The Controversial Home Loss Claim: A case of the taxpayer who claimed a loss on their property.

The Administrative Appeals Tribunal’s judgement has sent the tax world into a frenzy after the Tribunal ruled in favour of a taxpayer who sold the apartment she lived in for a loss and then claimed the $265,935 loss as a deduction on her tax return.

In this case, the taxpayer successfully maintained that the acquisition and sale of the apartment constituted a short-term profit-making business, and that the resulting loss may be claimed as a tax deduction. The tax regulations normally enable you to deduct losses incurred in a commercial operation, but you cannot deduct losses incurred in a private or capital activity. The taxpayer contended that she bought the apartment to make a quick profit and that the loss on the sale should be deductible, despite the fact that she resided in the unit as her primary residence throughout the ownership period. As you might expect, the Australian Taxation Office (ATO) had a different opinion.

The following were the facts of the case:

July 2015 – The taxpayer resided in a spacious family home in July 2015. When her husband died, she signed into a ‘off-the-plan’ deal to buy an apartment that would be completed by June 30, 2019.

December 2016 – The taxpayer was informed that the completion of the off-the-plan apartment had been postponed until June 30, 2020.

May 2018 – A taxpayer decides to sell her family home based on the advice of her real estate agent that it was a good time to sell.

May 2018 – As a purchaser, the taxpayer chose another apartment in the same completed complex. She had money from the sale of her family home that she could put towards the property, and she only meant to keep it for a short time since she needed the funds to settle the off-the-plan flat. Her point of view was that it was an opportunity to profit.

April 2020 – During the first COVID lockdown the taxpayer entered into a deal to sell the apartment at a loss.

July 2023 – Settlement on the sale of the apartment happened.

July 2023 – The purchase of the off-the-plan apartment completed and was settled. The funds from the sale of the other apartment, as well as some of the earnings from the sale of the family house, were used to settle the off-the-plan apartment.

The Case’s Controversy

According to the Tax Commissioner, someone treating the chance as a profit-making venture would not reside in the apartment and would have waited to sell if the market was not favourable.

The Tribunal set a low bar for proving profit-making intent and determined that the taxpayer’s residence in the property was subordinate to her profit-making intent.

This case is contentious for reasons other than the loss alleged by one taxpayer. It is due to the broader ramifications for property owners if the ATO deems that a transaction is commercial in nature and levies any profit as ordinary income rather than capital gains tax (CGT). For example, if the taxpayer in this situation had generated a profit rather than a loss, she would have paid tax at her marginal tax rate on the profit. She could not have used the main residence exemption or the CGT deduction.

One key takeaway from this case is that residing in a property does not guarantee that the sale of the property would be taxed under the CGT rules or qualify for the main residence exemption. For example, property ‘flippers’ who buy and refurbish a house may pay a substantial personal tax burden on any profit they make, with no recourse to the CGT reductions.

The full repercussions of this case will not be known for some time, and the ATO has yet to confirm whether it would appeal the verdict. In either case, identifying whether a transaction is taxed on revenue or capital account can be a complicated procedure, and it is critical to seek professional advice before entering into property transactions.

Gain insights into this unique case with expert analysis from Success Accounting Group.

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