Tax Treatment of Bad Debts

Why tax comes into it

When you make a sale on credit, the income and often the GST are usually accounted for before you are actually paid. If that debt later goes bad, the tax position can change, because you may have already brought the amount to account. This is why a write-off is not purely an internal bookkeeping step — it can interact with your income tax and GST obligations as well.

Timing and documentation

Tax outcomes generally depend on the debt being genuinely bad and on when you treat it as such, supported by proper records. Keeping the original invoices, evidence of your recovery efforts, and a clear note of when and why you wrote the debt off helps demonstrate that the write-off was real and timed appropriately. Good records make any later review far simpler.

Common pitfalls

Typical mistakes include writing a debt off too casually without evidence it is truly uncollectable, mishandling any GST adjustment, or assuming every unpaid invoice automatically qualifies. The rules have conditions, and they apply differently depending on how your business accounts for income and GST. Treating tax as an afterthought to the write-off decision is where problems usually start.

Involve your accountant

Because the detail depends on your structure, accounting method, and the facts of each debt, confirm the treatment with your accountant or registered tax adviser before relying on it. They can tell you what is available and what evidence you need. For the recovery side, keep good records and consider a professional referral before concluding a debt is lost.

A note on advice

This is general information only and is not tax, legal, or financial advice. Tax treatment of bad debts is specific to your circumstances, so obtain advice from a registered tax professional.