Tribunal decision means CGT on family home may be a step closer

Politically, the capital gains tax exemption on the family home is often seen as a roadblock to tax reform. But be warned, a change could come from an unexpected quarter.

An unusual case recently heard at the Administrative Appeals Tribunal could force one of the biggest personal tax changes in recent history.

Politically, the capital gains tax exemption on the family home is often seen as a roadblock to tax reform. But be warned, a change could come from an unexpected quarter.

An unusual case recently heard at the Administrative Appeals Tribunal could force one of the biggest personal tax changes in recent history.

Australians have always regarded the family home as a private asset and when sold no capital gains tax is payable under normal circumstances.

However, a decision from the AAT may turn this on its head and open the door for the tax office to take the lead from other countries and charge CGT on the sale of the family home.

In the case of Bowerman v Commissioner of Taxation, 86-year-old Sydney retiree Jenifer Bowerman argued successfully that the capital loss on selling her principal place of residence in Sydney’s south should be claimable as a tax deduction in her personal tax return.

Here’s the thing: if a capital loss can now be claimed on the family home, the natural progression would be for the ATO to balance the books by taxing the gains on the family home if a profit is made.

In this particular case, while waiting for the completion of a $1.5m off-the-plan unit in the exclusive suburb of Woolooware Bay that Mrs Bowerman planned to live in, she came to the conclusion that the development might be attractive to other downsizers and prices in the development may rise in the coming years.

Consequently, she purchased a nearly completed second unit in the same development for $1.2m and moved in six months later. Mrs Bowerman hoped to flip the cheaper property at the same time her $1.5m unit would be completed two years down the track and lock in a tidy profit.

Unfortunately for Mrs Bowerman, with the onset of Covid-19 in March 2020, the sale of the $1.2m unit – which she had lived in for 26 months and intended to sell for a profit to use towards the settlement of her more expensive $1.5m unit – resulted in a significantly lower price than expected. After stamp duty, agents’ fees and legal costs, Mrs Bowerman ended up with a capital loss of $265,000.

She lodged her tax return claiming the $265,000 tax on the basis that this loss should be treated as a tax deduction because her intention was to make a profit on the property, and as such the loss should be an allowable deduction in the attempt to produce assessable income. She argued that the fact she lived in the property was secondary to her intention to profit from the property.

The ATO disallowed the tax deduction shortly, to which Mrs Bowerman objected and was again disallowed the tax deduction, with the commissioner of taxation noting that she was not entitled to claim the loss from the unit in her tax return as it related to her primary residence, which is ordinarily exempt from gains and losses.

But then, after taking the case to the AAT, Mrs Bowerman got the outcome she wanted and won the case against the ATO, which has the option of appealing the decision to the Federal Court.

The implications of this decision are potentially far-reaching. For renovators who purchase property with the plan to move in, renovate and then sell for a profit, if the ATO decides to adopt the principles of the Bowerman case, the sale of the renovated property which would normally be CGT-free may attract tax in the future.

And it might not stop there, other countries around the world already have principles in place that align with the AAT’s decision in the Bowerman case in regard to taxing the sale of the family home.

Across the ditch our New Zealand neighbours pay capital gains tax on the sale of the family home if the “intention rule” applies. Under New Zealand tax law, a property purchased with the intention to sell it for a future profit may be subject to tax, even if it is a private residence. In determining if tax should apply, the owner’s buying and selling history is assessed to decide whether their intention was to make a profit on the property.

For Americans, the concept of paying tax on the sale of the family home is not new. US federal tax is payable on profits made on the family home after an allowance is applied. There is a tax-free profit threshold of $US250,000 for singles and $US500,000 for couples after which CGT is payable.

In Australia, taxing the sale of the family home would appear unlikely.

But just now the issue is back on the table.

An ATO spokesman says the tax office “is considering the implications of the decision of the tribunal, including whether any appeal may be appropriate”.

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