ATO issues decision impact statement on Bowerman case
The AAT decision does not impact the ATO’s approach to applying the CGT rules to gains and losses on the sale of property, the Tax Office says.
In a recently issued decision impact statement, the ATO said the Bowerman and Commissioner of Taxation decision by the AAT was an unusual case which will “limit the application of the AAT’s decision in future cases”.
The Bowerman decision examined the threshold test in the Myer Principle and how it relates to the acquisition of a private residence acquired for a profit-making purpose.
The AAT found that losses incurred by a taxpayer on the disposal of the property were deductible despite the fact it had been the taxpayer’s private residence.
The applicant in the case was a retiree who had spent her career running successful businesses and investing in property. She lived in a large water-front matrimonial home which she described as 'inconvenient'.
In July 2015, within weeks of her husband's passing, she entered into a contract to purchase an apartment that was under development in a new complex located near her matrimonial home, the Foreshore Boulevard apartment.
However, due to delays with the development of the complex, she decided to acquire a similar off-the-plan apartment which she would sell once the Foreshore Boulevard apartment was completed.
After residing at the second apartment for two years, she sold it, incurring a loss on the sale.
The Applicant needed to sell the second apartment because she required the proceeds of sale to complete the purchase of the Foreshore Boulevard apartment.
The Applicant objected to the Notice of Assessment in respect of the year ended 30 June 2020, claiming she had an allowable deduction for the loss (of $265,936) on the sale of the apartment.
The Commissioner disallowed the objection on the basis that the sale of the apartment was a mere realisation of a capital asset, and the loss was to be disregarded as a capital loss as the apartment was the Applicant's main residence. The Applicant subsequently filed an application for review with the AAT.
The Applicant contended that the apartment was held on revenue account given that she acquired it for a profit-making purpose in a business operation or commercial transaction.
The Applicant's argument relied upon the principles established in Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18 (Myer Emporium). Accordingly, she asserted that the loss was incurred in gaining or producing assessable income and should thereby be deductible.
In its decision impact statement, the ATO said it will review the impact of this decision, if any, on related advice and guidance products.
“We will review TR 97/7, considering whether to resolve any apparent inconsistency with legal principle as identified by the AAT, to clarify when a loss (as distinct from an outgoing) has been 'incurred' for the purposes of subsection 8-1(1),” it said.
The ATO said the “AAT's finely balanced conclusion” was open on the particular facts of this case and was an available application of the established Myer Emporium principles.
“The decision must be read in the context of the clear statements of principle from the courts that a profit-making purpose alone is insufficient to engage the Myer Emporium principle,” it said.
“The decision applies the approach of Justice Steward in Greig v Commissioner of Taxation, which remains the most authoritative explanation of the concept of a 'business operation or commercial transaction' within the meaning of the principle established in Myer Emporium.”
The Commissioner noted that cases concerning the application of the principles in Myer Emporium always turn on the facts of the particular case, and that the unusual factual findings in this case will limit the application of the AAT's decision in future cases.
“In circumstances where the principles in Myer Emporium (that is, a profit-making purpose and a commercial element to the transaction) do not apply, the Commissioner will continue to apply the CGT rules to gains and losses on the sale of real property including a person's main residence,” the ATO said.
“Accordingly, the Commissioner considers that this decision does not represent a departure from established principles concerning the sale of real property. Nor will it change how the ATO applies the CGT main residence exemption under section 118-100 where the principles in Myer Emporium do not apply.”
The Commissioner agreed with the the AAT's observation that existing authority supports the conclusion that the applicant did not 'incur' the loss until the contract of sale of the apartment had completed and that her loss was necessarily only realised upon the receipt of proceeds of settlement.
“The Commissioner takes a different view to the AAT as to the interpretation of TR 97/7, but is considering whether to update TR 97/7 to remove any perceived ambiguity or uncertainty as to its interpretation.”
