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ATO Issues Practical Compliance Guideline on Discretion to Allow Loss Offset in Special Circumstances Such as Flood, Bushfire, or COVID-19 — Orbitax Tax News & Alerts

The Australian Taxation Office (ATO) has issued Practical Compliance Guideline PCG 2022/1 - Non-commercial business losses - Commissioner's discretion regarding flood, bushfire or COVID-19. PCG 2022/1, which is primarily relevant for individuals and partnerships, concerns cases where the ATO Commissioner may exercise their discretion to allow the offset of losses instead of deferring a loss from a business activity to be offset against future income from the same business activity. Such discretion can be exercised in certain circumstances, including where a business activity is affected by special circumstances outside the control of the operators of the activity, including drought, flood, bushfire, or some other natural disaster. In relation to this, PCG 2022/1 provides a safe harbor by which taxpayers can manage their tax affairs as if the Commissioner exercised such discretion.

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What this Guideline is about

1. Division 35 of the Income Tax Assessment Act 1997 prevents an individual's losses from non-commercial business activities being offset against the individual's other assessable income in the year the loss is incurred.

2. All legislative references in this Guideline are to the Income Tax Assessement Act 1997.

3. Division 35 operates in relation to the business activities carried on by a business, rather than the business itself. A business may be made up of more than one business activity.

4. Broadly, 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:

  • the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests
  • the individual has a business activity that is eligible for an exception, or
  • the Commissioner exercises the discretion in subsection 35-55 for the business activity for one or more income years.

5. The discretion 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.

6. 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, including drought, flood, bushfire or some other natural disaster.

7. This discretion is for situations where the business activity was or will be affected by special circumstances that caused it to fail to satisfy one of the 4 tests or make a profit in the relevant year.

8. Special circumstances outside of the control of the operator of the business activity are those which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. Ordinary economic, weather or market fluctuations (which are expected to occur on a regular or recurrent basis and could reasonably be predicted to affect the business activity) will not normally be considered special circumstances.

9. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the 4 tests. In addition to drought, flood and bushfire, examples of special circumstances (depending on the facts) may include government restrictions, explosions and disturbances to energy supplies.

10. In recent years, special circumstances such as flood, bushfire and COVID-19 impacts may have caused the non-commercial loss rules to apply to a taxpayer's business. If this happens, and a taxpayer does not meet one of the other requirements for the loss to be offset against their other income, the taxpayer will need to seek the Commissioner's discretion to allow them to do so.

11. This Guideline outlines a 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). It does not, however, apply to amounts deferred in previous income tax years under the non-commercial loss rules. This Guideline also does not prevent you from applying for an exercise of the discretion in the usual way if your circumstances do not fall within the terms of the safe harbour.

12. This Guideline does not apply to the Commissioner's discretions in:

  • paragraphs 35-55(1)(b) or (c) - the 'lead time' limbs, or
  • subsection 35-55(2) - the blackhole expenditure limb.

Date of effect

13. This Guideline applies to the 2019-20, 2020-21, 2021-22 and 2022-23 income years.