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Is A Bad Debt Tax Deductible?

Thursday, June 29, 2017 - Posted by Michael McCulloch

With the end of financial year soon upon us many businesses will be looking at ways in which to reduce their taxable income.

One way in which you can legitimately do this is to write-off your bad debts prior to 30 June. This will effectively mean you do not pay tax on any income associated with the bad debt as these monies have never been received.

The Income Tax Assessment Act 1997 (Cth)

s25.35 -

(1)  You can deduct a debt (or part of a debt) that you write off as bad in the income year if:
(a)  It was included in your assessable income for the income year or for an earlier income year; or
(b)  It is in respect of money that you lent in the ordinary course of your business of lending money.
Note: If a bad debt is in respect of a payment that is required to be made under a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936 ): see subsection 63(1A) of that Act.

Writing off a debt you have bought
(2)  You can deduct a debt that you write off as bad in the income year if you bought the debt in the ordinary course of your business of lending money. However, you cannot deduct more than the expenditure you incurred in buying the debt.

Writing off part of a debt you have bought
(3)  You can deduct a part of a debt if:
(a)  You write off that part as bad in the income year; and
(b)  You bought the debt in the ordinary course of your business of lending money.
(4)  However, the maximum that you can deduct under subsection (3) for one or more income years is the amount (if any) by which:
- The expenditure you incurred in buying the debt;
exceeds:
- So much of the debt as has not yet been written off as bad.

Considerations: 

  • Any GST paid on expected income can be claimed as a refund
  • The debt must be considered a bad debt and not doubtful to be written-off.
    A debt is considered bad if, for example, an invoice remains unpaid and you have taken reasonable steps to recover the debt and it is unlikely the debt will be paid.
  • The debtor is deceased and there are insufficient assets in the asset in which to pay the debt
  • The debtors whereabouts is not known and you have undertaken reasonable enquiries in which to locate them and / or their assets
  • The debtor is bankrupt or has gone into liquidation and there will be insufficient funds in which to pay the debt

Using A Debt Collection Agency

As we noted previously in this article there is an onus on you, the business owner, to make reasonable steps and / or reasonable enquiries in which to recover the debt or locate the debtor. Contact us at LCollect to discuss your situation and your options.


Please Note: This article does not constitute legal or financial advice. You should seek your own independent advice from a qualified person.

Important Note: Bad debts will only need to be written-off if you report debts on an accrual basis. If you recognise income in your accounting system only when it's banked into your business account you will not have any adjustments to make as the income has not been recorded.


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