Bad Debts: How to Write Off a Bad Debt in Australia (ATO and GST Rules)

Bad debts are invoices you've decided you'll never collect. In Australia, a bad debt write off can cut your tax two ways: an income tax deduction for the unpaid amount (if you're on an accruals basis and already counted it as income), and a GST decreasing adjustment of one-eleventh of the unpaid total (if you report GST on an accruals basis). To claim the deduction you must decide the debt is bad and record the write-off in writing before 30 June of the year you claim it. For GST, a debt also qualifies once it's 12 months overdue, even if you haven't written it off.

What is a bad debt?

A bad debt is money a customer owes you that you've concluded can't be recovered through any reasonable, commercial effort. The ATO is clear that a debt which is merely doubtful doesn't count: it has to be genuinely bad at the time you write it off.

Typical bad debts for a small business: a client company that has gone into liquidation, a customer who has disappeared and can't be contacted, or an amount so small that chasing it through a tribunal would cost more than it's worth. A slow payer who still answers the phone usually isn't a bad debt yet. They're an overdue invoice, and the fix is better follow-up, not a write-off.

Late payment vs doubtful debt vs bad debt

If you track customer balances in an aged receivables report, the 90+ day column is where most future bad debts are sitting right now.

When can you write off a bad debt?

You can write off a debt when you've genuinely concluded it won't be recovered, and you can show why. You don't always need to have started legal proceedings first. The ATO accepts evidence such as reminder notices and records of attempts to contact the debtor by phone or mail, depending on the circumstances.

Good evidence that a debt is bad includes:

• The customer company is in liquidation or has been deregistered, or the individual is bankrupt.
• The customer has moved without a forwarding address and doesn't answer calls, emails or letters.
• You've sent reminders and a letter of demand, and legal action isn't commercially viable for the amount.
• A debt collector has returned the file as uncollectable.

Timing matters for tax. The write-off decision has to be made and recorded before the end of the income year you claim the deduction in, which for most businesses is 30 June. A decision you make in July can't be backdated into the previous year's return.

What are the ATO rules for writing off bad debts?

You can claim a bad debt deduction only if the amount was already included in your assessable income, in that year or an earlier one. That means it depends on how you account for income: accruals-basis businesses can claim, cash-basis businesses generally have nothing to claim.

Accruals basis vs cash basis

• Accruals basis. You count income when you invoice it, before you're paid. If the customer never pays, you've paid tax on money you didn't receive, so writing it off as a bad debt gives you a deduction to reverse that.
• Cash basis. You count income only when it arrives. An unpaid invoice was never in your income, so writing it off, forgiving it or waiving it has no income tax effect. Many sole traders and small service businesses are on a cash basis, so check with your tax agent which one you use.

The ATO's three steps

To claim a deduction, the ATO's bad debts guidance says you must do all of the following:

1. Include the income in your tax return for the year you claim, or an earlier year.
2. Determine the debt is bad, not just doubtful, at the time you write it off.
3. Write the debt off: make the decision and record it in writing before the end of the income year. Removing the debt from the customer's account and recognising a bad debt expense is the ATO's own example.

The debt must still exist when you write it off. If you've already forgiven it, sold it to a collector, or set it off against something you owe the customer, it's no longer a bad debt for tax purposes. Companies must also pass the continuity of ownership test (or a business continuity test) before deducting a bad debt; trusts have their own rules.

Can you claim GST back on bad debts?

If you account for GST on a non-cash (accruals) basis, you can claim back the GST you've already paid on an unpaid sale as a decreasing adjustment on your BAS. You qualify once the debt is written off as bad or has been overdue for 12 months or more, whichever happens first.

The ATO's conditions for the GST bad debt adjustment are:

• you made a taxable sale and paid the GST on it to the ATO
• you haven't received some or all of the payment, and
• you've written the debt off as bad, or it's been overdue for 12 months or more.

For a fully taxable sale, the adjustment is one-eleventh of the amount written off (or of the amount 12 months overdue), according to the ATO's ruling GSTR 2000/2. You claim it in the BAS for the period in which you write the debt off, or become aware it's been overdue for 12 months. On the BAS, a decreasing adjustment adds to your GST credits side (label 1B) and reduces what you owe.

Two points people miss:

• Cash-basis GST reporters don't get an adjustment, because they never paid GST on the unpaid invoice in the first place. The bad debt rules in the GST Act don't apply to them.
• The 12-month rule works without a write-off. You can claim the GST back after 12 months overdue while still chasing the customer. That's useful for a debt that's stuck in a liquidation.

The flip side applies to your own bills. If you claimed GST credits on a purchase and still haven't paid it 12 months after it was due, you may need to make an increasing adjustment. See the ATO's page on types of GST adjustments.

Worked example: writing off a bad debt

Here's the full calculation for a GST-registered sole trader on an accruals basis for both income tax and GST.

The facts: Mia runs a web development business. On 3 November 2025 she invoiced Coastline Pty Ltd $5,500 including GST ($5,000 plus $500 GST), due 17 November 2025. She reported the $500 GST in her October–December 2025 BAS and the $5,000 in her 2025–26 income. Coastline paid $1,100 in January 2026, then stopped responding. In May 2026 it went into liquidation, and the liquidator's report says unsecured creditors are unlikely to receive anything.

On 12 June 2026, Mia decides the balance is bad and records the decision in writing, then removes it from Coastline's account in her bookkeeping software.

The deduction is the GST-exclusive amount, because only $5,000 of the original invoice was ever in Mia's income, and $1,000 of that was paid. The other $400 comes back through the GST adjustment instead.

What if she'd waited? If Mia hadn't written the debt off, she could still have claimed the $400 GST adjustment once the debt was 12 months past due (from 17 November 2026), but she couldn't claim the income tax deduction until she actually wrote it off.

What if she's on a cash basis? Then there's no deduction and no GST adjustment. She only ever reported the $1,000 and $100 GST she actually received.

What if the liquidator pays a dividend later? Say she receives $440 in 2027. She includes $400 in her assessable income for that year and makes a $40 increasing GST adjustment in that quarter.

How do you record a bad debt write-off?

Record the decision in writing before 30 June, remove the amount from the customer's balance, and post it to a bad debts expense account. In most bookkeeping software that means entering a credit note or a "write off" against the invoice, coded to bad debts with the GST adjustment.

1. Write a short memo or minute dated before year end: customer, invoice numbers, amount, why it's bad, and that you've decided to write it off.
2. Clear it from the customer's account using your software's write-off function or a credit note marked "bad debt write-off". See our guide to credit notes for how adjustment notes interact with GST.
3. Post the expense to a bad debts account so it flows into your profit and loss, and the GST adjustment into your BAS.
4. Keep the evidence with the memo: reminders, the letter of demand, call notes, liquidator or bankruptcy notices, collector reports.

Keep these records for five years, like the rest of your tax records. If the ATO asks, the memo and the evidence trail are what prove the debt was bad and written off in time.

Writing a debt off for tax isn't the same as forgiving it. You can still accept payment if the customer resurfaces; you just bring the recovery back into income when it arrives.

How can you reduce bad debts before they happen?

The cheapest bad debt is the one you never let build up. Most come from long credit periods, no deposit, and slow follow-up, and all three are fixable before the next job.

• Take a deposit on larger or one-off jobs. Our guide to deposit invoices has the wording.
• Shorten your terms. Net 7 or Net 14 instead of Net 30 halves the time a problem can grow. See invoice payment terms.
• Check new business customers on the ABN Lookup and ASIC registers before extending credit.
• Stop work when a customer falls behind, rather than adding more to an unpaid balance.
• Offer a structured plan early. A customer who can pay over three months is better than one who pays nothing; see our guide to a customer payment plan.

For the full escalation path, from first reminder to tribunal, see how to chase overdue invoices.

This article is general information, not tax or legal advice. Bad debt rules differ for companies, trusts and money lenders. See the ATO or speak to a registered tax agent about your situation.

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