Floods, Fires, COVID-19 And Business Loss

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. If the taxpayer can’t pass the ‘normal’ tests to utilise their business losses against other income, there is an opportunity to seek the Commissioner’s discretion to use the losses.

An individual can seek the Commissioner’s discretion on using their tax losses if special circumstances outside the business operators’ control affected the activity. These situations allow for flexibility in applying tax loss rules.

In recent years, special circumstances such as flood, bushfire and COVID-19 may have led to individuals generating losses from their business activities. It 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. This 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;
• One of the following events affects the business activities:

– 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. They can seek discretion in connection with the use of business losses against other income.

For extra information from the ATO, click here!

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your advisers.