What Are Bad Debts? Definition, Write-Off Rules & Tax Treatment in Australia

What Qualifies as a Bad Debt?

To be considered a legitimate bad debt under Australian tax law, the amount must:

• Have previously been included in your assessable income
• Be written off in the same year you claim the deduction
• Be deemed genuinely irrecoverable

Examples include:

• A customer going bankrupt
• A client refusing to pay and becoming uncontactable
• Repeated failed payment arrangements

ATO Rules on Writing Off Bad Debts

Before claiming a deduction:

• You must form a genuine view that the debt won’t be paid
• You need to write it off in your books (journal entry, invoice status, etc.)
• Keep evidence of your collection efforts (emails, calls, letters)

Bad Debt vs Doubtful Debt

Feature	Bad Debt	Doubtful Debt
Recoverable?	No	Possibly
Tax deductible?	Yes (if conditions are met)	No (not until confirmed bad)
Accounting action	Written off	Provision may be recorded

How Bad Debts Affect GST

If you’ve already paid GST on a sale, and later write the invoice off as bad debt, you may be able to adjust your BAS to recover the GST amount:

• You must have accounted for the sale on a non-cash (accrual) basis
• The debt must be over 12 months old, or written off before then

How Ozobooks Helps

• Identifies uncollectible debts with you
• Handles correct journal entries
• Ensures timing aligns with ATO deduction rules
• Adjusts BAS to recover GST if eligible
• Keeps audit-ready documentation

FAQ

Q1: Can I write off bad debts under cash accounting?
No. Under the cash method, you only declare income when it’s received — so there’s no “bad debt” to deduct.

Q2: Do I need to notify the customer I’m writing it off?
No. But you should make every reasonable attempt to collect before doing so.

Q3: Can bad debts be reversed if the customer pays later?
Yes. If a written-off debt is later paid, you’ll need to declare it as income in that financial year.

Q4: Is legal action required before writing off?
Not necessarily. You just need to demonstrate that recovery is unlikely or impractical.