Every business ends up with invoices that simply don’t get paid. It’s one of the less glamorous realities of operating in the real world. But if you handle bad debts the right way before 30 June, you can turn that loss into a legitimate tax deduction — and potentially recover some of the GST you’ve already paid to the ATO.
What counts as a bad debt?
The first thing to understand is the difference between a slow-paying debtor and a genuinely bad debt. A customer who is overdue by 60 days might still pay — they’re slow, not gone. A bad debt, in the tax sense, is a debt that is genuinely irrecoverable. To claim a deduction, you need to demonstrate that you’ve made a reasonable effort to collect the money and have concluded it won’t be paid. That might mean sending multiple reminders, following up by phone, issuing a formal demand letter, or referring the matter to a debt collector — and the debtor has either disappeared, gone into administration, or simply has no capacity to pay.
The requirements to claim the deduction
Several conditions must be satisfied for a bad debt deduction to be valid. The debt must have been included in your assessable income in this or a prior year — which means this rule applies to businesses on an accruals basis, where you recognise income when it’s earned rather than when payment arrives. Cash basis businesses generally can’t claim bad debt deductions because the income was never brought to account. You must also write the debt off in your accounts before 30 June. This means making a formal entry in your accounting records to remove the receivable and record it as a loss. It’s not enough to decide in your head that a debt is uncollectable — the write-off must be documented in the accounts by 30 June.
The GST benefit
There’s an additional benefit worth knowing about. If you’re registered for GST and you’ve already remitted GST to the ATO on an invoice that’s now a bad debt, you may be able to claim that GST back as a decreasing adjustment on your BAS. The conditions are similar — the debt must be written off as bad, and it must have been more than 12 months since the invoice was issued (or the debtor must be insolvent). For a $1,100 invoice with $100 GST already paid over, you could recover that $100. Across a handful of old unpaid invoices, this can add up to a meaningful refund.
What records you need and why timing matters
Good record-keeping is essential. Keep copies of your invoices, evidence of collection attempts — emails, letters, debt collector correspondence — and the accounting entry showing the write-off before 30 June. If the debtor subsequently pays some or all of the debt after you’ve claimed the deduction, you’ll need to bring that amount back into income in the year it’s received. Now is the time to review your aged receivables, identify which debts are genuinely uncollectable, and process the write-off in your accounting system before the financial year closes. Your accountant can help assess which debts qualify and ensure the GST adjustment is handled correctly.
