Bad-Debt Provisioning

This lesson discusses tax and accounting treatment in general terms. Tax rules are complex and change over time. Consult your accountant before treating bad debt write-offs as deductions or making material provisioning decisions that affect your financial statements.

Provision vs write-off: the distinction

These two terms are sometimes used interchangeably in conversation but they are distinct accounting concepts, and the distinction matters.

A bad-debt provision (also called an allowance for doubtful debts) is an accounting estimate. You reduce the carrying value of your accounts receivable on the balance sheet to reflect the fact that some of it may not be collected. The reduction is recognised as an expense in the period you make the provision, but the underlying receivable remains on the books — it has not yet been given up. A provision reflects uncertainty: you believe there is meaningful risk that this debt will not be recovered, but you have not yet concluded that it is lost.

A write-off is a final step. You remove the receivable from your books entirely because you have concluded it is irrecoverable. The debt is gone from your balance sheet, and the expense — if not already provisioned — is recognised in full.

You can provision partially. If you have a $40,000 debt that is 120 days overdue and in dispute, you might provision 50% — recognising $20,000 of likely loss while keeping $20,000 on the books as the amount you still expect to collect. Later, if collection efforts fail entirely, you write off the remaining $20,000. If the debtor pays unexpectedly, you reverse the provision back to income.

When to provision

The decision to provision should be driven by your ageing data. As debts age, the probability of full collection decreases. A common approach is to apply provision percentages to each age bucket of your receivables — illustrative examples only: 60–89 days overdue, 10% provision; 90–179 days overdue, 25%; 180–359 days, 50%; 360+ days, 100%. These are examples to illustrate the concept. The right percentages for your business depend on your own historical collection experience, your industry, and the nature of your customer base. Businesses with a history of collecting most 120-day debts should provision more lightly; those with a poorer collection rate should provision more heavily.

Other triggers for provisioning regardless of age: you receive credible information that the customer is in financial difficulty or administration; a disputed debt where you believe the customer has a reasonable argument; or a debt referred to external recovery where the agency's initial assessment is poor.

When to write off

A write-off is appropriate when you have concluded the debt is genuinely irrecoverable. Common triggers: the debtor company has been deregistered or is in liquidation; the individual debtor is bankrupt; external recovery has been exhausted and the agent has returned the file; the amount is too small to justify further action and the debtor is unresponsive; or you have received a creditor's proof of debt in an insolvency and the likely dividend is negligible.

Document the write-off decision and the reason for it. A clear record — "written off 15 June 2026 following liquidation of the debtor company, ASIC confirmation received" — is important for your accountant, for any later recovery, and for demonstrating that the write-off was made in good faith if the ATO ever queries the deduction.

Tax treatment: an overview

The ATO allows a deduction for a bad debt that is written off as bad in the income year it is written off, provided the debt was previously included in your assessable income (that is, invoiced and recognised as revenue) and certain other conditions are met. The key word is "written off as bad" — a provision alone is generally not deductible. The write-off must actually occur, and it must be formally recognised in your accounts in the relevant income year.

There are additional conditions: you must have genuinely attempted to recover the debt (documenting your collection history helps here); the debt must have been included in assessable income (GST-exclusive); and the write-off must reflect a genuine business conclusion, not a tactical deferral of income. The rules are more complex for related-party debts and for businesses operating through trusts or complex structures.

Do not treat this as a complete statement of the law. Your accountant must review your specific circumstances before you claim a bad debt deduction. The rules change, and the ATO may request supporting documentation.

Written-off debts that are later collected

This situation occurs more often than businesses expect — particularly when a debt is referred to a mercantile agent months or years after it was written off, and the agent collects. If you have written off a debt and it is subsequently recovered, the collected amount is generally assessable income in the year it is received. You must include it in your income tax return for that period.

This is another reason to maintain clear records of all write-offs: amount, debtor, date, and the reason. If a recovery arrives years later, you need to be able to identify what was originally written off and reconcile the recovery against it for tax purposes.

Provisioning policy

Provisioning works best when it is applied consistently, not invoice by invoice based on whoever is in the room. Document your provisioning criteria: which age buckets attract which provision rates; what other triggers cause provisioning; and who has authority to approve write-offs. Apply the policy consistently across all debtors. Review it annually with your accountant. Disclose it in your financial statements (your accountant will advise on the appropriate presentation).

A well-applied provisioning policy gives you a more accurate picture of your true financial position than a balance sheet that carries aged, unlikely-to-be-collected receivables at face value. It also prompts action: a business that provisions at 90 days has a financial incentive to escalate collection before the 90-day mark.