decide when the primary facts amounted to the conduct of a business, in circumstances where I have concluded that they did not. Nevertheless, the parties addressed substantial submissions to this topic, and so I will deal with it, subject to these caveats.

184    Mr Morton emphasised that an item does not become trading stock until two conditions are met: the holder begins to hold the item for the purposes of sale, and the holder is engaged in a business activity.

185    Mr Morton and the Commissioner ultimately agreed that the reference in s 70-10 of the ITAA 1997 to something being held “for purposes of … sale” referred to a concept of “objective” purpose. After the High Court delivered judgment in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36; 419 ALR 324 (Automotive Invest), the parties took up an opportunity to file additional written submissions concerning the effect of the High Court’s decision on the parties’ joint position. The parties maintained that s 70-10 refers to “purposes” in an objective sense. As Edelman, Steward and Gleeson JJ explained in Automotive Invest at [115] –

by contrast with the purpose of an actual taxpayer, the object which some act is generally “apt to achieve”, “an objective purpose” in that sense, can be determined by reference to what a reasonable person engaging in the act would expect to achieve.

186    Of course, as the majority in Automotive Invest also explained at [130], even where the relevant inquiry does concern subjective or actual purpose, objective evidence (in the sense of evidence aside from what the taxpayer says was his or her actual purpose) can be used to build a circumstantial case as to the taxpayer’s actual purpose.

187    In this context, I understood the parties’ position to be that s 70-10 is not concerned with whether Mr Morton held Dave’s Block for the purpose of selling it in the ordinary course of his business. Given the parties’ approach to Automotive Invest, the parties must be understood as submitting that s 70-10 calls for an inquiry into whether a reasonable person in Mr Morton’s position would have held Dave’s Block with a purpose of selling it.

188    Automotive Invest dealt with a different statutory context from the one presently under consideration. The question in Automotive Invest concerned whether the “purpose” mentioned in ss 9-5(1) and 15-30(3)(c) of the A New Tax System (Luxury Car Tax) Act 1999 (Cth) was an objective or subjective purpose. The High Court held that ss 9-5(1) and 15-30(3)(c) referred to “purpose” in a subjective sense, being the actual purpose for which the relevant person was using the car in question. That was in circumstances where s 9-5(1) specifically referred to the taxpayer’s intention.

189    The parties also referred to the decision of Charlesworth J in Makrylos v Commissioner of Taxation [2023] FCA 971 (Makrylos), in which her Honour held at [20] that “[t]he word ‘purposes’ in s 70-10(1) refers to the subjective state of mind of the tax payer”. But the parties made submissions as to neither the precedential status of Charlesworth J’s statement in Makrylos, nor whether I should follow her Honour unless persuaded that there are compelling reasons not to do so.

190    In any event, the parties agreed that the relevant purpose in this case was an objective purpose. Whether the parties can, by so agreeing, alter the operation of a statute is a large question. Ultimately, it is not necessary for me to address these questions any further. I have formed the view that Mr Morton did hold Dave’s Block with a subjective intention to sell it from the time the development agreement was executed, which accords with the intention that would be imputed to a reasonable person in Mr Morton’s position.

191    The starting point is the decision of the High Court in Federal Commissioner of Taxation v St Hubert’s Island Pty Ltd (1978) 138 CLR 210 (St Hubert’s Island). An issue in that case was whether the term “trading stock”, as used in ss 6(1) and 36(1) of the ITAA 1936 encompassed “virgin land acquired by a land developer for the purpose of substantial improvement, subdivision and sale”: see St Hubert’s Island at 224 (Mason J). The Court held that “trading stock” does encompass land held for the purpose of sale: see St Hubert’s Island at 218 (Stephen J), 228–229 (Mason J), 234 (Jacobs J), 238 (Murphy J), 243 (Aickin J). Additionally, the Court held that land may form part of the trading stock of a business before it has been converted into the condition in which it is intended to be sold: see at 228–229 (Mason J), 235 (Jacobs J), 238 (Murphy J).

192    As Mason J put it at 228 –

If trading stock according to its ordinary meaning denotes land as well as goods and commodities, it must follow that land may form part of the trading stock of a business before it has been converted into the condition in which it is intended to be sold.

193    Senior counsel for Mr Morton accepted this proposition.

194    Additionally, Jacobs J said at 235 –

Once it is concluded that land may be trading stock, then I can see no reason to limit the application of the words to land which is in the condition in which it is intended that it should be sold. I am inclined to the view that land acquired or purchased for purposes of sale falls within the words of the definition whether or not the land is in the condition in which it is proposed that it shall be sold.

195    Murphy J agreed with Mason J and Jacobs J at 238.

196    Accordingly, there is no principle of law that precludes Dave’s Block from being the trading stock of Mr Morton’s putative business before it was subdivided into saleable form. To the extent that one was made, I do not accept any submission on Mr Morton’s behalf that the position of Dave’s Block is different from other raw material held for the purposes of transformation into saleable form, simply because Dave’s Block is land. Rather, the correct questions concern whether and when Mr Morton held Dave’s Block for the purposes of sale in the course of his business.

197    I accept the Commissioner’s submission that, by the time Mr Morton executed the Dave’s Block development agreement in November 2012, he had formed the requisite intention to sell Dave’s Block through a process of development and subdivision. Clause 7.1 of the development agreement required Mr Morton to permit Tarneit East to subdivide, develop, market and sell Dave’s Block during the term. Plainly, at this stage, Mr Morton envisaged that the development agreement would be carried out according to its terms. Mr Morton agreed that, in the event, the development was implemented in accordance with the terms of the development agreements. There is no suggestion in the evidence that, at the time the Dave’s Block development agreement was executed, Mr Morton was anything other than committed to subdividing and selling Dave’s Block in accordance with the agreement. At that point, Mr Morton held Dave’s Block for the purpose of selling it.

198    Mr Morton relied upon some key features of the case to meet the Commissioner’s arguments.

199    First, Mr Morton relied upon the fact that he continued to farm Dave’s Block until about 2015. Senior counsel submitted that Dave’s Block, unlike raw materials, served a purpose. But the Court was not taken to authorities establishing that a raw material will not be trading stock of a business if it is held for more than one purpose, including the purpose of being transformed and sold. The correct question is whether Dave’s Block was trading stock, not whether Dave’s Block was held as trading stock and for no other purpose.

200    Secondly, Mr Morton relied upon the fact that Dave’s Block had not been acquired for the purpose of resale. But the question in this part of the case is whether, and when, Mr Morton developed an intention to sell Dave’s Block. While the fact that a particular asset was not acquired for the purpose of resale may be a factual matter that tends against the inference that the asset is held for the purposes of sale, the other evidence in this case, including the development agreement and the history of negotiations with property developers, confirms that Mr Morton did develop an intention to sell Dave’s Block.

201    Thirdly, Mr Morton relied upon the fact that the development agreement was executed well before any legal or physical changes transpired in relation to Dave’s Block. But the absence of these changes is really part and parcel of the starting point, which is that land may be held as trading stock even before it is subdivided and sold. Land becomes trading stock because of the existence of an intention to hold the land for the purposes of sale in the course of a business. It is true that many steps needed to be taken to prepare Dave’s Block for sale in the course of Mr Morton’s putative business. But, on the hypothesis that Mr Morton’s activities did amount to a business, Mr Morton nevertheless committed the land to the business, as the raw material to be transformed and sold in the course of that business. While the factor upon which Mr Morton relies could, again, tend against that inference, the inference is compelling in this case. Once drawn, that inference disposes of the question whether requisite intention existed.

202    The second question on this limb of the case concerns when Mr Morton began to carry on his business, on the hypothetical basis that his actions did amount to a business. In my view, if my conclusion on the primary issue in this case is incorrect, Mr Morton commenced his business when he executed the development agreement in relation to Dave’s Block on 23 November 2012. As may be apparent from other aspects of these reasons, little attention was paid at the hearing to individuating the business which it was said Mr Morton carried on. In particular, it was not a focus of the hearing to discern whether that business extended to the whole of the Morton Farm, and thus represented a partnership or joint venture between Mr Morton in his own right, and Mr Morton and Peter Morton as trustees, or whether the business related just to Dave’s Block. In any event, the latest time at which the relevant business began to be carried on was 23 November 2012. It was at that time that, on the assumptions that I make here for the purpose of addressing the arguments, Mr Morton engaged Tarneit East to carry out the development on his behalf as his own business. The fact that business activity only commenced later is not determinative, and I would find that Tarneit East’s role in managing Mr Morton’s business meant that the business would have commenced as soon as the relationship between Mr Morton and Tarneit East came into being.

203    Nor do I consider that the analysis would have been any different if I had found that Mr Morton had undertaken a profit-making scheme. Subject to the same caveats concerning the counterfactual nature of the required exercise, I would have concluded, for the same reasons, that Mr Morton ventured Dave’s Block into the profit-making scheme when he signed the development agreement.

204    Accordingly, if I had found that Mr Morton’s activities had amounted to a business, I would have concluded that Dave’s Block began to be held as trading stock on 23 November 2012. If I had reached that conclusion, it would have followed that the amended assessments adopted the correct date for the valuation of Dave’s Block, but a question would remain concerning the appropriate amount that should have been brought to account as the value of Dave’s Block as at that date.

Conclusion

205    For these reasons, I conclude that the amended assessments issued by the Commissioner to Mr Morton in relation to the 2019 and 2021 years of income are excessive.

206    The power of the Court in a proceeding of this nature is to “make such order in relation to the [objection] decision as it thinks fit, including an order confirming or varying the decision”: s 14ZZP of the Taxation Administration Act. The relevant decision is the decision of the Commissioner that did not allow Mr Morton’s objections.

207    The Commissioner’s objection decision must be varied. Mr Morton’s objections canvassed a range of issues that have not been agitated in this proceeding. The relevant aspects of Mr Morton’s objection were paragraph [3(d)], in relation to the 2019 amended assessment, and paragraph [4(d)], in relation to the 2021 amended assessment. Those paragraphs called for the excision from Mr Morton’s assessable income of the amounts representing the net proceeds of the sale of Dave’s Block, or some lesser amount. Given my conclusion that no part of the proceeds of the sale of Dave’s Block should have been included in Mr Morton’s assessable income, it is not necessary for the objection decisions to be varied to allow for some lesser amount to be excised. The amounts specified in the objections accord with the amounts acknowledged by the Commissioner in this proceeding to be the amounts in issue.

208    Accordingly, I propose orders to the effect that –

(1)    The respondent’s objection decision made on 7 June 2023 in relation to the applicant’s objections to amended assessments issued to him on 2 August 2022 in respect of the income years ended 30 June 2019 and 30 June 2021 be varied such that the objections are allowed in part, by:

(a)    excising from the amended assessment of the applicant’s assessable income in respect of the income year ended 30 June 2019 the sum of $3,153,536, and recalculating the tax payable thereon accordingly; and

(b)    excising from the amended assessment of the applicant’s assessable income in respect of the income year ended 30 June 2021 the sum of $660,402, and recalculating the tax payable thereon accordingly.

(2)    The respondent pay the applicant’s costs of the proceeding.

209    I wish to hear from the parties on the form of orders.

Associate:

Dated:    11 April 2025