Most businesses pay income tax based on when invoices are issued, not when they are paid. It is important that your business reviews any outstanding debts before 30 June to avoid paying tax and GST on sales where payment will not be received.
There are two key steps that are often overlooked when declaring a bad debt.
- You need to determine that the debt is bad. This means it must be an amount that is unlikely to be recovered through any reasonable and commercial attempts.
- You must have made the decision to write off the debt and recorded that decision in writing before the end of the income year in which you claim a deduction. The simplest way to satisfy this is to record the bad debt expense in your accounting system by 30 June.
The rules around claiming a tax deduction for bad debts are complicated, so speak with us if you have material debts to write off.