Chasing an invoice that is never going to be paid is frustrating. The tax system can soften the blow, but only if you handle the paperwork properly.
The income tax side
The ATO says that to claim a deduction for a bad debt, you must have made the decision to write it off and recorded that decision in writing before the end of the income year in which you claim the deduction. That means before 30 June, not when you lodge.
A bad debt deduction is generally for money you previously counted as income, for example because you account for income when you invoice rather than when you are paid. If you report income only when cash arrives, there is usually nothing to deduct, because you never counted it.
The GST side
If you sold something taxable and paid the GST to the ATO but were never paid, you may be able to claim a decreasing adjustment on your BAS. The ATO says this applies where you write the debt off as bad, or where the debt has been overdue for 12 months or more. You make the adjustment in the period you write it off, or the period you become aware it has been overdue for 12 months.
What to do
- Review your debtors list before 30 June and identify invoices you honestly do not expect to collect.
- Write the decision down with the date, the customer, the amount and why you think it is unrecoverable.
- Keep evidence of your collection efforts, such as reminders, emails and any contact with a collection agency.
- Make the GST adjustment on the right BAS, and keep the tax invoice for the original sale.
- Talk to your accountant before writing off large amounts or debts owed by related parties.
If the customer pays later, you will need to account for it again. This is general information only.