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Deductions for bad debts in Australia


Deductions for bad debts is a very common issue to most companies. Today Wis Partners has collected authentic interpretation towards this issue from Wolters Kluwer to answer dilemmas posed by our clients.


Reserves or provisions for doubtful debts are not deductible. Before a deduction is allowable, the debt must be bad. That is a question of fact, dependent on the circumstances of each case, but generally a debt is bad in any of the following circumstances:

·      the debtor has died without leaving assets or is insolvent

·      the debt is statute-barred and the debtor relies on this as a defence for non-payment

·      the debtor and the debtor’s assets cannot be traced

·      in the case of a corporate debtor, the company is in liquidation and there are insufficient funds to pay the debt, or

·      on an objective view, there is little or no likelihood of the debt being recovered (TR 92/18).


A bad debt deduction may be claimed under ITAA97 s 25-35 or, alternatively, under ITAA97 s 8-1. Companies and trusts wishing to claim bad debt deductions under either provision must meet stringent preconditions. However, from 1 July 2012, a company or fixed trust that carries on a designated infrastructure project can deduct a bad debt without needing to meet these preconditions.


To be deductible, the debt must be in existence at the time it is treated as a bad debt and claimed as such. A release of a debt extinguishes it, leaving nothing to be incurred within the meaning of s 8-1, nor to be written off as bad under s 25-35(Point 70 ATC 4021). This is also the case wherever a debt is released, compromised or otherwise extinguished by the voluntary or acquiescent act of the creditor (GE Crane Sales 71 ATC 4268). Where a commercial debt is forgiven, the debtor may be affected by the debt forgiveness provisions. In addition, a deemed dividend may arise where a private company forgives a debt owed by a shareholder.


The Commissioner’s views as to the tax position where there is a sale of property held as security against a debt, or property is taken in satisfaction of the debt, are contained in TR 92/18. For the position where a life insurance company forgives an agency development loan made to an insurance agent, see TR 2001/9.


There is a limit on the amount a taxpayer may deduct for a bad debt relating to lease payments for the lease of a luxury car. Lease payments written off as bad debts by the lessor may only be deducted up to the amount of the finance charge reduced by the amounts of earlier deductions.

A deduction for a bad debt may, in certain circumstances, be denied if a tax avoidance scheme is involved. The recoupment of an amount deductible in respect of a debt written off as bad gives rise to an assessable amount.


Special provisions apply for bad debts in relation to consolidated groups.


It you still have any question about deductions for bad debts, please feel free to contact us at Wis Partners.


(Information source: Wolters Kluwe)