In an “unusual outcome,” the Administrative Appeals Tribunal (AAT) decided in Bowerman and Commissioner of Taxation [2023] AATA 3547 (Bowerman) that an individual who sold her main residence for a loss could deduct that loss under section 8-1 of the Income Tax Assessment Act 1997.
Bowerman highlights the breadth of what constitutes a profit-making transaction. Bowerman also reminds us of the functionality of a public ruling, which can bind the Federal Commissioner of Taxation (Commissioner) even when the Commissioner’s views in a public ruling may not accord with the case law.
Facts
Mrs Bowerman is a “savvy and entrepreneurial” 86 year-old retiree who had a history of making profits from various passive investments (including rental properties).
In 2015, and following the passing of her husband, Mrs Bowerman signed an off-the plan contract for a 3-bedroom property (Foreshore Boulevard Unit) in Woolooware Bay, NSW. She intended to live in the Foreshore Boulevard Unit once it was built (expected in 2020).
In 2017, Mrs Bowerman became aware of the capital growth potential of other properties in Woolooware Bay (having been in contact with the local property manager and sales office). Accordingly, Mrs Bowerman signed an off-the-plan contract for a 2-bedroom property in Woolooware Bay (Dune Walk Unit).
Mrs Bowerman saw an opportunity to make a profit from the Dune Walk Unit and to use that profit to fund the remaining costs of the Foreshore Boulevard Unit that she anticipated would be due in 2020 on settlement.
In May 2018, Mrs Bowerman moved into the Dune Walk Unit and treated it as her main residence. Mrs Bowerman lived in the Dune Walk Unit for 26 months.
In April 2020, and in preparation for the impending settlement of the Foreshore Boulevard Unit, Mrs Bowerman listed the Dune Walk Unit for sale. However, as a result of the Covid-19 lockdowns, Mrs Bowerman sold the Dune Walk Unit for a loss of $265,936 (Loss).
Mrs Bowerman deducted the Loss from her assessable income in the 2020 income year.
Issues
The issues in dispute were:
1. Whether the Loss was incurred by Mrs Bowerman in gaining or producing her assessable income within the meaning of section 8-1 having regard to the High Court authority in Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 (Myer Principle). That is:
a. Did Mrs Bowerman have an intention to make a profit on the sale of the Dune Walk Unit at the time she acquired it? (First Limb)
b. Was the purchase and sale of the Dune Walk Unit a commercial transaction or the sort of thing a businessperson does? (Second Limb)
2. Whether the Loss was private or domestic in nature and therefore not deductible under section 8-1 (particularly as Mrs Bowerman lived in the Dune Walk Unit)?
3. Whether the Loss was “incurred” in the 2020 income year (when the contract of sale for the Dune Walk Unit was signed) or in the 2021 income year (when the contract of sale for the Dune Walk Unit settled)?
Issue 1: Myer Principle
The AAT concluded that Mrs Bowerman satisfied both the First Limb and the Second Limb of the Myer Principle.
In respect of the First Limb, the objective evidence substantiated that Mrs Bowerman had the requisite profit-making intention at the time that she purchased the Dune Walk Unit. Mrs Bowerman was aware of the growth prospects of properties in Woolooware Bay and purchased the Dune Walk Unit accordingly.
The fact that Mrs Bowerman also intended to reside (and did reside) in the Dune Walk Unit was subsidiary to her profit-making purpose. In any event, the AAT said that profit-making purpose under the First Limb is satisfied if just one of the purposes is profit-making (see paragraph 73 of Bowerman).
Interestingly, the Commissioner in Taxation Ruling TR 92/3 (TR 92/3) says that the purpose, while not sole or dominant, needs to be “significant”. Is the AAT in Bowerman saying that the purpose threshold is lower?
In respect of the Second Limb, the AAT held that Mrs Bowerman’s acquisition and sale of the Dune Walk Unit was the sort of thing a businessperson would do. This conclusion was motivated by the pronouncements by the Full Federal Court in Greig v Commissioner of Taxation [2018] FCA 1084 (Greig - see our article here) that a ‘business deal’ or ‘commercial transaction’ is a low threshold. As the AAT said in Bowerman:
“The buying and selling of an asset including property, with a view to profit-making, is obviously something that business person would do.
…
So long as there is a flavour of commercial or business dealing, that is sufficient.”
The AAT rejected the Commissioner’s contentions that the Second Limb required ancillary or recurrent activities, or that a businessperson would not contribute to the wear and tear of a property by personally living in it for 26 months.
Issue 2: private or domestic in nature?
The AAT concluded that Mrs Bowerman’s Loss was not private or domestic in nature. This was because the purpose of Mrs Bowerman’s acquisition and sale of the Dune Walk Unit (that is, to make a profit as part of a commercial transaction) denies the possibility of the Loss being private or domestic in nature. This is consistent with principles outlined by the High Court in John v Commissioner of Taxation (1989) 166 CLR 417:
“The purpose of its acquisition and the fact of its sale as intended must serve to deny the possibility that the loss or outgoing is essentially private in nature.”
The AAT accordingly dismissed the Commissioner’s contention that, “as a matter of common sense,” the essential character of the Loss pertained to a main residence and was therefore domestic in nature:
“The loss on the sale of Mrs Bowerman’s property was always connected with her gaining or producing assessable income, and the fact she resided in the property did not change her profit-making intention.”
Interestingly, section 8-1 denies a deduction to the extent that it is a loss of a private or domestic. As Mrs Bowerman lived in the Dune Walk Unit for 26 months, it appears that the AAT may not have been asked to consider the question of apportionment.
Issue 3: when was the Loss incurred?
The AAT concluded that, because Mrs Bowerman relied on Taxation Ruling TR 97/7 (TR 97/7), and the view in TR 97/7 on when a loss is incurred, Mrs Bowerman incurred the Loss in the income year when the contract of sale for the Dune Walk Unit was signed.
The AAT conceded that, absent Mrs Bowerman’s reliance on TR 97/7, it would have decided that Mrs Bowerman incurred the Loss at settlement. This was consistent with the Commissioner’s argument in Bowerman that, in the income context, income is derived on settlement as this is when a debt accrues (per Gasparin v Commissioner of Taxation (1994) 50 FCR 73).
However, because TR 97/7 is a public ruling which Mrs Bowerman relied and acted upon, it bound the Commissioner. The Commissioner was therefore precluded from applying the law inconsistently with the public ruling (despite the AAT conceding that aspects of the ruling are “vague.”)
As noted by the AAT:
“It is obviously a matter for the Commissioner as to whether to update his public ruling to record his views as to the relevant authorities, or to withdraw it.”
Conclusions
There is no formal doctrine of precedent that applies to AAT decisions. However, decisions can be influential. While Mrs Bowerman was successful, the approach of the AAT in applying the Myer Principle heralds a warning for taxpayers who make gains from isolated transactions. This may include people who buy, renovate, and sell with an intention to profit - “flippers”.
That is, the AAT emphasised the low threshold for the Second Limb, particularly for property transactions and, when applying the First Limb, saying that the requisite profit-making purpose need only be “one of the purposes” in entering the transaction.
This compares with TR 92/3 that says the purpose should be “significant”, while Middleton J in Visy Packaging Holdings Pty Ltd v Commissioner of Taxation [2012] FCA 1195, relied on by the AAT in Bowerman, said the purpose must be “not insignificant”.
As the AAT concluded:
“…there is no rule in Australian income tax law that a profit or gain made on the sale of one’s residence, in circumstances where there is a profit-making intention, cannot give rise to a profit that is taxable as ordinary income.”
Besides Issue 1, Issue 3 illustrates that public rulings (like Taxation Rulings and Taxation Determinations) are binding on the Commissioner. Taxpayers can rely on public rulings even if the Commissioner’s views are inconsistent with the case law. However, the public ruling needs to apply to their circumstance and the taxpayer needs to show, as Mrs Bowerman did, that they relied on the public ruling.
We will be watching with interest as to whether the Commissioner appeals to the Federal Court. Is this a circumstance of losing a ‘battle’ but it being useful in the ‘war’ of the taxation consequences of isolated transactions?
If you have any questions, please contact one of our federal tax lawyers:
Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 428 439 730
E ehennebry@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E dsmedley@sladen.com.au
Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E rwarnock@sladen.com.au
