Property investors, take note – Disruption with the Bowerman Decision

12 December 2023

The circumstances in which a loss realised on the sale of a residential property may be deductible was considered by the Administrative Appeals Tribunal (AAT) in a recent unusual decision that is likely to have an impact on both losses and gains realised on property.

This recent decision highlights the breadth of what constitutes a profit-making transaction. Whilst it might be understood that losses on the sale of a residence are capital in nature, the AAT’s decision asserted on the facts that since there was a profit-making intention at the time of acquiring the property, a deduction was allowable on revenue account.

Whilst not binding on other parties, this decision will be of interest to property owners and investors. Property investors enjoy access to a raft of tax benefits, with negative gearing, expense deductions and capital gains discounts on sale being worthy of mention.

Stating the obvious: all these profile of investors are united in their common goal, being to profit.

And in the facts of Bowerman and Commissioner of Taxation [2023] AATA 3547, the taxpayer was no different.

The Facts

At the time of the decision, Mrs Bowerman was an 86-year old self-funded retiree, described by the AAT as ‘savvy and entrepreneurial’. Over the decades, she and her late husband had built an investment portfolio which included shares, managed investment trusts and investment properties.

 Mrs Bowerman executed a contract for the purchase of an off-the-plan residence, the ‘Foreshore Boulevard Unit’. At this time, she intended to sell the family home in which she resided and use the sale proceeds to fund the purchase of the Foreshore Boulevard Unit to ultimately reside there.

Mrs Bowerman was informed that the construction of the Foreshore Boulevard Unit was going to be delayed until June 2020 and that she would be able to sell the family home for more than $2 million.

So, in November 2017, she executed a contract to purchase another off-the plan unit (the ‘Dune Walk Unit’) in the same development as the Foreshore Boulevard Unit for $1.2 million. The Dune Walk Unit was scheduled for completion prior to the Foreshore Boulevard Unit. At this time, Mrs Bowerman decided to sell the family home and move to the Dune Walk Unit whilst the construction of the Foreshore Boulevard Unit was ongoing. She planned to eventually sell the Dune Walk Unit and move into the Foreshore Boulevard Unit when construction would be completed.

Mrs Bowerman sold the family home in May 2018 for $2.23 million. The proceeds of this sale funded the purchase of the Dune Walk Unit which she moved into and lived in until July 2020.

Mrs Bowerman contracted to sell the Dune Walk Unit in April 2020, to fund the payment for the Foreshore Boulevard Unit. However, at that time due to the height of the Covid-19 pandemic, property prices had dropped and Mrs Bowerman was compelled to sell the Dune Walk Unit for a loss of approximately $265,000 which was settled in July 2020. The same month, Mrs Bowerman moved into the Foreshore Boulevard Unit where she resided thereafter.

Mrs Bowerman deducted the loss from her assessable income in the 2020 income year.

The Commissioner of Taxation disallowed the claim for the loss on the basis that the sale of the Dune Walk Unit was the realisation of a capital asset, that the loss was capital in nature and because the Dune Walk Unit was her main residence, she was not entitled to carry forward the losses from the sale.

The case came before the AAT to review the ATO’s objection decision.

The Decision

The AAT decided on 3 issues:

  1. Whether the loss on the sale of the Dune Walk Unit was deductible because it was incurred in gaining or producing assessable income. That is, was there an intention to make a profit on the sale of the Dune Walk Unit at the time it was acquired?
  2. If so, whether the deduction was denied because the deduction was of a private or domestic nature, particularly as the taxpayer lived in the Dune Walk Unit; and
  3. If the loss was deductible, whether it was incurred in the 2020 being the year the contract was signed or the 2021 income year being the year the sale contract was settled.

Issue 1: Was the loss deductible?

Mrs Bowerman relied on a principle from the High Court case FCT v Myer Emporium (1987) 163 CLR 199 that a profit from an isolated transaction involving the sale of property will be assessable if the taxpayer acquired the property for a profit-making purpose and the acquisition and sale of the property occurred as part of a business operation or commercial transaction. The profit-making intention is not required to be the sole or dominant purpose of entering into the transaction.

The AAT was satisfied that Mrs Bowerman had the profit-making intention required at the time she purchased the Dune Walk Unit and that her intention to live there was only subsidiary to her profit-making intention. A significant factor to the AAT’s decision on this issue was the ‘incontrovertible fact’ that prior to purchasing the Dune Walk Unit, Mrs Bowerman intended to re-sell the unit for a profit instead of holding it for long-term investment.

Mrs Bowerman’s profit-making intention was further inferred from her proactiveness in keeping abreast of expansions and sales in the development. The AAT considered that her purchase of the Dune Walk Unit was ‘opportunistic’ in nature, and was characteristic of a businessperson.

For these reasons, the AAT considered the purchase of the Dune Walk Unit to be a ‘commercial transaction’ and that the loss on the sale of the Dune Walk Unit was deductible.

Issue 2: Was the loss private or domestic in nature?

The AAT concluded that the loss incurred by Mrs Bowerman did not lose its connection to her profit-making intention simply because she resided in the Dune Walk Unit. It held that the loss was not of a private or domestic nature.

An important factor that seems to have been overlooked, is that a deduction is denied 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, arguably the loss should be apportioned.

Issue 3: When was the loss incurred?

This issue arose because Mrs Bowerman submitted that the loss was incurred on the sale in the income year ended 30 June 2020, being the income year in which the contract for the sale of Dune Walk was executed. She relied on and asserted that the Commissioner was bound by Taxation Ruling 97/7 which at paragraph [9] stated ‘a taxpayer who uses a cash receipts based accounting system need not necessarily have paid or borne a loss or outgoing in order for that loss or outgoing to have been ‘incurred’ for the purposes of section 8-1.’

On the other hand, the Commissioner argued that the loss was realised at settlement on the receipt of proceeds in the 2021 income year, not when the contracts became unconditional in the 2020 income year.

The AAT concluded that Mrs Bowerman was entitled to rely on TR 97/7 as it is a public ruling and binds the Commissioner and therefore, the loss on the sale of the Dune Walk Unit could be claimed in the income year ended 30 June 2020.

It should be noted that in the absence of the public ruling the loss would be normally incurred on settlement being in the 2021 year.


In the capital versus revenue distinction it has long been the position that the intention at the time of acquisition is key. The AAT reached their decision having regard to the strength of the taxpayer’s testament and evidence around her intention at the time of acquisition of the property being:

  1. The taxpayer knowing at the time of purchasing the Dune Walk Unit that she would have needed to sell this apartment to fund the completion of the Foreshore Boulevard Unit; and
  2. The taxpayer’s awareness of growth in the off the plan units in the development acknowledging that she probably would have made a profit had it not been for the COVID-19 restrictions.  In the AAT’s view this is the sort of approach a businessperson would do.

This AAT decision only binds Mrs Bowerman and does not set a precedent for other taxpayers.

However, the decision raises a range of issues in relation to the revenue/capital distinction which will be concerning for property investors and those that buy, renovate and sell properties within a short period of time and argue held on capital account on the basis they have used the property as their main residence.

If the ATO adopts the principles of this decision, a gain on the sale of an investment property which might usually enjoy the CGT 50% discount might instead be taxable on revenue account at the taxpayer’s marginal rate. This could potentially give rise to far greater tax liability for the taxpayer than if the gain were assessed on capital account, as many would normally assume to be the case.

This decision would not generally impact the CGT position on any gain or loss on sale of a rental property. However, the application of the decision by the ATO could extend to where long-term property owners, such as farmers, decide to sell their land for commercial or residential development.

The low bar that the decision sets in relation to a profit-making purpose and the nature of a commercial transaction raises the question of how broad the ambit is for any gains or losses to be assessed on revenue account and thereby potentially losing the CGT discount. This has been a characteristic of the decision that has been criticised as being vulnerable to being overturned on appeal.

Next Steps

Unlike the facts of this case, most properties are sold for a profit. If the isolated transaction principle is to be applied to the profit on the sale of a property so that it is taxed solely on revenue account, the problem is that taxpayers will lose the ability to access the 50% general discount as well as other CGT concessions including the main residence exemption.

So is it that the ATO has lost this battle but may have won the war?

We will be paying close attention to any developments from this decision and any actions of the Commissioner in response. From the perspective of providing clarity on the isolated transaction principle, it would be helpful if the case goes on appeal to the Federal Court.

The team at Cooper Partners have extensive experience in advising and assisting property investors achieve their goals. For any questions or tailored advice, contact the Cooper Partners engagement team to see how this decision might affect you.

This newsletter is current as of 12 December 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.