The controversial case of the taxpayer who claimed a loss on their home

A decision by the Administrative Appeals Tribunal has the tax world in a flurry after the Tribunal found in favour of a taxpayer who sold the apartment she lived in for a loss, then claimed the $265,935 loss in her tax return as a deduction.

In this case, the taxpayer successfully argued that the purchase and sale of the apartment was a short-term profit making venture. Also, that the loss generated from this could be claimed as a tax deduction. The tax rules generally allow you to deduct losses that relate to a commercial activity. Although you cannot claim the loss if it is private or capital in nature. The taxpayer argued her case, even though she had lived in the property as her private residence across the ownership period. The Australian Taxation Office (ATO), as you can imagine, had a different point of view.

The facts of the case were:

• July 2015 – The taxpayer lived in a large family home. After her husband passed away, she signed an off-the-plan contract to purchase an apartment scheduled for completion by 30 June 2019.
• December 2016 – The developer notified the taxpayer that they had delayed completion of the off-the-plan apartment until 30 June 2020.
• May 2018 – Taxpayer settles on the sale of her family home on advice from her real estate agent that it was a good time to sell.
• May 2018 – Taxpayer settled on another apartment, as a purchaser, in the same complex that had been completed. She had money from the sale of her family home that she could use. She only intended to keep the property for a short period of time as she needed to use the funds to settle the off-the-plan apartment. Her position was that it was an opportunity to make a profit.
• April 2020 – The taxpayer entered into a contract to sell the apartment at a loss during the first COVID lockdown.
• July 2020 – Settlement on sale of the apartment occurred.
• July 2020 – The buyer completed and settled the purchase of the off-the-plan apartment. They used a substantial portion of the proceeds from selling the other apartment and some proceeds from selling the family home to pay for the off-the-plan apartment.

The Tax Commissioner’s position was that someone approaching the opportunity in a business-like manner as a profit-making venture would not live in the apartment and would have waited to sell if the market was not favourable.

The Tribunal set a low bar for proof of a profit-making intention. They found that the fact that the taxpayer lived in the property was secondary to her profit-making intent.

The reason why this case is controversial is not simply because of the loss claimed by one taxpayer.

It is because of the broader implications to property owners if the ATO determines that a transaction is commercial in nature and taxes any profit as ordinary income rather than under the Capital Gains Tax (CGT) provisions. For example, if the taxpayer in this case had made a profit instead of a loss, she would have paid tax on the profit at her marginal tax rate. She would not have been able to apply the main residence exemption or the CGT discount.

This case shows that simply living in a property doesn’t guarantee access to CGT rules or the main residence exemption. For example, property flippers who buy and renovate homes may not qualify for CGT concessions. They could face a significant personal tax bill on any profit they make.

It will be some time before we know the full implications of this case. The ATO is yet to confirm whether it will appeal the decision. Either way, it is a complex process for the ATO to determine whether a transaction is taxed on revenue or capital account. It is important to seek advice before entering into transactions involving property.

For advice on property and the tax obligations, contact your Aintree Group advisor today!

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your financial advisor.