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Bad debts

Last updated 31 August 2006

Did you write off any bad debts in your business?

No, Go to Lease expenses.

Yes, Read on.

You need to know

Include income from the recovery of bad debts in Other business income at I or J in the Income section of item P8.

You are not allowed a deduction for bad debts unless you have previously included the amount in your assessable income or it is for money you lent in the ordinary course of a money-lending business carried on by you.

Do not include accounting provisions for doubtful debts at I. You show them in the Expenses section at All other expenses, then add them back at H Expense reconciliation adjustments in the Reconciliation items section.

Before you can claim a bad debt, it must be bad and not merely doubtful. The question of whether a debt is a bad debt will depend on the facts in each case and, where applicable, the action taken for recovery.

For more information, see Taxation Ruling TR 92/18 - Bad debts.

You can claim a deduction for:

  • Partial debt write-offs - where only part of a debt is bad and is written off, you may claim a deduction for the amount written off.
  • Losses incurred in debt-for-equity swaps for debt written off after 26 February 1992 - where under an arrangement you discharge, release or otherwise extinguish the whole or part of a debt owed to you in return for equity in the debtor. You can claim a deduction for the difference between the amount of the debt and the greater of the market value of the equity at the time of issue or the value of the equity recorded in your books at the time of issue. The market value of the equity is the price quoted on the stock exchange or, if the equity is not listed, the net asset backing of the equity.

Where you are not in the business of lending money, the deduction is limited to the amount of the debt you have included in assessable income.

Records you need to keep

Keep a statement for all debtors whose bad debts you wrote off during the year, showing:

  • their name and address
  • the amount of the debt
  • the reason you regarded the debt as bad, and
  • the year that you returned the amount as income.

Completing this item

Step 1, Write your total primary production bad debts at Bad debts in the Primary production column, item P8 on page 3 of your schedule. Do not show cents.

Step 2, Write your total non-primary production bad debts at Bad debts in the Non-primary production column. Do not show cents.

Step 3, Add up your primary production and non-primary production bad debts and write the total at I.