Commissioner of Taxation v Morton - Tax Appeal

Original Word Document (135.3 KB) Federal Court of Australia

Commissioner of Taxation v Morton [2026] FCAFC 31

| Appeal from: | Morton v Commissioner of Taxation [2025] FCA 336 |
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| File number(s): | VID 578 of 2025 |
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| Judgment of: | O ’ CALLAGHAN, Derrington and Mcevoy JJ |
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| Date of judgment: | 27 March 2026 |
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| Catchwords: | TAXATION – appeal from decision of primary judge with respect to an appeal under Pt IVC of the Taxation Administration Act 1953 (Cth) against objection decision – where amended assessments of taxation brought proceeds from the sales of lots on a residential development into account as assessable income – where primary judge held that assessments were excessive – where primary judge held that lots on development were not trading stock for the purposes of Pt 2-25 of the Income Tax Assessment Act 1997 (Cth) – where primary judge held that property sale was not in the course of carrying on a business of property development, but proceeds from the sales of the allotments were instead capital receipts derived upon the realisation of an asset – where primary judge held that taxpayer embarked upon enterprising means of achieving the best price when realising a capital asset – appeal dismissed |
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| Legislation: | Income Tax Assessment Act 1997 (Cth)

Taxation Administration Act 1953 (Cth) |
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| Cases cited: | Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41

Commissioner of Taxation v Whitfords Beach Proprietary Limited (1982) 150 CLR 355

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 275 CLR 165

Crow v Federal Commissioner of Taxation (1988) 19 ATR 1565

Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310

Howland-Rose v Commissioner of Taxation (2002) 118 FCR 61

Kennedy v De Trafford [1897] AC 180

Morton v Commissioner of Taxation [2025] FCA 336

Puzey v Commissioner of Taxation (2003) 131 FCR 244

Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550

Scott v Davis (2000) 204 CLR 333

Scottish Australian Mining Company Limited v Federal Commissioner of Taxation (1950) 81 CLR 188

Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1

Statham v Federal Commissioner of Taxation (1988) 20 ATR 228

Stevenson v Commissioner of Taxation (1991) 29 FCR 282

The Hudson’s Bay Co Ltd v Stevens (1909) 5 TC 424

Watson v Federal Commissioner of Taxation (2020) 277 FCR 253

XCO Proprietary Limited v Federal Commissioner of Taxation (1971) 124 CLR 343 |
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| Division: | General Division |
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| Registry: | Victoria |
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| National Practice Area: | Taxation |
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| Number of paragraphs: | 185 |
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| Date of hearing: | 17–18 November 2025 |
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| Counsel for the Appellant: | Mr GJ Davies KC, Ms M Schilling SC and Ms C Nicholson |
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| Solicitor for the Appellant: | Australian Taxation Office |
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| Counsel for the Respondent: | Mr DJ McInerney KC and Mr TK Jeffrie |
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| Solicitor for the Respondent: | Sladen Legal |
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ORDERS

| | | VID 578 of 2025 |
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| BETWEEN: | COMMISSIONER OF TAXATION

Appellant | |
| AND: | DAVID MORTON

Respondent | |
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| AND BETWEEN: | DAVID MORTON

Cross-Appellant | |
| AND: | COMMISSIONER OF TAXATION

Cross-Respondent | |

| order made by: | O ’ CALLAGHAN, Derrington and Mcevoy J J |
| DATE OF ORDER: | 27 March 2026 |
THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondent’s costs of the appeal.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J:

introduction

1 The respondent, Mr David Morton, is a retired farmer. For many years he owned a small parcel of land known to his family as “Dave’s Block” in Tarneit, in Melbourne’s west. He farmed that land and adjoining land owned by his mother and father, as one property, the whole of which the parties referred to as “Morton Farm”. In 2010, Morton Farm (including Dave’s Block) was rezoned from rural to residential land. Over the following years, Mr Morton and his family organised for Morton Farm to be developed, subdivided, and then sold as individual allotments as part of a housing estate. As part of that enterprise, Mr Morton received proceeds from the sale of the allotments (also called lots) on what had been Dave’s Block.

2 The appellant, the Commissioner of Taxation, issued amended assessments of taxation to Mr Morton for the 2019 and 2021 tax years, which 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 appealed to this court under Pt IVC of the Taxation Administration Act 1953 (Cth) from the disallowance of the objections, claiming that the assessments were excessive, because the proceeds from the sales of the allotments that comprised Dave’s Block were capital receipts derived upon the realisation of an asset, and were therefore not assessable as income. Mr Morton contended before the primary judge, as he did on appeal, 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.

4 The Commissioner contended that the amounts in issue were assessable as income on two bases, namely that:

(1) in developing, subdividing, and selling the land that comprised Dave’s Block, Mr Morton carried on a business, and therefore the land was trading stock for the purposes of Pt 2-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), and the amounts in issue were income according to ordinary concepts for the purposes of s 6-5 of the Act; or

(2) 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 The primary judge fixed six agreed questions for hearing and determination. The substance of the questions, and his Honours answers to them, are set out as follows:

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

Answer: No.

(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?

Answer: No.

(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?

Answer: In the alternative to the answer to question two, 23 November 2012.

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

Answer: No

(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?

Answer: In the alternative to the answer to question four, 23 November 2012.

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

Answer: No.

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

6 Having so answered those questions, the primary judge made the following orders:

2.    The appeal against the respondent’s objection decision dated 7 June 2023 be allowed.

3.    The applicant’s assessments to income tax for the income years ended 30 June 2019 and 30 June 2021 be set aside and the matter be remitted to the respondent for issuing amended assessments 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.

4.    The respondent pay the applicant’s costs of the proceeding, to be taxed if not agreed.

7 The Commissioner now appeals each of those orders and seeks orders that the appeal be allowed, that the questions instead be answered consistently with his case, and that the matter be remitted to the primary judge for further hearing in relation to two additional questions that were agreed to be deferred.

8 Mr Morton cross-appealed part of the judgment below, concerning the answers of the primary judge to questions three and five above. The cross-appeal only arises in the event that the Commissioner’s appeal is allowed. The primary judge held that, if Mr Morton were carrying on a business or had ventured the land into a profit-making undertaking or scheme, the date on which he commenced holding the land as trading stock or ventured the land into a profit-making undertaking or scheme would be 23 November 2012. Mr Morton submitted that the earliest date on which he could be said to have held Dave’s Block as trading stock or to have ventured it into a profit-making undertaking or plan was when he ceased farming on his land in 2015 and the land ceased being the primary fixed asset of that business.

9 For the reasons that follow, in my view the appeal should be dismissed, with costs.

the facts

10 Counsel for the parties on appeal agreed that the findings of fact made by the learned primary judge were accurate and complete for the purposes of the appeal.

Morton Farm and Dave’s Block

11 Mr Morton’s father, Colin Morton, was a life-long farmer who purchased around 344 acres (139 hectares) of land in Tarneit in the mid-1950s. Along with 40 acres (16 hectares) held by Mr Morton’s mother, known as “Alison’s Block”, this land constituted Morton Farm. It was bisected by Derrimut Road, which ran north-south. 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”.

12 Dave’s Block comprised about 4.17 hectares, or 10 acres. Mr Morton’s father subdivided it from his larger holding in 1973, and in 1980 (before the introduction of the capital gains tax provisions of the ITAA 1997) sold it to Mr Morton for $13,500. Dave’s Block abutted the western side of Derrimut Road, making it part of what became the Morton West development.

13 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”. Together they were referred to in the proceeding below 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 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 Morton Farm as trustees of the family trusts.

14 Morton Farm had been farmed by Mr Morton’s father, as one property from the 1950s. Initially, Mr Morton’s father ran sheep, but 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 lived in Swan Hill, but he travelled regularly to Melbourne.

15 Mr Morton’s father died in 1996. Between 1996 and 2015, Mr Morton continued to work and maintain the farm. From about 2006 he grew crops, such as wheat and barley. Mr Morton was still living in Swan Hill, but he continued to travel regularly to Melbourne. He used local subcontractors to help him with the farm work. Mr Morton gave evidence 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” (J at [11]).

16 In 2008, the Victorian government published a planning update foreshadowing changes to Melbourne’s Urban Growth Boundary. Mr Morton formed the view that the western boundary would likely be moved to take in Dave’s Block, and Morton Farm as a whole. The planning update also led Mr Morton to consider that the inclusion of the farm within the Urban Growth Boundary could cause the value of Dave’s Block to increase.

17 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 Morton Farm. At around the same time, Mr Morton and Peter Morton discussed how to get the best return from its sale. Mr Morton formed the view at this time that subdividing it and selling individual lots would achieve the best possible sale price.

18 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 because they were unwilling to make the titles to the properties available to any developer to use as security for the developer’s financing.

19 In 2010, Dave’s Block was brought within the Urban Growth Boundary and was rezoned. That rezoning 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.

20 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 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 in evidence before the primary judge. The evidence did not enable the primary judge to make a finding as to whether they were executed, which is of no moment because formal development agreements were later entered into.

The development agreements

21 There were three such agreements, which were varied during their term by three deeds of variation. The terms of the Dave’s Block development agreement were central to the Commissioner’s case that the primary judge erred in allowing Mr Morton’s appeal, so it is necessary to set them out at some length. The Commissioner also relied on the terms of exemplar contracts of sale entered into by or on behalf of Mr Morton and purchasers.

22 The first development agreement was subtitled “Property: West – ‘Dave’s Block’, Tarneit”. It 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” (Dave’s Block development agreement). 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”, which the primary judge called “Tarneit East”, and which I shall mostly call the developer.

23 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 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, another Dacland company which the primary judge called “Tarneit West”.

24 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.

Dave’s Block development agreement

25 I set out below the relevant terms of the Dave’s Block development agreement to which the court was taken to at the hearing of the appeal.

26 The Dave’s Block development agreement commenced with recitals, which included the following:

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.

R.5.    The Developer has agreed to undertake the Development with the intent of maximizing the sum of the Development Fee, subject to the Developer achieving a reasonable return after deducting Development Costs.

27 The “Land” meant Dave’s Block; the “Owner” was Mr Morton; and the “Developer” was Tarneit East. (In these reasons I mostly refer to “the owner”, and “the developer” and “the land” in lower case).

28 Clause 1.15 defined “Development” to mean “the development of the Land in accordance with the Development Approval and this agreement”.

29 Clause 1.18 defined “Development Costs” to mean the costs and expenses incurred by the developer in relation to the Development Works, including various enumerated items.

30 The expression “Development Works” was defined as follows:

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.

31 Clause 3.1 of the development agreement imposed on the developer an obligation to develop Dave’s Block as follows:

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

32 Clause 4 concerned the developer’s financial capability. Clause 4.1 provided that “[t]he Developer must on or before the date of this agreement satisfy the Owner that the Developer has sufficient financial resources and/or debt and equity commitments to meet the Developer’s obligations under this agreement”.

33 Clause 5.1 required the developer to “use its best endeavours to obtain the Development Approval”.

34 Clause 6 dealt with the developer’s right to develop Dave’s Block, as follows:

1. 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.

35 Clause 7 set out the responsibilities and rights of the developer, relevantly as follows:

1. 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.

…

7.7    Where the terms of engagement by the Developer of any contractor include a right of the Developer to retain any sum of money or other security or assurance (such as a bank guarantee) (Retention) from the contractor to secure performance of the contractor’s obligations:

7.7.1    the Developer agrees to assign to the Owner the benefit of its rights to any Retention it holds or is entitled to under each agreement with a contractor immediately:

7.7.1.1    on request by the Owner if the Owner has given a notice to the Developer under clause 30.1 and the default remains unremedied;

7.7.1.2    upon termination of this agreement under clauses 23 or 24 of this agreement,

and in which case the Developer will hold the benefit of any such Retention for the Owner and will execute any documents reasonably required by the Owner to complete the assignment;

7.7.2    the Developer must only deal with a Retention in accordance with the terms of the agreement under which the Retention was paid or given to the Developer.

…

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.

36 Clause 8.1 required the developer to provide to Mr Morton an overall “Development Budget” and an individual “Stage Budget” for each stage, within a specified timeframe. Clause 8.2 required that in calculating the budget, the developer must act “on a reasonable commercial basis”. Clause 8.3 provided that if Mr Morton did not give written approval to a Stage Budget within a specified timeframe, the developer may use another specified assessment method set out in cl 24. Clause 8.4 provided that the developer 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 the assessment method under cl 8.3 (the agreement references cl 9.3, but that is a typographical error).

37 Clause 9 provided that Mr Morton could approve or reject the milestones proposed by the developer, as follows:

1. MILESTONES

9.1    The Developer must give to the Owner the Developer’s proposal for the Milestones within 120 days of the gazettal of a PSP which includes the Land (Milestone Proposals).

9.2    If the Milestone Proposals are accepted by the Owner, the Milestone Proposals shall be the Milestones.

9.3    If:

9.3.1    the Owner does not accept the Milestone Proposals (or any part of them); or

9.3.2    the Developer does not satisfy its obligations under clause 9.1,

either party may treat the matter as a Dispute in accordance with clause 37.

9.4    The Developer must achieve the Milestones.

9.5    The Milestones may only be varied with the consent of the Owner, which must not be unreasonably withheld.

9.6    Subject to clause 10, failure by the Developer to satisfy a Milestone is a default pursuant to this agreement.

38 Clause 10 concerned delays in dealing with milestones, and more specifically cl 10.2 contained an obligation on Mr Morton to approve reasonable requests for extensions to milestones.

39 Clause 11 provided:

1. 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.

40 Clause 12.1 provided that the developer would “prepare or arrange for the preparation of the Plan” for the development of Dave’s Block. Pursuant to cl 12.3.1, the developer could amend the plan, provided that it did not reduce the number of lots. Pursuant to cl 12.4, where cl 12.3 did not apply, the developer could only amend the plan with Mr Morton’s consent. Clause 12.5 stated that Mr Morton was required to make the certificate of title available to the developer for the registration of the plan.

41 Clauses 14.1.1-14.1.2 required the developer to “maintain or procure that its contractors maintain the Insurances in respect of the Land” and “cause the Insurances to be taken out in the name of the Developer with the interest [o]f the Owner noted”. Clause 14.3.1 provided that Mr Morton must not do or permit anything to be done that would prejudice “the Insurances”.

42 Mr Morton’s responsibilities and rights were the subject of several clauses, the most important of which was cl 15:

1. 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.

15.2    Despite clause 15.1:

15.2.1    the Owner may continue to use and occupy any part of the Land which the Developer does not require for construction purposes, for primary production purposes; and

15.2.2    the Developer must give the Owner not less than 90 days written notice that the Developer requires a part of the land for construction purposes, in which case the Owner must cease its primary production activities on that part of the Land within that period. The parties acknowledge and agree that at the date of this agreement the Developer has not given a notice to the Owner for the purposes contemplated by this clause.

15.3    The Owner or its duly appointed representative will have access to the Land or any part thereof for the purpose of inspecting and viewing the progress of the Development but only at such reasonable times and in such manner as shall not prevent or hinder the Developer from effectively and efficiently carrying out the Development.

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.

…

15.12    The Owner must not mortgage or otherwise encumber or grant any interest in relation to the Land without the Developer’s prior written consent (other than an interest under a contract of sale for a Lot or which is otherwise contemplated by this agreement), but nothing contained in this clause is intended to limit or prevent the Owner granting a lease or licence over the Land or require the Owner to obtain the Developer’s consent to granting a lease or licence over in relation to a part of the Land on which the Developer is not undertaking construction works (or works immediately prior to construction works), provided that the lease or licence must be capable of being terminated by the Owner on giving no more than 20 Business Days notice.

43 Clause 16 was titled “Restrictions on owner’s use and conduct”, and included provisions prohibiting the owner from objecting or supporting any objection in relation to the development (cl 16.1) and provisions which said that Mr Morton must not:

(a) interfere with the developer carrying out its rights and obligations under the agreement (cl 16.1.2); and

(b) undertake, attempt or purport to undertake any Development Works (cl 16.1.3).

44 Without being exhaustive, cl 17 required Mr Morton to execute such documents as might be necessary to allow the developer to obtain planning approvals and other permits.

45 Clause 18 provided that the developer was “solely responsible for incurring and paying all Development Costs”.

46 Clause 19 provided:

1. DEVELOPMENT FINANCE

The Owner agrees that the Developer will determine the terms of the Development Finance and that:

19.1.    the Owner is not required, whether jointly with the Developer or otherwise, to borrow any moneys for the purposes of the Development;

19.2.     the Owner is not required to guarantee any Development Finance obtained by the Developer;

19 .3.     the Land must not be used as security for Development Finance.

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

1. 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.

48 The financial arrangements between Mr Morton and the developer were the subject of several clauses. The central clause was cl 21, which provided:

1. 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.

49 Clause 22 dealt with the means by which the Development Fee would be paid to the developer. 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 the developer authorised “any person engaged by the Developer or the Owner to distribute the Sale Proceeds … as instructed by the Developer”.

50 Clause 25 imposed various obligations on the developer to maintain books and records, as follows:

1. RECORDS AND ACCOUNTS

25.1    The Developer must:

25.1.1    open and maintain a bank account in relation to the Development which does not relate to any other part of the Developer’s business;

25.1.2    maintain and cause to be maintained true and proper invoices, financial statements, financial reports, billings and books of account (Accounts) with respect to the Development Works, the Development Fee and the Development Costs;

25.1.3    ensure that the Accounts in relation to the Development reflect properly the facts of all activities and transactions in relation to the Development; and

25.1.4    keep all Accounts in accordance with generally accepted accounting principles in Australia, consistently applied, and in particular for the industry in which the Development is undertaken.

25.2    The Owner or the Owner’s agent may inspect the Accounts upon 7 days notice to the Developer.

25.3    The Developer shall provide the Owner with monthly reports in relation to matters including:

25.3.1    the Development;

25.3.2    satisfaction and work towards satisfying Milestones,

25.3.3    statements of Development Costs incurred and comparisons of these to the Budget;

25.3.4    sales of Lots and settlements; and

25.3.5    receipt of Sale Proceeds

during the Term.

25.4    The Developer will provide such information in relation to the Development Works, the Development and the Development Costs at each Meeting as the Owner reasonably requires.

51 Clause 28 provided that completion would be deemed to have taken place when the work was completed, Mr Morton received the sale proceeds, and Mr Morton paid all sums due to the developer.

52 Clause 29 concerned termination by the developer, and provided that if Mr Morton was “in material default under the agreement, [it] may, after giving the Owner 20 Business Days in which to remedy the default, terminate this agreement if the default has not been remedied by giving 5 Business Days written notice”.

53 Clause 30 concerned a like termination provision enabling Mr Morton to terminate the agreement if the developer was in default.

54 Clause 31 provided:

1. PAYMENTS AND ACTIONS

31.1    The parties agree that upon termination of this agreement other than in accordance with clause 28, the Owner must pay to the Developer:

31.1.1    for each Stage which is a Completed Stage on the date of termination, any unpaid Development Fee for that Stage; and

31.1.2    for each Stage which is not a Completed Stage, a sum equal to the Development Costs incurred and unpaid (but excluding the Dacland Management Fee) by the Developer for that Stage up to the date of termination of this agreement.

…

31.7    Upon termination of this agreement pursuant to clause 29 or 30, on request by the Owner within 20 Business Days of that termination, the Developer will immediately transfer or assign (to the maximum extent possible) to the Owner or an entity nominated by the Owner:

31.7.1     all agreements in relation to the Development and the Development Works;

31.7.2    all Intellectual Property Rights;

31.7.3    registered business names relating to the Development;

31.7.4    internet domain names, email addresses, telephone and facsimile numbers relating to the Development

at the expense of the Owner…

55 Clause 32.1 provided that the developer accepted the condition of Dave’s Block.

56 Clause 32.4.1 provided that the developer released Mr Morton and indemnified him against any claims and liabilities arising out of or in respect of the agreement or the development.

57 Clause 33 contained acknowledgments and warranties by the developer , including that it had “the expertise necessary to undertake the Development”.

58 Clause 34 contained acknowledgments and warranties by Mr Morton, including that he had negotiated the agreement with the assistance of legal advisers.

59 Clause 38 provided that the development agreement did not create a partnership, a joint venture, or any employment relationship between Mr Morton and the developer, as follows:

1. 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.

60 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.

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

62 Schedule 3 contained an unexecuted copy of the power of attorney. Recital R.3, which the primary judge said “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.

63 The Attorney was Tarneit Development Project Pty Ltd (the developer).

Revisions and variations

64 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.

65 On 26 March 2014, a deed of variation was executed between Mr Morton (in his capacity as the 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 replaced cls 1.2 and 1.3 of sch 2 to each development agreement with new cls 1.2–1.5, which contained a new formula for calculating the Development Fee under each agreement, as follows:

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;

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.

…

…     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.

66 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 State Budget”.

67 On 26 August 2016, a second deed of variation was executed between the same parties to support Dacland obtaining finance. Clause 5.1 replaced cls 1.2–1.5 of sch 2 of the development agreements with new cls 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).

68 Clause 7 of the second deed of variation inserted a new cl 8C into each development agreement which 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.

69 Civil construction works on the Morton Farm development commenced in September 2017, and proceeded in what the primary judge called “a stop-start fashion”, due to Dacland’s difficulties in securing adequate funding. With construction stopped, Dacland obtained funding from new financiers in November 2017.

70 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 primary judge said (at [50]) that 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.

71 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. The primary judge said (at [51]) that the purpose of the deed appeared 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.

Contracts of sale

72 The Commissioner relied on the terms of some exemplar contracts of sale entered into by or on behalf of Mr Morton and purchasers for the proposition that “the parties themselves regarded the development as a development being conducted on behalf of the landowner”.

73 Unsurprisingly, most of the contracts were contracts for the sale of residential lots and were relevantly all in similar terms. There were two contracts for the sale of commercial premises (a childcare centre and a service station). One of the contracts in evidence before the primary judge and which the Commissioner took us to was signed by a power of attorney of the owner, one Mr Ackerman, who counsel presumed was associated with the developer. That was said to mean that “we can proceed, your Honours, along the lines that the terms of this contract of sale were conceived of by the developer and agreed to by the [owner]”. The Commissioner also contended that it was significant that some lots were sold before construction of the development had commenced because “the landowner has a personal liability to the purchaser to sell a lot that’s not yet in existence”. It was also said to be of significance that because Mr Morton was the owner and the vendor under the contracts of sale for the lots, his rights and obligations under the agreements were his rights and obligations and were enforceable only by him and against only him.

74 The court was also taken to various special conditions in an exemplar contract of sale of a lot not yet in existence, including terms that imposed: an obligation on Mr Morton to endeavour to have the relevant plan of subdivision certified and endorsed with a statement of compliance; a right to amend it; a right in him to create additional lots; and a right in him to create further Stages.

75 Particular reliance was placed on cl 16.1 of the special conditions:

The Purchaser acknowledges and agrees that to facilitate the progressive development of the Development, the Vendor may undertake further Development Works on other lots after settlement and, notwithstanding that the works in any part of the Development or on lots to be built subsequently may block out or impede access to light and air available to the Lot currently or at Settlement or at any other time, the Vendor will be entitled to carry out those works.

76 We were also taken to provisions in the contract under which the vendor reserved the right to amend design guidelines as reasonably necessary from time to time for the land contained in the planned subdivision to which the purchaser could not object; a provision by which the purchaser acknowledged and agreed that the vendor may conduct marketing activities on or about the development generally, including after settlement; and another provision granting to the owner an option to repurchase the land if the purchaser is in breach of the special condition dealing with the construction of a dwelling, all of which could be enforced only by the owner.

77 The Commissioner submitted that these, and like provisions, “incontrovertibly demonstrates that the structure [of Dave’s Block development agreement] … was a profit-making scheme into which the land was ventured, and was a profit-making scheme that was carried out by or on behalf of the [owner]”. It was also submitted that the significance of terms of the contracts of sale was to show that the owner:

enters into contracts of sale with third parties, binding himself to rights and obligations as the person for whom the development has been carried out, or on whose behalf the development has been carried out. Now, the learned primary judge dismissed the relevance of these contracts by simply saying they can’t override the meaning of the November 2012 contract. In our submission, they are entirely consistent with the 2012 contract.

…

[The terms of contracts of sale were] created on the basis that the [owner] is the person for whom the development is being carried out, either by or on his behalf, in circumstances where the provisions of the contracts of sale all deal with conditions designed to enable the development of not only the lot concerned, but all the neighbouring lots, where all of that development is not to be compromised by anything that the purchaser does. So that if the purchaser starts comprising the development, the right to – at law, the rights for stopping that are not held by the developer; they’re held by the [owner].

The development

78 The primary judge gave the following explanation (at [52]) “about what was actually done to ‘develop’ Mr Morton’s land”.

79 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.

80 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, making it necessary for the farm to cease operation before the development could take place.

81 Senior counsel for Mr Morton at the trial accepted that the planning permit imposed a number of obligations on Mr Morton as the owner of Dave’s Block. The primary judge said (at [54]) that “[i]t appear[ed] 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”.

82 The development of 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 on 11 January 2016.

83 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.

84 In August 2017, bulk earthworks began on Dave’s Block. Civil construction works on Dave’s Block commenced in September 2017.

85 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 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.

86 As the primary judge explained (at [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, which included prohibiting, for example, “mock period style” features.

87 In this way, as the primary judge observed (at [60]), the development of 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”.

88 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.

89 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 and the objections thereto

90 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.

91 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.

92 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.

93 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.

94 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.

95 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.

The factual findings of the primary judge

96 The evidence in the proceeding below comprised an affidavit of Mr Morton with its annexures; an affidavit of Mr Ross Eva, an associate of Mr Morton’s; and the contents of a filleted version of the court book that was agreed between the parties.

97 Mr Morton and Mr Eva were cross-examined, the former “at length by senior counsel for the Commissioner” (J at [72]).

98 The primary judge summarised the evidence that Mr Morton gave in cross-examination, all of which he accepted, including as follows.

99 First, 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 (J at [73]).

100 Secondly, as for his negotiations with Dacland, Mr Morton explained that “the key tenets” to which he adhered while negotiating were that (J at [76]):

(a) the Morton Farm properties should not be used as security for loans taken out by Dacland; and

(b) 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 family.

101 Thirdly, Mr Morton was asked a number of questions about the monthly reports which cl 25.3 of the Dave’s Block development agreement required the developer to furnish to Mr Morton. The primary judge summarised his responses as follows (at [79]):

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.

102 Fourthly, Mr Morton was asked about updates he was given via email. As the primary judge said (at [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.

103 The primary judge found that Mr Morton “impressed [him] as an open, honest, and frank witness” and that he “gave his evidence in a direct manner, and never struck [him] as attempting to avoid questions put to him by senior counsel for the Commissioner”. He said further that he “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” (J at [82]). His Honour continued:

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.

104 Mr Eva was the managing director of a company whose business was to connect landholders with developers, in exchange for a commission (J at ([87]).

105 Mr Eva deposed that he contacted Mr Morton after the State government’s announcement concerning the Urban Growth Boundary. He said that he and Mr Morton first met in 2010 or 2011, together with the representatives of a developer. Mr Eva deposed that, at that time, Mr Morton told him 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.

106 In around November 2014, Mr Morton asked Mr Eva to attend monthly meetings with Dacland on Mr Morton’s behalf. Mr Eva said 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 said that he agreed to assist Mr Morton in his capacity as a friend.

107 Mr Eva said that the first landowners’ meeting was held in January 2015. He said 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.

108 The primary judge also noted that Mr Eva’s evidence was not challenged and that he was an honest witness, whose evidence he accepted (J at [93]).

the reasons of the primary judge

109 Having set out the competing contentions of the parties and the general principles of law applicable (which I deal with below, and about which there was no dispute between the parties), the primary judge said that the following features of the development of Dave’s Block within the Morton Farm development were significant to determining whether Mr Morton’s activities constituted either a business of land development, or the undertaking of a profit-making scheme (as the Commissioner contended).

110 First, Mr Morton did not acquire the land with the intention of profiting by its sale. Accordingly, his activities fell 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 (citing among other cases The Hudson’s Bay Co Ltd v Stevens (1909) 5 TC 424) (J at [148]-[149]).

111 Secondly, 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, including theft, dangerous driving and property damage in the area, and that Mr Morton’s decision to engage with property developers was prompted by changes, not of his making, affecting Dave’s Block that spelled the end for the viability of his farming business (J at [150]).

112 As to the Commissioner’s contention that “Mr Morton was actuated by a desire to achieve the maximum profit possible”, the primary judge reasoned as follows (at [151]):

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.

113 Thirdly, the primary judge said that although the fact that Mr Morton continued to farm Dave’s Block after the announcement of the rezoning of the land in 2010, and up to about 2015, “[did] not exclude the possibility that Mr Morton had embarked on a new business of property development … it does inform the nature of Mr Morton’s activities during this initial period” (J at [152]).

114 Fourthly, the primary judge said that the means by which Dave’s Block was developed were significant, and that although “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”, citing Stevenson v Commissioner of Taxation (1991) 29 FCR 282 at 290 and Statham v Federal Commissioner of Taxation (1988) 20 ATR 228 at 235-236. Here, the primary judge observed, or found, as the case may be (at [153]-[158]):

(a) Dacland was responsible under the Dave’s Block development agreement for undertaking the “Development Works”, which encompassed the wide range of activities identified at [30 ] above;

(b) cl 6.1 of the Dave’s Block development agreement conferred upon the developer the “exclusive right to subdivide, develop, market and sell” Dave’s Block during its term;

(c) whatever business like organisation, books, and accounts existed were not controlled by Mr Morton, or maintained on his behalf;

(d) cl 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 the developer, and the agreement did not empower the developer to act as Mr Morton’s agent, otherwise than in accordance with the terms of the agreement;

(e) the development agreement did not provide for the developer, or any other Dacland company, to carry out works on Dave’s Block as agent for Mr Morton;

(f) Mr Morton played little active role in the development of Dave’s Block, and 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;

(g) while Mr Morton probably did receive monthly reports pursuant to the Dave’s Block development agreement, he did not read them, or take much of an active interest in the conduct of the development;

(h) contrary to the Commissioner’s contention, cl 7.4 of the Dave’s Block development agreement, which required the developer to complete the development “in a proper and business like manner, to a standard not less than that of an experienced residential property developer”, did not indicate that Mr Morton was engaged in a business, because if the development were not undertaken in that fashion, Mr Morton would likely realise less for his land than if the developer carried out the development properly;

(i) contrary to the Commissioner’s contention, the provisions in the Dave’s Block development agreement concerning project budgets and milestones carry limited significance, although the budgets relied upon by the Commissioner did constitute one area in which Mr Morton had an opportunity to influence the conduct of the development;

(j) the mechanism in the Dave’s Block development agreement for setting the sale price of subdivided lots, did not bear one way or the other on the question before the court, because 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;

(k) 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, and the fact 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 tells against the conclusion that Mr Morton was carrying on a business of property development;

(l) the process followed by Mr Morton for engaging Dacland and negotiating the development agreements did not suggest that Mr Morton was engaged in a business, and Mr Morton formed the view that subdividing Dave’s Block and the rest of Morton Farm would secure the best financial result for him and his family;

(m) no sophisticated commercial analysis was necessary to lead Mr Morton to that conclusion, and indeed he did not conduct any.

115 Fifthly, the primary judge said that the fact that Mr Morton was not involved in obtaining the finance required to undertake the development was “a very significant factor that tells against the conclusion that Mr Morton was carrying on a business of property development” (J at [159]). His Honour continued:

159    … 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.

116 Sixthly, the primary judge said (at [162]) that he was “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”. His Honour continued:

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.

117 Seventhly, the primary judge did not consider that Mr Morton’s activities were marked by “repetition” in the relevant sense, it being common ground that repetition is one of the “badges of trade” that can be used to discern the existence or commencement of a business. His Honour further said (at [163]-[165]):

… 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. 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.

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.

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.

(Emphasis added by the primary judge).

118 Eighthly, the primary judge was not persuaded that the arrangements between Mr Morton and Dacland, including the arrangements as to agency and powers of attorney, truly altered the position. He addressed the Commissioner’s submission that sought to characterise the development of Dave’s Block as being conducted “for the benefit of the applicant”, the object of maximising sale proceeds, and to Mr Morton’s ability to compel the proper performance of the developer’s obligations under the Dave’s Block development agreement. His Honour said (at [166]) that “[t]hat characterisation was quite accurate, as long as one remembers that Dacland also sought to benefit from its involvement in the development” and “[t]he 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”.

119 The primary judge said (at [174]) that “[i]n 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”.

120 In that regard, the primary judge pointed to cl 38 of the Dave’s Block development agreement, which expressly provided that it did not establish a partnership, joint venture, or relationship of employment, and did not authorise the developer to act as Mr Morton’s agent except in accordance with the agreement’s terms. Absent any suggestion of a sham or the like (expressly disavowed by the Commissioner), the primary judge said that there was no reason why cl 38 should not be given effect, citing Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 275 CLR 165 at 43 (“where the terms of the parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject of an estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship”).

121 Further, the primary judge pointed (at [176]) to cl 6.3 of the development agreement, which provided that Mr Morton had “no interest” in the development. His Honour said that “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” and that “[a]bsent 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”. (I interpolate that the Commissioner was critical of the primary judge’s use of the word “manager” in that context, saying that it had no legal meaning, but it is tolerably clear that his Honour used the word in that passage as a substitute for agent, so nothing turns on it).

122 The primary judge also said (at [177]) that the fourth and fifth points set out above “buttress this conclusion, as they indicate that the conduct of the development was not carried out at the direction of Mr Morton” and that “[s]ubject to some constraints, Tarneit East was entitled to, and did, act independently from Mr Morton’s direction in carrying out the development”.

123 The Commissioner also relied on the fact that the contract of sale referred to the development as Mr Morton’s development, but the primary judge did not consider that relevant because as he said at [178]:

… 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.

124 The primary judge also said (at [179]) that the ways in which proceeds from the development were divided likewise supported that conclusion, because “the remuneration derived by the developer was linked to the success of the project” and that “[w]hile 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”.

125 The primary judge concluded his analysis of the eighth point by reiterating his view (at [180]) “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”, continuing as follows:

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.

126 Ninthly, the primary judge said that he was not persuaded that the evidence concerning planning applications weighed in favour of the conclusion that Mr Morton was carrying on a business. He dealt with the Commissioner’s submission that it did as follows (at [181]):

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.

(emphasis in original)

127 For those reasons, the primary judge concluded (at [182]) that Mr Morton at no stage embarked on a business of developing land, and never ventured Dave’s Block into a profit-making scheme. Accordingly, he found that no part of the proceeds of the sale of Dave’s Block was assessable income in Mr Morton’s hands, and that Mr Morton had made out his case that the amended assessments issued by the Commissioner to him in relation to the 2019 and 2021 years of income were excessive.

128 Accordingly, the primary made the orders set out at [6 ] above.

the submissions on appeal

The Commissioner’s submissions

129 The Commissioner filed a notice of appeal dated 12 May 2025, but his counsel did not make any submissions by reference to it at the hearing of the appeal, nor did he make any reference to his written submissions dated 7 October 2025 and (in reply) dated 5 November 2025. That is not surprising, because those documents contained grounds and submissions that were, in considerable part, inconsistent with the case advanced by the Commissioner at the hearing of the appeal, including that the primary judge erred in rejecting evidence; that he erred in finding that Mr Morton’s lack of involvement in finding finance was a very significant factor and in failing to distinguish correctly between a mere realisation of a capital asset and the conduct of a business or the venturing of the asset into a profit-making undertaking or plan; and that he failed to apply the correct legal test in respect of s 15-15 of the ITAA 1997. Because the bulk of the grounds of appeal and the written submissions made in respect of them were inconsistent with the case argued, and because no reference was made to them at the hearing of the appeal, nothing more need be said about them.

130 As I have mentioned, at the hearing of the appeal the Commissioner accepted that all of the findings of fact made by the primary judge were sufficient and complete, with two exceptions “of indirect, perhaps minor, relevance” which it was said his Honour “inferentially referred to”, being evidence about the setting up of the sales office and the requirement that the developer provide monthly reports to Mr Morton, although that minor relevance was not explained.

131 Further, the Commissioner did not challenge the factual findings or the legal reasoning in respect of the conclusions of the primary judge, including that:

(1) Mr Morton did not acquire Dave’s Block with the intention of profiting from its sale, but purchased it from his father in 1980 and farmed the land until 2015 (J at [148]).

(2) The circumstances of the sale of Dave’s Block were not of his making and included (J at [11], [15]):

(a) the incorporation in 2010 of Dave’s Block into the expanded Urban Growth Boundary;

(b) the consequential increases in rates and land tax;

(c) the thefts and damage to property prevalent in the area; and

(d) the fact that farming on Dave’s Block was therefore no longer commercially viable.

(3) Mr Morton did not pursue a course of conduct calculated to achieve the maximum available proceeds for Dave’s Block, or Morton Farm, at any cost. Instead, he adhered to, and the development agreements reflected, two tenets which (J at [151]):

(a) precluded the land from being used as security for finance; and

(b) provided for Mr Morton to obtain a fixed percentage of the sale of the proceeds of the subdivided lots.

(4) Mr Morton was not involved in obtaining any finance required to undertake the development.

(5) Mr Morton did not understand the development processes and why things were happening, or not happening (J at [90]).

(6) Mr Morton was unwilling to be involved in any active way with the development of the land ([J at [103]) and in fact played little active role in the development of Dave’s Block (J at [154]).

(7) Mr Morton continued to farm Dave’s Block after the development agreement had been entered into, as he was entitled to do under cl 15.2, which as the primary judge put it, suggested “that Mr Morton remained committed to his farming of the land” between 2010 and 2015 (J at [152]).

132 At the risk of unnecessarily repeating myself, the Commissioner also expressly eschewed any suggestion that the terms of the development agreements were a sham, or anything of the sort, and did not seek to challenge the primary judge’s favourable assessment of the credibility of Mr Morton (or Mr Eva) or any finding of fact his Honour made.

133 The Commissioner’s principal contention at the hearing of the appeal was that various provisions of the Dave’s Block development agreement, and to a much lesser extent the terms of contracts of sale of subdivided blocks entered into between Mr Morton and the purchasers, demonstrate that the acts and activities undertaken by the developer, in performance of the agreement, were undertaken by the developer by or on behalf of Mr Morton and that the primary judge erred as a matter of the proper construction of those terms in concluding at [166]-[180] of his reasons that they were the acts and activities of the developer in the independent pursuit of its own business, and that they were not the acts or activities of Mr Morton.

134 The Commissioner conceded that he relied heavily on the terms of the Dave’s Block development agreement, as the following exchange between Derrington J and Mr Davies KC (who appeared with Ms M Schilling SC and Ms C Nicholson of counsel for the Commissioner) demonstrates:

DERRINGTON J: So is the question – does the question come more to an evaluation or interpretation of the contractual arrangements between the parties? And if that is so, I take it that the Commissioner’s position is the contract should be read according to the terms? There’s nothing – there’s no shams or anything in them other – we should just take the documents as they are? That’s the correct position, is it?

MR DAVIES: We certainly rely very heavily on the documents.

DERRINGTON J: I noticed.

MR DAVIES: And make the submission that his Honour misconstrued them in a fundamental way.

135 The Commissioner also submitted that what was done to implement the Dave’s Block development agreement in a practical sense assists in making the judgment required, as this exchange makes clear:

DERRINGTON J: And surely it is an analysis of the contractual rights between the parties.

MR DAVIES: All right. I’ll come - - -

DERRINGTON J: Is it, or isn’t it? You can tell me if I’m wrong. I mean, I’m just trying to understand what we have to decide.

MR DAVIES: Yes.

DERRINGTON J: Is it – do we decide on the basis of what they agreed, or do we decide on the basis of what they did, or a mixture of the two or – I just - - -

MR DAVIES: In our submission, your Honour, on the facts of this case, what was done was done pursuant to and in accordance with the agreement.

…

MR DAVIES: And what was done was done to implement the agreement, so that the characterisation of the agreement may be sufficient to answer the question.

DERRINGTON J: Yes. That’s what I was trying - - -

MR DAVIES: But it assists to know in characterising the agreement what it was that was done to implement it.

DERRINGTON J: In a practical sense what was done.

MR DAVIES: In a practical sense.

136 The Commissioner submitted that whether the question concerns the carrying on of a business or a profit-making scheme or undertaking, the cases (see, eg, XCO Proprietary Limited v Federal Commissioner of Taxation (1971) 124 CLR 343) make it clear that not every act that takes place as part of that business or profit-making scheme is one that needs to be undertaken by the taxpayer himself or herself, and that where the work is undertaken by subcontractors, pursuant to an agreement requiring it to do that work imposed upon them by the taxpayer, the work that is then carried out is done so on behalf of the taxpayer.

137 Mr Davies put the Commissioner’s case in the course of his oral submissions as follows:

Now, one of the other critical things that Whitfords Beach makes clear about proposition of business and profit-making scheme or undertaking is whether there is a commercial transaction in place … [The Dave’s Block development agreement] was a very commercial agreement, explicable by nothing other than (a) on the side of Mr Morton, the pursuit of deriving a profit from converting his rural land into residential lots and reselling them, and explicable by that fact on his part, and on the other side, explicable on no other reason than the developer seeking to make a profit by receiving a percentage of the sales proceeds in circumstances where the costs to the developer of carrying out what Mr Morton has required him to do, are less than the percentage of the proceeds that it gets.

So they’re both driven by profit-making purpose. They’re both driven by the goal of maximising sale proceeds by – and this is the critical point – not by then selling the land, but by doing something to the land so its value will increase, and the sale proceeds will be maximised. And that bit, the bit that has to be done to the land, is a major change to the land … it’s then broadacres rural, and what’s required is that it’s transitioned into much smaller subdivided lots for residential purposes, and the fact is that it takes years of activity to achieve that, both because of the planning activity that needed to be undertaken, which I will come to, and then, secondly, because of the actual work required to carry out and comply with the conditions attaching to the planning permit for the development subdivision.

So we have both parties to the agreement driven by the pursuit of profit, in circumstances where the profit to each is calculated in a different way, so they’re looking at different things, but they’re both driven by the pursuit of profit, and then the agreement requires work to be undertaken under it in order for it to be implemented and carried out, and as I will come to it, your Honour, that work is explicable, in a characterisation sense, if I can put it, it’s all commercial business-like work.

…

I think that your Honours will be able to conclude from what’s set out and the documents that I will take your Honours to … that the scope of what was required was very considerable indeed, and that it – the scope of what was done was clearly designed to convert land that was in a rural form, if I can put it that way, into properly landscaped, properly serviced, serviced by power, water, electricity, roads, properly serviced, much smaller subdivided lots for residential living, in circumstances where other infrastructure such as community halls, open spaces, the like, were required to be located on the land. In our submission, that’s sufficient to be able to properly characterise whether there was a business or profit-making scheme in the facts of this case.

…

Now, when your Honours come to the agreement, your Honours will see that this is not an agreement where the landowner is simply permitting a developer to come on and exercise its own business.

138 Having put the Commissioner’s case in that way, Mr Davies then took us at considerable length through the various specific clauses of the Dave’s Block development agreement upon which he relied in support of his core submission that Mr Morton had by that agreement appointed the developer to carry out the development as his agent – that is, that the developer was appointed to carry out the development “on his behalf” and that he therefore ventured the land to a business venture or to a profit-making undertaking or plan.

139 Mr Davies submitted that recitals R4 and R5 (set out above at [26 ]) were “upfront evidence” of the fact that both Mr Morton and the developer were seeking to maximise their profits. The same point was made in respect of cl 7.2 (“[t]he Developer will undertake and complete the Development Works with the intent of maximising its Development Fee”).

140 It was next submitted that the definitions of “Development” and “Development Approval”, set out at [28 ] and [60 ], respectively, which contemplated a “Precinct Structure Plan” (PSP) being incorporated into the Wyndham Planning Scheme was “evidence of the fact” that it was something more than a “mere than the realisation of an asset”. As counsel put it:

Now, one of the big issues in this case and the cases is what occurred – a business or profit-making scheme or undertaking or simply a mere realisation of an asset? Here we have evidence of the fact that it’s not a mere realisation of an asset. It could have been realised at the time. It could well have been – the land could well have been sold as broadacres, and its value at that time would have taken into account its potential development potential – its development potential, but that was not what was done. What was decided to be done was not to realise it, but to embark upon activity that required alterations to the Wyndham Planning Scheme so as to then substantially change the character of the land from rural to residential, and then sell it.

141 Mr Davies then recited cl 3.1 (“[t]he parties agree that the Developer will undertake the Development by performing the Development Works”); cl 4.1 (“[t]he Developer must on or before the date of this agreement satisfy the Owner that the Developer has sufficient financial resources and/or debt and equity commitments to meet the Developer’s obligations under this agreement”); cl 5 (“[t]he Developer must use its best endeavours to obtain the Development Approval”); cl 6.1 (“[i]n 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”); and cl 6.2 (“[d]uring 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”).

142 Clause 6.3 is obviously problematic to the Commissioner’s case. It provided that “[f]or the avoidance of doubt, other than its interest in the land, the Owner has no interest in the Development ” (emphasis added). The Commissioner suggested that it was a provision that was intended to protect Mr Morton from liability in relation to costs associated with carrying out the development, and submitted that the words “other than its interest in the Land” were material because: (i) that interest is fundamentally altered by the development because before the development took place, Mr Morton owned rural broadacres, and afterwards he was the owner of certificates of title relating to subdivided residential lots; and (ii) the consequential impact upon the value of the land.

143 Counsel next turned to cl 7, which is headed “Developer’s responsibilities and rights”. It is set out above at [35 ]. It was submitted that the provisions deal with “the sorts of things that one would expect to see in … a transaction that’s being negotiated and struck in a commercial setting designed to achieve business ends” and “the agreement … is incapable of implementation, and, even more narrowly, the work to be carried out as part of the development by the developer pursuant to the agreement was incapable of being carried out without the participation of the landowner”.

144 The Commissioner took issue with the statement made by the primary judge that Mr Morton had “little active role” in the development. He conceded that it is:

true … that in relation to the actual physical work involved in the construction, the landowner does not have an active role, and true it is that in relation to what was actually done to achieve planning approval, he did not have an active role. Of course, the reason why he didn’t have an active role is because he had neither experience in obtaining alterations to the planning scheme and obtaining planning permits, nor did he have any expertise in construction work, and the contract was how he enabled that work, in which he had no expertise, to be carried out by others on his behalf.

145 I interpolate to note that the primary judge in fact accepted Mr Morton’s evidence that he was “unwilling[] … to be involved in any active way with the development of the land” (see J at [103]). As I have said, the Commissioner did not challenge any of Mr Morton’s evidence, which included that evidence.

146 The Commissioner, however, pointed to certain clauses in the development agreement which, it was submitted, “required [him] to be actively involved”.

147 I will set out the key provisions in summarised point form:

it was necessary for the owner to give written consent to a Stage Budget within 10 days of its delivery (cl 8.3);

the developer must not commence any development works in relation to a Stage Budget unless either the owner has given written approval or it has been determined pursuant to the Assessment Method (as defined) (cl 8.4);

the owner’s role in accepting Milestone Proposals (as defined) (cl 9);

the developer must not request the owner to enter into a contract of sale for the lot in a stage unless the developer has obtained and given to the owner a Sale Valuation (as defined) (cl 11.2.1);

the developer will only make amendments to the plan with the owner’s consent, not to be unreasonably withheld (cl 12.4);

the owner will make the certificate of title available to the developer for the registration of the plan within 10 days of the developer’s request (cl 12.5);

the owner must not do or permit anything to be done that will prejudice the Insurances (as defined) (cl 14.3.1);

the owner will provide to the developer and its representatives, agents, employees, contractors, prospective purchasers, unfettered access to the land and the developer shall have uninterrupted access to the land (cl 15.1);

the owner must cease its primary production activities upon the giving by the developer of 90 days’ notice to do so (cl 15.2.2);

the owner has the right to have access to the land for the purpose of inspecting and viewing the progress of the development (cl 15.3);

the owner appoints the developer as the owner’s agent to do and perform acts in respect of the development and the development works, for the purpose of undertaking the owner’s obligations under the agreement (cl 15.7);

the owner appoints the developer to be its attorney to empower the developer 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 (cl 15.8);

the owner is not to mortgage or otherwise encumber or grant any interest in relation to the land without the developer’s prior written consent (cl 15.12);

the owner must on request by the developer do all things reasonable to allow the developer to apply for the Approvals (as defined), any consent of a responsible authority in relation to the land, such other applications as the developer may wish to make, or otherwise to comply with its obligations under the agreement (although nothing in this clause requires the owner to undertake any development works, assume any financial obligation or suffer any financial loss) (cl 17);

the owner must pay the Development Fee (as defined) (cl 21);

the owner will open and maintain a Sale Proceeds Account (as defined) into which all proceeds from the sale of the Lot payable to or received by the owner shall be deposited and from which the owner will pay the developer the development fee (cl 22.1);

the developer shall provide the owner with monthly reports in relation to the development, satisfaction and work towards satisfying the milestones, statements of development costs incurred and sales of lots and settlements, and receipts of sale proceeds (cl 25.3);

the developer will provide such information in relation to the development works, development and development costs at each meeting as the owner reasonably requires (cl 25.4);

in the event of termination, other than in the event of completion under cl 28, the owner must pay to the developer:

• any unpaid development fee for each Completed Stage (cl 31.1.1);

• for each stage which is not a Completed Stage, a sum equal to the development costs incurred and unpaid by the developer for that stage up to the date of termination of the agreement (cl 31.1.2);

upon termination of the agreement, on request by the owner within 20 business days of that termination, the developer will immediately transfer or assign to the owner all agreements in relation to the development, all intellectual property rights, registered business names relating to the development, internet domain name etc at the expense of the owner (cl 31.7).

148 Clause 38 is another provision that is not without difficulty for the Commissioner’s case. As set out above, it provided that nothing in the agreement constitutes a partnership or a joint venture between the parties and nothing in it authorised or empowered the developer to act as agent for the owner, otherwise than in accordance with its terms (cl 38.1). It further provided that the developer “will carry out its responsibilities as an independent party and assumes all the risks of so doing” (cl 38.2) and that the developer was to conduct the development “in its own right” (cl 38.3).

149 The Commissioner made the following submission about those provisions:

Now, in our submission, those clauses do not have the consequence that the work required by the landowner to be carried out pursuant to this agreement is not work that is carried out on his behalf because that expression is used in the authorities dealing with both the carrying on of a business and the carrying on of a profit- making scheme or undertaking. And, your Honours, I’ve given submissions about that already. We use the expression “or on his behalf”.

Just step back for a moment. If the acts of the developer in carrying out the development are not said to be acts for or on behalf of the landowner, the question remains, in relation to the other things, has the landowner carried on the business or ventured the land into a profit-making scheme or undertaking? In our submission, the answer to both those questions is yes. The landowner has committed the land to these agreements. The agreement, on its face, is a profit-making scheme or undertaking, and just dealing with scheme – profit-making or undertaking, is it carried out by him and the answer is yes, absolutely, it is carried out by him, because the steps that he has taken is to make available for years his farming land so that others – the developer – can develop and change its characterisation, and the owner has then sold not rural broadacres, but the owner has sold subdivided residential lots.

Now, those limited facts, in our submission, constitute profit-making scheme or undertaking within the meaning of the authorities …

The taxpayer’s submissions

150 Mr DJ McInerney KC appeared with Mr TK Jeffrie of counsel for Mr Morton.

151 Mr McInerney submitted that the primary judge correctly found that no part of the proceeds of sale of Dave’s Block were assessable income of Mr Morton because he was merely realising a capital asset, and:

(a) he was not carrying on a business of developing, subdividing and selling his land, so that the proceeds of sale did not constitute ordinary income within the meaning of s 6-5 of the ITAA 1997; and

(b) Mr Morton had not ventured his land into a profit-making undertaking or scheme, so that the proceeds were not assessable pursuant to ss 6-10 and 15-15 of the ITAA 1997.

152 Mr McInerney submitted the appeal should be dismissed because:

(a) the primary judge applied the correct tests to determine whether Mr Morton was carrying on a business or had ventured Dave’s Block into a profit-making undertaking or plan;

(b) the primary judge’s reasoning as to the application of the relevant statutory tests to the evidence was correct; and

(c) the Commissioner had not demonstrated error in either of the primary judge’s two ultimate conclusions or with respect to any particular factual finding.

153 Mr McInerney relied on a number of different clauses of the Dave’s Block development agreement in support of the proposition that Mr Morton did not carry on a business of developing, subdividing and selling the land and had not ventured his land into a profit-making undertaking or scheme, and had a limited role to play, as follows:

Mr Morton granted to the developer the exclusive right to subdivide, develop, market and sell the land (cl 6.1);

other than his interest in the land, Mr Morton had no interest in the development (cl 6.3);

the manner in which the developer was to undertake and complete the development works was at its discretion (cl 7.3);

Mr Morton was prohibited from objecting or supporting any objection to the development, interfering with the developer carrying out its rights and obligations under the agreement and undertaking or attempting to undertake any development (cl 16);

Mr Morton was not required to borrow any money for the development or guarantee any of the development finance, and that Dave’s Block was not to be used as security (cl 19);

it was for the developer, not Mr Morton, to determine the terms and conditions of the sale of any lot, including the sale price of the lot (cl 20.2);

the developer was not required to obtain Mr Morton’s consent to the terms of any sale of a lot, including the sale price (cl 20.3);

the developer could do all things it considered necessary or desirable in its sole discretion to enter into and give effect to the sale of a lot in the name of Mr Morton, by way of exercise of the power of attorney or otherwise (cl 20.4);

nothing in the agreement constituted a partnership or a joint venture or authorised or empowered the developer to act as agent for Mr Morton, otherwise than in accordance with the terms of the agreement (cl 38.1);

the developer was to carry out its responsibilities as an independent party and assumed all the risks of so doing (cl 38.2);

the developer was to conduct the development in its own right (cl 38.3).

154 Mr Morton also relied upon the unchallenged factual findings of the primary judge that he was provided updates through landowner reports, but that he did not usually read them (J at [80]) and that he 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 (J at [154]).

155 As Mr McInerney put it, “it is apparent from the judgment that the majority of factors support the conclusion that this was a mere realisation of an asset. The factors that don’t support that conclusion are neutral on the matter. And we say, with respect, that his Honour reached the only rational conclusion, that is also reflective of the truth, the substance of the matter being that Mr Morton himself at no stage embarked on a business of developing, subdividing and selling his land. He merely realised his long-held family asset”.

consideration

156 Although counsel for Mr Morton suggested otherwise in their written submission, it was common ground at the hearing of the appeal that the role of the Full Court in an appeal such as this is to conduct a real review, or an independent assessment, of the evidence at trial in order to determine whether the primary judge erred in law (there being no allegation that his Honour erred as to any matter of fact). Compare Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550 at [43]. As Fisher J said in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 321, another case in which the facts were not in dispute:

The primary question argued before the trial judge was whether the taxpayer was carrying on a business, in which case the outgoings were deductible under the second limb of s. 51. The facts upon which this question is to be determined, are, as above mentioned not in dispute, but whether the activities of the taxpayer can be characterized as a business venture is a matter to be concluded (or otherwise) from those facts. It is the question whether this positive conclusion is justified which constitutes the issue before us. Counsel on both sides appeared to concede that we were as well placed as the trial judge in determining whether or not it was the right conclusion. Such a concession accords with the approach of the High Court on appeal in Martin v. Federal Commissioner of Taxation (1953) 90 C.L.R., at p. 479: “It is simply a question of the right conclusion to draw from the whole of the evidence. Although the issue is one of fact there is no conflict of evidence and the case is one of those cases where the court of appeal is in as good a position to reach a conclusion as the judge below.”

157 Neither party in this case argued that the primary judge misstated the relevant legal principles. As I have explained, the Commissioner’s main contention on appeal was that the learned judge had mischaracterised the effect of the terms of the Dave’s Block development agreement.

158 The central question for determination by the primary judge was whether, in seeking to maximise the amount of money which he received from the sale of Dave’s Block, Mr Morton committed the land to a business venture or to a profit-making undertaking or plan or whether he merely sold the land to the best advantage (Commissioner of Taxation v Whitfords Beach Proprietary Limited (1982) 150 CLR 355 at 400 per Wilson J: “the true question is whether the taxpayer in proposing to maximize the amount of money which it received on sale of the land committed the land to a business venture or to a profit-making undertaking or scheme or merely sold the land to the best advantage”).

159 In Crow v Federal Commissioner of Taxation (1988) 19 ATR 1565 at 1573, Lockhart J observed:

It is well established that profits obtained from the realisation of property are to be treated on revenue account and as assessable to tax “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”: Californian Copper Syndicate v Harris (1904) 5 TC 159 at 166; FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692.

Whether or not a business is carried on by a taxpayer is, of course, a question of fact; but the reported cases are of assistance in pointing to certain factors which can provide a useful guide. Continuity and repetition of transactions pointing to a systematic course of conduct are important factors: Martin v FCT (1953) 90 CLR 470; 5 AITR 548. There is a greater scope for the characterisation of a series of acts as being within the scope of carrying on a business where the acts are motivated by the desire for or expectation of profit, although a particular commercial transaction may form part of a business in the absence of the attainment or expectation of profit in that transaction: Investment and Merchant Finance Corp Ltd v FCT (1971)125 CLR 249, per Barwick CJ at 255; (1971) 2 ATR 361 at 363. A series of repeated transactions of the same kind is often an incident of carrying on a business: FCT v St Hubert’s Island Pty Ltd (in liq) (1978) 138 CLR 210 per Jacobs J at 237; 8 ATR 452 at 468. Where a realisation of property is motivated by factors other than those normally to be expected in a business context, the court will be less ready to find that the realisation had the nature of a business transaction.

…

It is neither necessary nor correct that each individual transaction be analysed for the purpose of determining whether a business is carried on. One must look to the overall affairs of the person concerned and to the system, if any, employed.

160 As Hill and Carr JJ (French J agreeing) said in Puzey v Commissioner of Taxation (2003) 131 FCR 244 at [46]–[48]:

The question whether a person is carrying on a business is a conclusion to be drawn from all relevant facts and circumstances. There are some relevant propositions which can, however, be stated … it is self-evident, every business must have a first transaction. And there may be a business, even if that business is small in scope … A person may carry on a business, notwithstanding that the person had some other activity, such as full-time employment. It is not necessary in concluding that a business is carried on that the acts to be undertaken are acts of the person seeking to establish he or she is carrying on a business. So a person may appoint another to take the steps which constitute the business activity …

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.

In deciding whether or not a business is carried on, courts have pointed to what have been called in the United Kingdom the “badges of trade”, indicia which, while no one of them will be determinative of whether a business is carried on, collectively will demonstrate a business. These include the profit motive (although a non-profit company may still carry on a business), acting in a business-like way, (although many businesses may be found which operate in a non-businesslike way), the keeping of books of account and records (although the fact that there are none will not necessitate the conclusion that a business is not carried on), and repetition (although a fixed-term project may still be a business).

(Citations and internal quotations omitted).

161 And as French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ said along similar lines in Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at 19 [59]:

The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.

(Citations omitted)

162 Further, “the Commissioner does not need to show that the [taxpayer] was carrying on a business. As we have seen, it is enough to answer the statutory description that there was a profitmaking undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realization of an asset then it was not a profit-making undertaking or scheme”. See Whitfords Beach at 383-384 (Mason J).

163 And to establish the existence of a business or profit-making undertaking or plan it is not necessary that the taxpayer personally carries out the activities in question. See, by way of example, Stevenson at 290 and Puzey at 256 [46]. Rather, it is also relevant to consider activities carried on for or on behalf of the taxpayer, whether as agent, employee or pursuant to some other contractual or other arrangement. See Puzey at 256 [46], 258 [54]; Howland-Rose v Commissioner of Taxation (2002) 118 FCR 61 at 125 101.

164 It may be accepted, and Mr Morton did accept, that:

(1) the Dave’s Block development agreement involved a commercial transaction;

(2) he intended to derive a profit from subdividing the land by recovering a percentage of the sale proceeds of the lots;

(3) he anticipated that the value of the land, and thus the sales proceeds, would increase once the development was completed;

(4) the development works involved bringing Dave’s Block within the Wyndham Planning Scheme and were designed to effect major changes to the land; and

(5) he appointed the developer as his agent to do and perform acts in respect of the development, and the development works, for the purpose of undertaking his obligations under the agreement (cl 15.7 says so expressly).

165 I do not, however, accept the Commissioner’s contention that the developer was appointed to carry out the development “on behalf” of Mr Morton as his agent and that he therefore ventured the land to a business venture or to a profit-making undertaking or plan.

166 The Commissioner’s reliance on the notion that the Dave’s Block development agreement made the developer his agent affirms the force in Lord Herschell’s observation in Kennedy v De Trafford [1897] AC 180 at 188 (repeated by Dixon J in Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at 50) that “[n]o word is more commonly and constantly abused than the word ‘agent’”. See Scott v Davis (2000) 204 CLR 333 at 408 [227]. As Mr Dal Pont says in his work Law of Agency (3rd ed, LexisNexis Butterworths Australia, 2014) p 8:

Judges have adverted to the loose and slipshod use of the word ‘agent’, and have observed that ‘[t]hat the misuse of the word in common speech connotes an obscurity of the concept of agency’, one going so far as to opine that ‘[n]o word is more commonly and constantly abused than the word “agent”. Comments of this kind reveal that not all relationships branded as agency relationships exhibit the elements or characteristics of the legal concept of agency. More is required to establish an agency relationship than showing that one person did work at the request of another person for the latter’s benefit, or that the relationship created attracts fiduciary duties. And even though agency involves a representative capacity, it cannot be assumed that identifying a person as a ‘representative’ in relevant documentation refers that person an agent for legal purposes.

What follows from the foregoing is that it is possible for persons to suppose that their relationship is that of principal and agent, when in point of law it is not, and vice versa. The substance, not just the form, of the agreement or the exact circumstances of the relationship between the parties must be assessed.

(Citations omitted; emphasis added)

167 For those reasons, it seems to me that merely to point to those provisions of the development agreement that impose obligations on the owner or to provisions that the developer carry out acts on behalf of the owner does not go far enough, first because to ask the question “was the developer the agent of the owner?” is not the relevant ultimate question; and secondly, because the proposition put by the Commissioner does not come to terms with express terms of the agreement limiting the scope and nature of the relationship – or to use Mr Dal Pont’s words, “[t]he substance … of the agreement or the exact circumstances of the relationship”.

168 The relevant question is not whether the developer was the agent of the owner or acted on his behalf – the relevant questions are whether:

(a) in developing, subdividing, and selling the land that comprised Dave’s Block, did Mr Morton carry on a business such that the amounts in issue were income according to ordinary concepts?; or

(b) the amounts in issue are assessable as statutory income on the ground that the amounts were profit arising from the carrying on or carrying out of a profit-making undertaking or plan?

169 And as for the second question, assuming that an agency relationship existed between Mr Morton and the developer to the extent contemplated by the development agreement, the true question must involve defining the content of that relationship. Here, it seems to me, the Commissioner’s agency contention does not come to terms with specific terms of the development agreement that limit and define that content, namely:

(a) other than its interest in the land, the owner has no interest in the development cl 6.3);

(b) the manner in which the developer was to undertake and complete the development works was at the discretion of the developer (cl 7.3);

(c) nothing in the agreement authorised or empowered the developer to act as agent for the owner, otherwise than in accordance with the terms of the agreement (cl 38.1);

(d) the developer was to carry out its responsibilities as an independent party and assumed all the risks of so doing (cl 38.2);

(e) the developer was to conduct the development in its own right and nothing contained in it granted or gave to, or created in, the developer a beneficial or equitable interest in the land (cl 38.3);

(f) other than as permitted by the agreement, neither party was to represent or warrant to a person that it acted for or on behalf of the other party (cl 38.4).

170 Further, cl 15.7 provided that the owner appointed the developer as his agent to do and perform acts in respect of the development and the development works, for the purpose of undertaking the owner’s obligations under the agreement. As Derrington J pointed out at the hearing, such a clause would not be necessary if, as the Commissioner contended, the developer was doing the work of the owner.

171 As the primary judge observed at [168] and [172]-[174], and with respect I entirely agree:

… 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.

…

It is beyond doubt that a relationship of agency existed between Mr Morton and Tarneit East in relation to Dave’s Block … 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.

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.

In truth, the question whether [the developer’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 [the developer] should be taken into account in discerning the character of the proceeds of the sale of Dave’s Block in Mr Morton’s hands.

(Emphasis added).

172 In this case, there are many factors (which the Commissioner did not dispute) which in evaluating that question of fact point to the realisation of Dave’s Block as being motivated by factors other than those normally to be expected in a business context including that Mr Morton did not acquire the land with the intention of profiting from its sale by subdivision, but purchased it from his father in 1980 for the purpose of conducting farming operations (which he did for 35 years); the circumstances of the sale of Dave’s Block were not of Mr Morton’s making because farming on Dave’s Block was no longer commercially viable for all the reasons he gave (the incorporation of it into the expanded Urban Growth Boundary, the consequential increases in rates and land tax and so on); Mr Morton did not seek to achieve the maximum available proceeds at any cost, but instead adhered to the two “tenets” he described; he did not borrow any money to fund the development works; and he was unwilling to be involved (and was not involved) in any active way with the development of the land.

173 Further, senior counsel for the Commissioner himself submitted that “it assists to know in characterising the agreement what it was that was done to implement it”. See [135 ] above. In that regard, the primary judge found, and the Commissioner did not dispute, that Mr Morton had little or no involvement as a practical manner in the development of the land, which tends against the notion he was engaged in any business of property development. Further, the primary judge found as a fact that Mr Morton did not understand the development processes and why things were happening or not happening (J at [90]) and that he played little active role in the development; 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 and did not read the monthly reports that he probably received (J at [154]).

174 As I have explained above, the Commissioner both before the primary judge and on appeal contended that it was significant that a contract of sale referred to the development as Mr Morton’s development and that he owed obligations under the contracts to the purchasers. But because Mr Morton owned the land that was being sold, he was inevitably the contractual counterparty to the purchasers of subdivided lots, and it was inevitable that the purchasers owed him certain obligations in relation to the development (as the primary judge observed at [178]).

175 The Commissioner also placed reliance on the “massive” scale of the subdivision, citing Whitfords Beach at 385 (per Mason J). As the primary judge said, there is no doubt that the development of Morton Farm occurred on a very extensive scale, culminating in the creation of about 1,632 lots. But as his Honour also observed, and again I agree, “[t]he scale of the subdivision and sale of the [farm] was a product of the size and nature of [it] as an asset, in combination with forces prevailing in the market for residential property in Tarneit over the relevant period” and that he “[did] 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” (J at [162]). As Woodward, Lockhart and Hartigan JJ said in Statham at 233:

It is well established by the reported cases, including those mentioned above, that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant matter to be taken into account in determining the nature of the realisation, ie in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme.

176 And as Williams J said in Scottish Australian Mining Co mpany Limited v Federal Commissioner of Taxation (1950) 81 CLR 188 at 195:

The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then 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. 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.

177 And as Kenny, Davies and Thawley JJ said along similar lines in Watson v Federal Commissioner of Taxation (2020) 277 FCR 253 at 264-5 [41], “the scale of activities does not have the consequence that the activities are properly to be characterised as the carrying on of a business. The scale and nature of the activities undertaken by the taxpayer was a function of the number of group members and the complex nature of the process required to assess the various claims. It does not lead to a conclusion that a business was being carried on”.

178 The Commissioner also submitted that the primary judge erred (at [163]) in rejecting his contention that where the activity is a fixed term project such as the land development of the scale carried out in this case, repetition holds less weight. In my view, his Honour did not err in concluding that the development in this case was an isolated disposal (see J [163]-[165] at [117 ] above). That said, in my view the absence of repetition was not, as his Honour put it, “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. It was, rather, it seems to me a factor that was not informative in the particular circumstances of this case, and did not weigh in the balance one way or another.

conclusion

179 It was common ground that if the development, subdivision and sale of Dave’s Block was the mere realisation of an asset, the proceeds of sale would not be assessable income in the hands of Mr Morton, and they would not be derived from a business or from a profit-making undertaking.

180 In my view, the learned primary judge was correct to conclude that Mr Morton merely realised a capital asset, for the reasons he gave in his carefully considered and detailed reasons (noting my different view about his Honour’s characterisation of the issue of repetition). It follows that Mr Morton did not embark on a business of developing land, nor did he venture Dave’s Block into a profit-making scheme, and that no part of the proceeds of the sale of Dave’s Block was assessable income in his hands. The primary judge thus correctly concluded that Mr Morton had established that the amended assessments were excessive.

181 In my view, the Commissioner’s appeal should therefore be dismissed, with costs.

182 It also follows that Mr Morton’s cross-appeal in relation to his Honour’s answers to questions three and five does not arise.

| I certify that the preceding one-hundred and eighty-two (182) numbered paragraph s are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan. |
Associate:

Dated:    27 March 2026

REASONS FOR JUDGMENT

DERRINGTON J:

183 I agree with the reasons for judgment of O’Callaghan J, and the orders which his Honour proposes.

| I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Derrington. |
Associate:

Dated:    27 March 2026

REASONS FOR JUDGMENT

MCEVOY J:

184 I also agree with the reasons for judgment of O’Callaghan J, and the orders which his Honour proposes.

| I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice McEvoy. |
Associate:

Dated:    27 March 2026

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