Taxpayer Successfully Claims Losses on Home Property:

Background: In a recent and highly controversial decision, the Administrative Appeals Tribunal (AAT) ruled in favour of a taxpayer who sold her property at a loss and claimed the loss as a deduction on her tax return. This case has sent shockwaves through the tax world, as it challenges conventional notions of taxation on property transactions. The central issue in this case revolved around whether the taxpayer’s purchase and subsequent sale of her apartment constituted a short-term profit-making venture, allowing her to deduct the substantial loss incurred against her other income.

Facts of the Case:

  1. July 2015: The taxpayer was living in a large family home. Following the passing of her husband, she entered into an ‘off-the-plan’ contract to purchase an apartment, which was expected to be completed by June 30, 2019.
  2. December 2016: The taxpayer received notification that the completion of her off-the-plan property was delayed until June 30, 2020.
  3. May 2018: The taxpayer decided to sell her family home, based on advice from her real estate agent suggesting that it was an opportune time to do so.
  4. May 2018: She subsequently purchased another apartment within the same complex, which had already been completed. Her intention was to hold this property for a short period and make a profit. She had funds from the sale of her family home that she intended to use for the settlement of the off-the-plan property.
  5. April 2020: The taxpayer entered into a contract to sell the apartment at a loss, coinciding with the onset of the first COVID-19 lockdown.
  6. July 2020: The sale of the apartment was completed.
  7. July 2020: The taxpayer’s purchase of the off-the-plan property was also completed, with proceeds from the sale of her family home and the apartment contributing to the settlement.

The Australian Taxation Office (ATO) disputed the taxpayer’s position, contending that a genuine profit-making venture would not involve living in the apartment and would have waited for a more favourable market to sell.

The Tribunal’s Decision: The AAT ruled in favour of the taxpayer, emphasizing that the taxpayer’s primary intent was to make a profit from the property transaction. The fact that she lived in the apartment for a period was deemed secondary to her profit-making intent. The AAT set a relatively low bar for proof of a profit-making intention, which surprised many tax experts.

Implications and Controversy: This case is controversial not only due to the loss claimed by the taxpayer but also because of its potential wider implications for property owners. If the ATO were to determine that transactions like this are commercial in nature, it could mean taxing any profit as ordinary income rather than applying the Capital Gains Tax (CGT) provisions. Had the taxpayer made a profit instead of a loss, she would have faced taxation at her marginal tax rate, without access to the main residence exemption or the CGT discount.

This case serves as a cautionary tale for property owners. Living in a property does not guarantee it will be taxed under CGT rules or qualify for the main residence exemption. Property “flippers” who buy and renovate houses may also face significant personal tax bills on their gains without the concessions available within CGT rules. The full implications of this case remain uncertain, and the ATO has not yet confirmed whether it will appeal the decision. 

The decision in this recent tax case is more than just a surprising outcome; it’s a signal of changing times in the world of property taxation. It shows us that what we thought we knew about capital gains and income tax isn’t always so clear-cut. This case isn’t just a story about one taxpayer’s victory; it’s a warning and a guidepost for all property owners and investors. The rules are shifting, and to stay ahead, we need to be in the know.

Understanding these complex tax rules can be daunting, but you don’t have to navigate them alone. At Investax Group, our expertise is more than just solving tax problems – it’s about giving you peace of mind. Whether you’re dealing with your home’s tax status, trying to make the most of your property investments, or figuring out the tax side of a real estate deal, our team is here to help.

We tailor our advice to your unique situation, ensuring that you’re not just following the rules, but also making smart choices for your financial future. If the thought of dealing with property taxes leaves you puzzled, give Investax Group a call. Let’s make sure your next step in the property market is a confident and informed one.

Source – Bowerman and Commissioner of Taxation (Taxation) [2023] AATA 3547 (31 October 2023)

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