Ditwah disaster and the tax system: Relief for victims, recognition for donors

IT is a well-established principle that income tax is imposed on net income, after allowing deductions for expenses incurred in the production of income, losses and outgoings, as well as qualifying payments, including donations made to the Government, subject to the provisions of the Inland Revenue Act, No. 24 of 2017 (“the Act”).

- By N.M.M. Mifly

In the aftermath of an unprecedented national calamity, tax policy must go beyond mechanical application and reflect principles of equity, reasonableness, and public interest – Pic by Pradeep Dilrukshana

(Pic by Pradeep Dilrukshana)

Accordingly, people affected by Cyclone Ditwah may claim deductions for losses arising from the disaster for income tax purposes under Section 19 of the Act. At the same time, members of the public who contribute to Government-led relief efforts, whether in cash or in-kind, may claim such contributions as qualifying payments when computing their taxable income, subject to Sections 52 and the Fifth Schedule to the Act.

As stated above, losses are deductible in determining the tax payable by any person, whether a natural person (individual) or a legal person (entity), subject to the provisions of the Act. Sections 17 and 19 of the Act govern the nature and deductibility of such losses.

A business or investment loss generally arises where the expenses incurred exceed the income generated. Loss or destruction of trading stock or loss of a capital asset of a business where such loss exceeds the consideration, if any, received, constitutes a deductible business loss for tax purposes.

Accordingly, losses relating to trading stock, capital assets of a business, and expenditure incurred on repairs arising from such cyclonic disaster are deductible, subject to the relevant provisions of the Act.

a)“Losses are not accepted by the tax authority”: A myth

There is a common misconception in some quarters, particularly among certain auditors and taxpayers, that the tax authority will reject a self-assessment return simply because it declares a loss instead of income. As a result, some taxpayers resort to declaring artificial income rather than reporting the genuine loss incurred for fear of auditing or rejection of the return of income.