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Property flippers find little joy as ATO moves to cool CGT hopes

The ATO makes it very clear anyone thinking of cashing in on a recent CGT-related property decision should stop in their tracks.

Property flippers should take note of recent developments. Picture: AAP Image/Mick Tsikas
Property flippers should take note of recent developments. Picture: AAP Image/Mick Tsikas

Jenifer Bowerman is an 86-year-old widow who took on the might of the Australian Taxation Office and won in a landmark case reminiscent of the classic 1990s Australian movie The Castle starring Michael Caton. The ATO has now put out its “decision impact statement” to discuss the case and what its implications are for the rest of us.

The case revolved around Bowerman who lived in a large waterfront home in Sydney’s south with her husband for over 40 years until her husband passed away in 2015. The house was inconvenient for having 78 steps from the road down to the house so it was no surprise that within weeks of her husband’s passing, Mrs Bowerman purchased a more suitable off-the-plan 3 bedroom apartment in a nearby suburb that was expected to complete in 2019.

Mrs Bowerman continued to live in the matrimonial home, but in 2017 she was advised that her new apartment would be delayed by a year and would not complete until 2020. Realising the strong appeal for downsizers and retirees in such a development, she decided to purchase another property in the same complex which was due to complete in 2018. The plan – move in, wait for her dream apartment to complete and sell the interim apartment for a profit, helping to pay for the property that she wanted.

In 2018 she sold the family home and moved into the second apartment and lived there for two years while her main apartment was being built. Unfortunately her plan came unstuck in 2020 when the main apartment was completed and was ready to settle. She sold the second apartment for a loss to pay for the main apartment with the loss attributable partly due to a temporary market downturn caused by the Covid downturn.

The loss of $265,936 was claimed by Bowerman in her tax return and was rejected by the commissioner of the ATO, noting gains and losses relating to a person’s principal place of residence are exempt from CGT. She took the case to the Administrative Appeals Tribunal (AAT) and won the right to claim the loss as a tax deduction on the grounds that the purchase of the temporary property from 2018 to 2020 was driven by a “profit making purpose” and fit the bounds of a “commercial transaction”.

Timothy Ricardo, director at NSW accounting firm Bishop Collins, says: “The CGT main residence exemption is probably the most valuable tax break in this country and it is interesting to hear the ATO say in the decision impact statement that the Bowerman decision does not represent a departure from established principles concerning the sale of real property. In other words, it will not change the way that the ATO normally applies the main residence CGT exemption.”

The ATO further noted in its statement that the circumstances of the Bowerman case were somewhat unique and it does not expect this case to become a precedent for future cases that go to the AAT.

The key element that allowed Bowerman to claim a tax deduction for the loss were linked to a 1987 case where the ATO took retail giant Myer Emporium to court and won, where a disputed transaction was ruled to be subject to income tax.

In an ironic twist, Bowerman used an ATO win in 1987 to argue her case against the Tax Office in 2023 – which she won.

And in common with the case in 1987 against Myer, she argued that her purchase of the interim apartment was opportunistic and that she was a career businessperson having invested in property with her husband over the years, and as such, the property purchase was a “commercial transaction”. She also argued that the primary purpose of the interim apartment purchase was to make a profit, and that her living there was a secondary purpose.

The decision of the AAT came as a shock to many industry experts. Had Bowerman really fulfilled both elements of what is known as the Myer Emporium principle? Was the purchase of the interim apartment a commercial transaction with a “profit-making purpose”?

You could argue that a business person would not usually sell an investment asset at a bad time to meet a personal liability. In this case, Bowerman sold the interim apartment to settle upon her desired apartment. And would a business person normally have a longer investment time frame than two years to hold a property asset, noting transaction costs run into the tens of thousands making it harder to generate a capital gain in a short period of time?

Bowerman purchased the interim property from the vendor for $1,200,000 in 2018, who had purchased it for $823,360 just under four years earlier. Was this an indication that she might have overpaid for the property?

And finally, in something we will never know the answer to: Would Bowerman have put her hand up and asked that the 1987 Myer Emporium principle to be applied, and voluntarily paid income tax if things had gone her way and she made a large capital gain on the property instead of a loss?

The key takeaway from this is that the ATO has no plans to review the capital gains tax free status of the family home.

However, property flippers should take note. The Myer Emporium principle that Bowerman used to her advantage could also potentially be applied against serial property renovators. Was it a commercial transaction? Was it a profit making purpose? Time will tell whether the ATO will apply more scrutiny to people who buy homes, move into them as a principal place of residence, renovate them and sell them for a profit in a relatively short period of time.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au

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Original URL: https://www.theaustralian.com.au/business/wealth/property-flippers-find-little-joy-as-ato-moves-to-cool-cgt-hopes/news-story/35f3dd1092dd89b63b2f7e789ccd4ac1