Bad Debt Write-Off Generator

Bad Debt Write-Off in Australia: ATO Requirements, GST Adjustments, and What You Must Document

A bad debt write-off is the formal process of removing an uncollectable receivable from your books. In Australia, the ATO allows businesses registered for GST to claim a decreasing adjustment on previously remitted GST — effectively recovering the GST component of a debt that was never paid. For income tax purposes, Section 25-35 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for bad debts written off, provided specific conditions are met. The key word in both contexts is "genuinely bad" — a debt is not deductible merely because you think it might not be paid. You must have taken reasonable steps to recover it and have a reasonable basis for concluding it is irrecoverable before writing it off.

The ATO's conditions for a bad debt deduction under Section 25-35 are: the debt must have been included in your assessable income in a prior year (i.e., it was a genuine arms-length transaction); it must be genuinely bad — not merely doubtful or slow-paying; and it must be written off in your accounts during the income year in which you claim the deduction. Writing it off in your ledger before 30 June is important: a debt you identify as bad in July cannot be claimed in the prior financial year, even if the circumstances that made it bad occurred before 30 June.

The GST bad debt adjustment is separate from the income tax deduction and has its own conditions. Under Division 21 of the GST Act, you can claim a decreasing adjustment (equal to 1/11th of the amount written off) in the BAS period in which the debt is written off — provided the debt is at least 12 months overdue, or you have reasonable grounds to believe it will not be recovered. You must also have remitted the GST on the original supply and written the debt off in your accounts. Note that if the debt is later recovered, a corresponding increasing GST adjustment must be made in that period.

How to use this bad debt write-off generator

1. Enter the debtor's details, the original invoice number and date, the amount outstanding (including GST), and the date the debt is being written off.
2. Document the collection attempts made — dates of letters, calls, and any responses received. This section is critical for ATO audit purposes.
3. Select the reason for write-off (debtor insolvent, debtor cannot be located, debt uneconomical to pursue, etc.) and have the form approved and signed by an authorised officer.
4. Download the form as a PDF, retain it with your financial records for at least 5 years (the ATO's standard record-keeping requirement), and use the GST amount to make the decreasing adjustment in your next BAS.

What is the difference between a bad debt and a doubtful debt?

A bad debt is one that is genuinely irrecoverable — the debtor is insolvent, cannot be located, or the debt is so old and uncollected that there is no reasonable prospect of recovery. A doubtful debt is one where collection is uncertain but not yet ruled out. Only bad debts can be deducted under Section 25-35; doubtful debts are not deductible until they become genuinely bad. Businesses that use AASB 9 expected credit loss provisioning for financial reporting purposes should note that the accounting provision for doubtful debts does not create a tax deduction — only the actual write-off does.

What are the ASIC implications of writing off a bad debt from an insolvent company?

If the debtor company is in external administration (voluntary administration, receivership, or liquidation), you should lodge a proof of debt with the administrator or liquidator to formally claim your debt in the insolvency process. Writing off the debt in your books does not affect your right to participate in any distribution from the estate. ASIC's MoneySmart website and the Australian Restructuring Insolvency and Turnaround Association (ARITA) provide guidance on the proof of debt process. Even where recovery is unlikely, lodging a proof of debt preserves your legal entitlement and ensures you receive any distribution that is made.

What records must I keep to support a bad debt write-off?

The ATO expects you to retain: the original invoice or contract; evidence of the debt being included in a prior BAS or income tax return; a record of collection attempts (letters, emails, calls — with dates); the write-off approval document (this form); and a copy of the BAS in which the GST adjustment was claimed. These records must be kept for at least 5 years. If the write-off relates to an insolvent debtor, also retain any correspondence with the liquidator or administrator and a copy of any proof of debt lodged.