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With the end of the financial year approaching, debtors should be reviewed to see if any of them are bad and can be written off. A tax deduction is available for bad debts written off.

To claim a deduction for a bad debt it must be written off in the books of accounts prior to 30 June.  It is important that all reasonable steps to recover the debt have been taken.  A commercial judgement is allowable – meaning it is not essential that all legally available steps to collect the debt are taken.

The deduction is claimed under s25-35 of the ITAA.  To claim a tax deduction, the debt must:

• Be in existence (e.g., No deed of release has been executed)
• Be bad
• Be written-off as a bad debt in the year of income the deduction is claimed, and
• Have been brought to account as income in any year (or, if by a money lender, the debt must be in respect of a loan in the ordinary course of that business).

If a debt is ‘bad’ based on a commercial judgement, it is also bad for s25-35 purposes.  A creditor doesn’t have to take all legally available steps to recover the debt.

A debt is considered to be ‘bad’ if:

• The debtor has died leaving no, or insufficient, assets to meet the debt
• The debtor cannot be traced, and the creditor cannot find the existence of (or location of) assets against which action could be taken.
• The debt has become statute-barred and the debtor is relying on this defence (or it is reasonable to assume so) for non-payment.
• The debtor is a company in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt, or
• If, on an objective view of the facts or probabilities existing at the time, there is little or no chance of the debt (or part of it) being recovered.

A debt will generally be accepted as ‘bad’ (depending on the particular facts of the case) if the taxpayer has taken all reasonable steps to try to recover the debt and not simply written it off as bad.

Please call us to discuss this and other tax planning considerations before the end of the financial year.