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The AAT decision demonstrates the reluctance of the ATO to allow tax deductions where profit-making activities lead to a loss, says a tax expert.
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Bowerman decision highlights flaws with ATO approach to losses
21 March 2024
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The Bowerman and Commissioner of Taxation decision highlights a tendency by the ATO to treat losses from a profit-making undertaking as a capital loss, according to tax specialist and education provider John Jeffreys.
The Administrative Appeals Tribunal determined in the Bowerman case that losses incurred by the taxpayer on the disposal of the property were deductible despite the fact it had been the taxpayer’s private residence.
The applicant had claimed a tax deduction for the $265,936 amount, arguing that she had entered into a profit-making undertaking that had resulted in a loss.
“In accordance with the principles of the Myer Emporium case, a profit from such a venture would have been assessable income. Accordingly, a loss from such a venture is an allowable deduction,” explained Jeffreys in a recent webinar.
The ATO denied the deduction, stating that it was the mere realisation of a capital asset and the loss was of a private or domestic nature because the apartment had been the applicant’s main residence.
However, the AAT found that the primary purpose of the applicant’s acquisition of the apartment was to make a profit and that therefore the acquisition and sale of the apartment was considered to be a ‘commercial transaction’
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In its decision impact statement issued last week, the ATO stated that the Bowerman decision was an unusual case that would limit the application of the AAT’s decision in future cases.
Commenting on the ATO’s response, Jeffreys said while it is fair to say that the facts are unusual, it was the loss on the disposal of real estate that was the unusual aspect of this case.
“What was unusual was that Covid was depressing the residential house prices for a short period of time,” he said.
“What was not unusual about this case was entering into a transaction with a profit making purpose that resulted in a loss. That happens in the Australian economy daily.”
Jeffreys said this is a key issue that the ATO is not being completely open about.
“There is a tendency for the ATO to say any profit from a profit-making undertaking is ordinary income and assessable,” he said.
“However, any loss from such an undertaking will be treated as a capital loss that must be set off against a capital gain in order to obtain a tax deduction for the loss.”
Jeffreys said the rate at which taxpayers enter transactions to make a profit occurs much more frequently than what the ATO assumes.
One of the main areas where this happens is with cryptocurrency, he said.
“I believe that the Tax Office’s position on cryptocurrency is wrong. I believe that most people acquire cryptocurrency with the intention of resale at a profit and if they make a loss, then they should be able to claim a tax deduction provided the non-commercial loss provisions don’t apply.”
However, the ATO has consistently stated that such losses are on capital account and are capital losses, he said.
“I cannot understand how that view reconciles with cases such as Greig, Bowerman and Myer,” said Jeffreys.
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