Collecting and writing off debts

September 4, 2014

123rf - Life InsuranceIf your business has a bad debt, that is a debt that you have taken all reasonable steps to recover, but appears unlikely to be paid, then it is possible to write it off as a tax deduction.

While this does pose a small consolation, it is obviously preferable not to find yourself in this situation.

Therefore, if unpaid invoices are an ongoing problem for your business, it may be worth reviewing your debt collection processes.

Recovering debts

If you have a debt that has not been paid, it is usually worth negotiating directly with the client. If the client indicates that they will be able to pay within a reasonable time frame, it is usually in your best interests to grant them this leeway.

In some cases, it may also be advisable to negotiate a discount. Although this can be frustrating and disappointing, you may end up with a larger portion of the full amount than you would have if you had sold the debt to a debt collection agency.

Selling a debt

Selling a bad debt can be a good option if you do not think you have a decent chance of recovering the amount.

This means you will sell the debt to a debt collection company for a small portion of its total value, but will not receive any additional payment if they are successful in recovering the full amount.

It is also possible to enlist the services of a debt collection company without selling them the debt. This means that they will attempt to recover the debt on your behalf for a commission fee. Using a debt collector is an effective way to show your debtor that you are serious about recovering the amount.

Writing off a debt

If you are planning to write a bad debt off as a tax deduction then the amount owing must have been included in your assessable income.

You must also be able to provide the ATO with proof that you have taken reasonable steps to recover the debt.

A bad debt cannot come from an associated party, such as a family member, and it needs to have been formally written off in your accounts.

If you have received a tax deduction for a bad debt that is subsequently recovered, you must then declare this debt as normal business income.

Our accountants and business advisors are on hand to help with any questions you may have about this article.
Phone (02) 4926 2300 or email us.


If you would like to discuss writing off debts and debt collection, please do not hesitate to contact us here at Leenane Templeton.


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