As many of the government’s COVID-19 economic supports coming away, economists predict there’ll be many business failures to follow. If your business is unable to obtain payment from a debtor, depending on the accounting method used by your business, you may be able to claim a tax deduction for the unpaid amount.
If you account for your income on an accruals basis, you may be able to claim a tax deduction for a bad debt. In order to claim a deduction for a bad debt, you must have included the amount in your assessable income. You will also need to determine that the debt is genuinely bad, rather than merely doubtful, at the time you write it off.
The next step in claiming a bad debt deduction is to write-off the debt as bad. This usually means that you have to record the decision in writing to write-off the debt before the end of the income year in which you intend to claim a deduction.
In instances where you have dealt with the bad debt in other ways, for example, waived or forgiven the debt, extinguished the liability in another way, or sold the debt, the debt is no longer in existence and you cannot write it off as a bad debt .
Companies that want to deduct bad debts will have the additional hurdle of satisfying the continuity of ownership test (COT).
There may also be GST consequences for businesses when writing-off bad debts. For example, where the business accounts for GST on a non-cash basis, a decreasing adjustment can be claimed where you’ve made the taxable sale and have paid the GST to the ATO and have subsequently not received the payment. However, the debt will need to have been written off as bad and has been overdue for 12 months or more.
Businesses that account for income on cash basis will not be able to claim a deduction for bad debts. This is because these businesses only include an amount in their assessable income when it is received, therefore, bad debts will have no income tax consequences.
If non-payment from customers or debtors is getting your business down, we can help you sort out the bad debts from the others and help you get a tax deduction or a GST adjustment when the time comes. Call us today for expert advice.