IPA urges consideration for taxpayers to be considered under special circumstances

In a submission to the Draft PCG 2022/D2 Non-commercial business losses, general manager technical policy, Tony Greco, wrote that if a business relies on customers directly impacted by the special circumstances, it in turn would suffer the same consequences of not being able to meet one of the four tests or make a profit in the relevant year.

“Given the number of businesses impacted by special circumstances particularly COVID-19 related, a safe harbour to self-assess the Commissioner’s discretion [is] most welcomed,” Mr Greco wrote. “Without this avenue taxpayers would be required to apply for the [Commissioner’s] discretion and have to wait for the confirmation that the application was successful.”

The guidelines in the draft PCG provide the basis for the safe harbour excise of the Commissioner’s discretion. The draft PCG makes tax administration easier for businesses impacted by floods, bushfires, and COVID-19 events. Impacted businesses within the guidelines of the safe harbour will not need to apply for the discretion for the income years ended 2019-20, 2020-21 and 2021-22. Taxpayers who fall out of the guidelines are not prevented from applying for an exercise of the discretion in the usual way if their circumstances do not fall within the terms of the safe harbour. This is a good practical way to reduce administration whilst protecting the integrity of the non-commercial loss provisions.

Mr Greco said if a business is significantly reliant on businesses directly impact by special circumstances, then due consideration is warranted for similar safe harbour relief.

“COVID-19 related restrictions are not isolated to lock down areas as downstream impacts are also common when consumers cannot travel,” he wrote.

“In recent years, special circumstances such as flood, bushfire and COVID-19 impacts may have caused the non-commercial loss rules to apply to many more businesses than in previous years. As a result, many taxpayers have not been able to meet one of the other requirements for the loss to be offset against their other income, requiring the taxpayer to seek the Commissioner’s discretion to allow them to do so.

“This draft PCG provides a welcomed safe harbour that, provided you satisfy the relevant conditions, allows you to manage your tax affairs as if the Commissioner had exercised the discretion in paragraph 35-55(1)(a).”

Currently, the non-commercial loss rules contained in division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevent an individual’s losses from non-commercial business activities from being offset against the individual’s other assessable income in the year the loss is incurred. A loss from each business activity that an individual (alone or in partnership) carries on in a year is deferred to be offset against future income from the same business activity, unless one of the following applies:

• The individual meets the income requirement, and the business activity satisfies one of the four stipulated tests.
• The individual has a business activity that is eligible for an exception.
• the Commissioner exercises the discretion in subsection 35-55 for the business activity for one or more income years.

This draft PCG focusses on the Commissioner’s discretion that can be exercised in relation to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable, by reference to the circumstances specified, to defer the losses. One of the circumstances in which the discretion may be exercised is where the business activity was or will be affected by special circumstances outside the control of the operators of the business activity that can include drought, flood, bushfire or some other natural disaster.