| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012840751413
Date of advice: 17 July 2015
Ruling
Subject: Bad debt
Question
Are you entitled to a deduction for bad debts?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts
You operate a business.
You complete your BAS and tax returns on a cash basis.
You have sold items of trading stock which have not been paid for. The debt is greater than 12 months.
These debts were not included in the business's income in the 2013-14 financial year or previous years.
You have tried to recover the monies numerous times.
The items sold and not paid for were not showing in your closing stock figures on your tax return.
You are not in the business of lending money.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 25-35.
Reasons for decision
Summary
The figures declared for your closing stock reflect the reduction in your trading stock on hand which effectively allows a deduction for the cost of stock sold. No further deduction is allowed for the debt owed to you. The debt is not an amount you have incurred and therefore is not an allowable deduction under any provision. Furthermore the amount owing has not been included as assessable income in your tax return.
Detailed reasoning
Bad debts
A deduction for a bad debt may be allowable under either section 25-35 or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Taxation Ruling TR 92/18 Income tax: bad debts clarifies the circumstances in which a deduction for bad debts is allowable.
Subsection 25-35(1) of the ITAA 1997 states that you can deduct a debt (or part of a debt) that you write off as bad in the income year if:
(a) it was included in your assessable income for the income year or for an earlier income year, or
(b) it is in respect of money that you lent in the ordinary course of your business of lending money.
You are not in the business of lending money and no amount was included in your assessable income in relation to the unpaid amount. Therefore a deduction is not allowable under section 25-35 of the ITAA 1997.
General deduction
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
For a deduction to be allowed under section 8-1 of the ITAA 1997, an amount must be incurred.
Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape.
The guidelines developed by the courts that help to determine if an expense has been incurred include:
• there must be a presently existing liability to pay a pecuniary sum,
• presently existing liability is determined on the circumstances of the case,
• an expense is incurred when actually paid if there was no presently existing liability.
In your case, while it is acknowledged that you have not received payment for the items sold, you have not actually incurred an expense. That is you do not owe or have to pay an amount in relation to the debt owed to you. Therefore, no deduction is allowed under section 8-1 of the ITAA 1997.
The inclusion of an item of trading stock on hand at the beginning of the income year, and the exclusion of that item from trading stock on hand at the end of the income year, effectively allows a deduction for the cost of trading stock sold during the year. If trading stock is sold, yet not paid for, the taxable income is reduced because such items of trading stock are no longer on hand, and are not taken into account at the end of the income year.
Therefore, as the sale of your items is reflected in your closing stock figures, no further deduction is allowed.
There is no other provision that allows a deduction for the debt owing in your circumstances.