As the Australian business climate rapidly approached the end of the financial year, all businesses are probably very busy getting their Accounting records in order to ensure that their books are ready and reconciled for end of financial year reporting. With June 30 just around the corner, it is important that businesses remember to send out all invoices relating to the period and more importantly; write off bad debts before the end of the financial year.
Every tax earning country has their own laws regarding writing off your bad debt, here in Australia we refer to specifically the Sections 25-35 of the Income Tax Assessment Act which provide for the deductibility of bad debts as follows:
(1) You can deduct a debt (or part of a debt) that you write off as bad in the income year if:
(a) it was included in your assessable income for income year or for an earlier income year; or
(b) it is in respect of money that you lent in the ordinary course of your business of lending money.
With that in mind, here are some handy tips to help you when writing off your bad debts:
1. For bad debts to be written off in the financial accounts,
they are required to be in writing.
2. In order to claim a deduction for a bad debt, you must ensure this amount is written off prior to the end of the financial year.
3. To ensure a deduction is allowable, the debt must be bad, not merely doubtful.
4. Writing off a bad debt means that you are losing out on that exact amount of money from your bottom line profit.
5. Do not forget to claim a refund of the GST paid to the ATO on sales. This strategy is for taxpayers who report income on an accrual basis. Income from business activities will generally be returned on an accruals basis and will ordinarily be derived for tax purposes when a recoverable debt arises (i.e. generally when the invoice is raised).
6. You can write off bad debt and claim back GST credits when an amount has been outstanding over 12 months. You should always remember that anything you write off effectively come straight out of your pocket (ie. it’s your profit you’re writing off).