Federal Court delivers win for former farmer in recent tax dispute

Last week, the Federal Court issued orders in a tax case involving the sale of a parcel of land in Tarneit, referred to as Dave’s Block by the owners.

For many years, the applicant in the case, David Morton, and his father Colin Morton farmed Dave’s Block and a block of adjoining land as one property, the Morton farm.

After the urban boundaries of metropolitan Melbourne were expanded, the Morton farm was rezoned as residential land.

The Morton family then organised for the Morton Farm to be developed, subdivided, and then sold as individual allotments as part of a housing estate.

The Commissioner of Taxation issued amended assessments of taxation to Morton for the 2019 and 2021 tax years.

The assessments included the proceeds from the sales of the allotments on Dave’s Block as assessable income.

Morton then lodged objections to the assessments, which were disallowed.

He claimed that the proceeds from the sales of the allotments that comprised Dave’s Block were capital receipts derived upon the realisation of an asset, and therefore not assessable income.

Morton also stated 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.

The Commissioner, however, argued that the amounts were assessable as income on two bases.

The ATO said that in developing, subdividing and selling the land, Morton had carried on a business and that therefore Dave’s Block was trading stock.

It claimed that the amounts were therefore income for the purposes of section 6-5 of the ITAA 1997.

In the alternative, the Commissioner contended that the amounts in issue were assessable as statutory income on the basis that the amounts were profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

Justice Wheelan determined that the amended assessments issued by the Commissioner to Morton in relation to the 2019 and 2021 years of income were excessive.

He concluded that no part of the proceeds of Dave’s Block should have been included in Morton’s assessable income.

“I conclude that Mr Morton at no stage embarked on a business of developing land, and never ventured Dave’s Block into a profit-making scheme,” said Justice Wheelan.

“In my view, therefore, no part of the proceeds of the sale of Dave’s Block was assessable income in Mr Morton’s hands, and he has made out that the amended assessments are excessive.”

The Court proposed that the Commissioner’s objection decision be varied to allow the applicant’s objections in part by excising the sum of $3.15 million from his assessable income for the 2019 income year.

It also ordered the sum of $660,402 to be excised from the applicant’s assessable income for the 2021 income year.