Bad debts – first they don’t pay you, then you have to chase them, now they want you to do what??

So one of your customers isn’t going to be able to pay you and you want to write the debt off, guess what, the pain doesn’t quite stop there. If you want to claim a tax deduction there are some steps that you need to take


  • Has the debt really gone bad?
    • If you are still chasing it, then it is not bad.
  • You have to write it off in the year you claim a deduction
    • Look at your bad debts and write them off before 30 June of that year.
  • You must have already paid tax on it
    • For Example, you put the invoice through debtors
    • You pay tax on your invoices (non cash basis)
  • Something official in writing to say that it’s been written off (not just bookkeeping entries in the accounts)
    • If you are a company or trust then a minute or resolution
    • Otherwise some sort of written meeting note, record of business decision etc.


Anything else?

  • If you do your accounting on a cash basis, you can’t claim the bad debt as a deduction
    • Why: because you never included it in your income
    • But: You can claim the expenses related to the work completed and chasing the debt
  • If you do your tax on a cash basis but your accounting system includes debtors, you’ll still need to write these amounts off
    • Why:
      • to make sure your debtors account is correct
      • to make sure your GST account is correct
    • You should take all steps reasonable to make sure you have recovered the debt.
      • Why:
        • If you did not chase them for it, how do you know it is bad?
        • The tax office will generally require that you have taken all reasonable steps
      • But: for large debts chasing could include, legal action and valuation of securities held against the debt.
    • If you have a company or trust there are some tricky little requirements to make sure you are able to claim the debt.
      • Why:
        • To make sure you are not trying to claim something that is not really your debt (yes this does happen!)
        • The rules for companies and trusts are always more complex
      • But: If it is actually your debt then you should generally be able to meet these rules and claim it.
    • Don’t forget to adjust the GST, especially if you do this on a non cash basis

Hints & Tips

  • If you take legal/Debt Collection action against the debtor after 30 June, you can’t write the debt off until you actually have exhausted your options. Then you can write it off after the action if there is no likelihood of recovery.


But wait there is more:

  • Want to help protect yourself more, look into what you need to do under the PPSR (Personal Property Securities Register)

#note this does not apply to moneylenders, they have their own set of requirements

Bad Debts |