Almost every business eventually runs into a customer who simply never pays. You did the work, you sent the invoice, you followed up — and the money never came. Beyond the obvious frustration, there is a tax question worth getting right: if you reported that invoice as income but never received the cash, can you get any relief? In some cases, yes. A genuine bad debt may be written off to reduce your assessable income, and you may also be able to recover GST you have already paid. The catch is that the rules are specific, and timing matters.
First, did you ever count it as income?
This is the question that decides everything. You can generally only write off a debt as bad if the income was previously brought to account — in other words, if you already reported it as assessable income in this or an earlier year.
That usually depends on how you report:
- Accruals (non-cash) basis: you record income when you raise the invoice, not when you are paid. So an unpaid invoice has already been counted as income — and if it goes bad, there may be something to write off.
- Cash basis: you record income only when the money actually lands in your account. If you were never paid, you generally never returned that income — so there is nothing to write off, because it was never taxed in the first place.
If you are not sure which basis you report on, that is worth confirming before you do anything else. It changes the answer entirely.
When a debt counts as genuinely bad
A bad debt is not just a slow-paying customer or an invoice that is a few months overdue. To be deductible, the debt needs to be genuinely unrecoverable — you have formed a reasonable view, based on the facts, that you are not going to get paid.
Things that help show a debt is truly bad include:
- repeated, documented attempts to recover the amount that have failed
- the customer becoming insolvent, bankrupt or going into liquidation
- the debtor disappearing or becoming uncontactable
- the cost or impracticality of chasing it any further outweighing what you would recover
A debt that is merely late, in dispute, or that you have simply chosen to stop chasing without good reason will generally not qualify. The test is whether it is bad, not whether it is inconvenient.
Write it off — and document it — before year end
Timing is where a lot of businesses come unstuck. To claim a bad debt deduction in a particular income year, you generally need to physically write the debt off in your accounts before the year ends — that is, on or before 30 June.
A vague intention to write something off “eventually” is not enough. What you want is a clear, dated decision recorded in your books. In practice that means:
- making a deliberate write-off entry in your accounting software before 30 June
- keeping the original invoice and a record of your recovery attempts
- noting why you concluded the debt was unrecoverable, and when
If you wait until you are preparing your return after year end to decide, you may have missed the window for that year. A quick review of your debtor list in May or June each year is a sensible habit.
You may be able to claw back the GST too
If you are registered for GST (broadly, businesses with turnover of $75,000 or more must register, and others may choose to) and you paid GST on the original sale, you may be able to recover that GST when the debt goes bad and is written off.
This is a separate adjustment from the income tax deduction, and it is claimed through your activity statement. The amount and timing depend on your circumstances and how long the debt has been outstanding, so it is worth checking the current ATO rules — but it is easy to overlook, and it can be real money back in your pocket.
One more thing to keep in mind: if a debt you have written off is later paid, you generally need to bring that recovered amount back to account as income in the year you receive it.
Practical steps to recover the money first
Writing a debt off is the last resort — recovering it is always better than a deduction. Before you give up on an invoice, work through the basics:
- send a clear, polite reminder as soon as the invoice is overdue, then follow up consistently
- pick up the phone — a direct conversation often resolves what emails do not
- offer a short payment plan if cash flow is the genuine issue
- send a formal letter of demand setting out the amount and a final date
- consider a debt collection service or, for larger amounts, small claims options
- keep a written record of every contact and response along the way
That paper trail does double duty: it improves your chances of being paid, and if the debt does ultimately go bad, it is exactly the evidence you need to support the write-off.
Prevention beats cure
The cleanest bad debt is the one you never have. A few habits go a long way: clear written terms up front, deposits or progress payments on larger jobs, prompt invoicing, and quick follow-up the moment a payment slips. None of it is glamorous, but together it dramatically reduces how often you are left chasing money you will never see.
And when a debt truly cannot be recovered, the goal is simple — make sure you at least get the tax treatment right, on time, with the right records behind it.
If you would like a hand reviewing your debtors before 30 June, sorting out the write-offs, and checking whether a GST adjustment applies, we are happy to help. Book a chat at nebulaaccounting.au or call 0433 822 227.
This article is general information only and does not take account of your personal circumstances — it is not personal tax, financial or legal advice. Tax laws change and apply differently to different people. Nebula Accounting Pty Ltd is a registered tax agent (No. 26259377); please speak with us or check with the ATO before acting.