When an individual makes a loss from a business that is carried on as a sole trader or in partnership with others, it is necessary to consider whether the loss can be applied against income from other sources.

The non-commercial loss rules are used for this purpose. In situations where the taxpayer is not able to pass the ‘normal’ tests to utilise their business losses against other income there is an opportunity to seek the Commissioner’s discretion to enable the losses to be used.

One of the situations where an individual can seek the Commissioner’s discretion on the use of their tax losses is where the business activity was affected by special circumstances that were outside the control of the operators of the business.

In recent years, special circumstances such as flood, bushfire and COVID-19 may have led to individuals generating losses from their business activities and might have made it difficult for the individual to pass the non-commercial loss rules.

The draft Practical Compliance Guideline (PCG) sets out a safe harbour position which allows taxpayers to utilise the losses as if the Commissioner had exercised discretion without needing to apply for this. The ATO intends that the safe harbour approach will apply for the 2020, 2021 and 2022 income years.

To qualify for the safe harbour, a business must meet all of the following conditions:

• Satisfy the $250,000 adjustable income test;
• Make a loss from the business activity;
• The business activity was affected by one or more of the following events:

– flood (including where receiving ATO flood support);

– bushfire (including where the business qualified for an ATO bushfire lodgment and payment deferral); or

– a government-imposed lockdown, business closure and/or restriction due to COVID-19;

• The relevant event meant that the taxpayer was not able to carry on the business activity, or unable to carry it on to the same scale as was usual, or some or all of the business’ customers were not able to access the business activity, or access it in the same way as usual;
• Have not applied for a private ruling requesting the Commissioner exercise the ‘special circumstances’ discretion in relation to your business activity in the relevant income year; and
• The taxpayer has evidence to support that they are eligible for the safe harbour.

If the taxpayer is not able to rely on the safe harbour approach they can still potentially apply to the Commissioner to seek discretion in connection with the use of business losses against other income.

For extra information from the ATO, click here!