Controversial Case of a Taxpayer who Claimed a Deduction from a Loss on a Home Sale

In Bowerman and Commissioner of Taxation [2023] AATA 3547, the taxpayer argued that she should be liable to claim a deduction from a loss on a home sale. The fact summary of this case is written below:

  • After the demise of her husband in 2015, she signed a contract to buy an off-the-plan apartment in Woolaware Bay, which she was likely to live in after completion.
  • In November 2017, the taxpayer signed a contract to purchase an off-the-plan apartment in the Dune Walk Unit, which was part of the same development as the Foreshore Boulevard Unit. The Dune Walk Unit was expected to be completed sooner than the Foreshore Boulevard Unit.
  • The taxpayer stated that she intended to live in the Dune Walk Unit while the Foreshore Boulevard Unit was being developed, but also admitted that she bought the unit with the expectation of making a profit. She said that she would not have made the purchase if she thought she would not make any money on it.
  • Eventually, the taxpayer lived in the Dune Walk Unit for 26 months before selling it at a loss due to a lack of buyer interest caused by COVID-19 restrictions.

The taxpayer attempted to claim a loss on revenue account in her initial tax return. However, the ATO refused to allow the deduction, arguing that the sale of the Dune Walk Unit was merely the realisation of a capital asset. The ATO considered not only that the loss was capital in nature but also that the main residence provisions disregarded the capital loss.

The AAT didn’t agree with the ATO’s position and concluded that the taxpayer was eligible to claim a deduction for the loss on the revenue account under section 8-1 ITAA97, based on the Myer principle. That is, the AAT was satisfied that she bought the property for profit-making purposes in the short-term and that this transaction had been made in the context of a ‘business deal’ or ‘commercial transaction’.

The AAT reached its decision based on the following factors:

  • The taxpayer was aware of the need to sell the Dune Walk Unit to complete the Foreshore Boulevard Unit when she purchased it.
  • Despite the COVID-19 restrictions, the taxpayer was aware of the growth potential of off-the-plan units in the development and was likely to have made a profit if not for the pandemic.

The AAT also noted that the intention to make a profit did not have to be the sole or dominant purpose of the transaction, but merely one of the purposes for it to be taxed on the revenue account. Additionally, the AAT considered that buying the Dune Walk Unit to resell it at a profit was a business-like decision. The fact that the taxpayer resided in the property as her private residence throughout the ownership period did not make the loss a private matter, according to the AAT’s conclusion.

The AAT has decided the deductibility of losses incurred on the sale of a property. According to the ruling TR 97/7 by the ATO, expenses are considered incurred when a sale contract is entered into. The taxpayer relied on this ruling, which bound the ATO, and therefore the AAT held that the loss on the sale of the Dune Walk Unit was incurred and deductible in the income year when the sale contract was signed. However, if TR 97/7 had not been in place, the loss would only have been deductible at settlement.

This decision could have significant implications for those who buy and sell properties in a short period and wish to claim that the property is held on capital account. The decision sets a low threshold for the sale of a property to be taxed on a revenue account as a commercial or business transaction.

The facts of this case are unique as most properties are sold for profit-making purposes. If the profit on the property sale is taxed on the revenue account, the issue is that taxpayers will not be able to access the 50% discount and other CGT concessions.

We’ll have to wait and watch if the ATO files an appeal against the AAT decision. If the ATO appeals, there is no guarantee that the Federal Court will make the same decision as the AAT. A decision impact statement will be released, if the ATO doesn’t appeal the decision, which will guide how the ATO plans to deal with the AAT decision.

ATO View Prevails Despite Bendel Case Decision

In the previous update, it has been discussed the AAT’s decision in Bendel and Commissioner of Taxation [2023] AATA 3074. This decision has challenged the ATO’s long-standing position that unpaid distributions owed to a private company can be treated as a loan for Division 7A purposes. However, since the matter is being contested before the Federal court, the ATO has issued a Decision Impact Statement to explain its administrative approach.

For now, until the final outcome of the case, the ATO will continue to apply its existing view, as expressed in TD 2022/11. This determination outlines the ATO’s view that a corporate beneficiary’s failure to call for the payment of its trust entitlement and allowing the trustee to use these funds amounts to a loan to the trust for Division 7A purposes.

During the appeal process, the ATO will generally not finalise objection decisions concerning whether an unpaid trust distribution is a loan for Division 7A purposes, except where the taxpayer gives notice requiring the Commissioner to object. In such cases, the decision will be made based on the ATO’s existing view outlined in TD 2022/11.

The reminder has been sent to taxpayers and practitioners by the ATO that the AAT deals with Division 7A. Leaving trust distributions owed to corporate beneficiaries unpaid could trigger other tax implications, including under the reimbursement provisions in section 100A.

In general terms, section 100A is an integrity provision dealing with trust distributions, which can apply in cases where income is assigned to a beneficiary of a trust, but the real economic benefit of the funds is given to another party. This includes situations where the funds are retained by the trust.

While the PCG sets out various scenarios that are low-risk from a compliance perspective, be aware that some low-risk scenarios need the amount owed to the beneficiary to be placed on complying with Division 7A loan terms.

This AAT decision challenges ATO’s position. The practitioner must know how the ATO is dealing with this issue and appreciate that unpaid trust distributions owing to corporate beneficiaries may trigger other tax considerations.

Tax Debts on Hold

Debts on hold are uneconomical to pursue and the ATO wouldn’t commit resources to try and gather them. However, if a client is liable for any refunds or credits, then these will be used to pay the debts even if they are on hold. Many clients may not know that their debts are on hold because they will not show an outstanding balance on the account.

Practitioners with clients expecting refunds that also have debts on hold should make sure those clients know that these refunds can still be used to offset these outstanding liabilities.

Tax Agent Linking

The ATO introduces additional steps that need taxpayers to allow and nominate their agents through ‘Online services for business’ to enhance the security of its online services. While these steps previously only applied to certain taxpayers, they now apply from 13 November 2023 to all taxpayers with ABNs except individuals and sole traders.

Taxpayer who maintains their current arrangements with their existing agents should not be affected because these additional steps apply to taxpayers who are either:

  • Hiring a new agent as their representative; or
  • Offering an existing agent with authority for a new tax obligation.

The ATO has released guidance to help taxpayers and agents with this process and has also flagged various common issues.

The ATO reminds agents that they should only add themselves to an account that they are allowed to represent their clients. By adding themselves inadvertently to an incorrect account, this will remove any existing agents linked to that account, and as a result, the client needs to repeat the nomination process.

Agents should also ask clients to inform them after completing their nomination steps. This is because the agent is not automatically notified of this, but they only have 28 days to add the client to their client list prior to the nomination period normally expires (although this deadline can be extended for another 28 days).