A bad debt write-off is not simply a matter of deciding an invoice is uncollectable and deleting it from the aged receivables. Under Australian tax law, there are distinct — and separately triggered — rules governing when a debt qualifies for a GST adjustment on the BAS, when an income tax deduction arises, and what documentation you need to support either claim. Getting these right requires understanding the difference between cash and accruals accounting, the ATO's substantiation requirements, and the precise timing of write-off decisions.
What Qualifies as a Bad Debt
For income tax purposes, section 25-35 of the ITAA 1997 allows a deduction for a bad debt that has been written off as bad during the income year. The debt must have been included in assessable income in a prior year — which immediately tells you that this deduction is only available to accruals basis taxpayers. A cash basis small business taxpayer who never brought the invoice into income has no deduction to claim, because they never paid tax on revenue they never received.
The ATO requires that the debt be genuinely bad — not merely doubtful or overdue. A debt that is technically still enforceable but commercially uneconomic to pursue can still qualify, provided you can demonstrate you have made genuine attempts to collect it (demand letters, engagement of a debt collector, or legal proceedings commenced and abandoned). An aged receivable that simply sits unpaid for 90 days is not automatically a bad debt.
Accruals vs Cash Basis: Who Gets the Income Tax Deduction
The distinction matters enormously in practice. An accruals basis taxpayer — generally any entity not eligible for, or not choosing, the small business entity (SBE) simplified accounting methods — recognises revenue when the invoice is raised. They pay GST and income tax on that amount in the relevant period. When the debt goes bad, they are entitled to both a GST credit adjustment (on the BAS) and an income tax deduction (in the tax return).
A cash basis taxpayer recognised the revenue only when payment was received. Since they never received payment on the bad debt, they never included it in assessable income, so there is no income tax deduction. The GST position is slightly different and addressed separately below.
The Journal Entries
For an accruals basis entity with an outstanding invoice of $1,100 (including $100 GST):
When the invoice was originally raised:
- Debit Accounts Receivable $1,100
- Credit GST Collected $100
- Credit Sales Revenue $1,000
When written off as bad:
- Debit Bad Debt Expense $1,000
- Debit GST Collected $100 (adjusting the GST previously remitted)
- Credit Accounts Receivable $1,100
The debit to GST Collected reflects the fact that you originally remitted $100 in GST to the ATO, and you are now entitled to claw it back via a decreasing adjustment on your next BAS.
Adjusting the BAS for GST Already Remitted
Under Division 21 of the A New Tax System (Goods and Services Tax) Act 1999, a registered entity that has remitted GST on a taxable supply is entitled to a decreasing adjustment (a GST credit) when the consideration for that supply has been written off as a bad debt.
This adjustment appears at label 1B (GST on purchases) on the BAS — not at G10 or G11 capital acquisitions. The ATO's practice is to treat the bad debt GST adjustment as a credit against your GST liability for the period in which the write-off decision is made and documented.
You cannot claim the adjustment on the BAS for a period prior to the write-off decision. If your client's debt became obviously uncollectable in March but they didn't formally write it off until June, the credit belongs in the June BAS quarter.
For cash basis GST reporters — those using the cash accounting option under Division 29 — the GST was never remitted on an unpaid invoice in the first place, so there is no decreasing adjustment available. This symmetry is logical: cash basis reporters pay GST when they receive payment, so an uncollected invoice never triggered a GST liability to begin with.
Provisioning vs Writing Off
A provision for doubtful debts (debit Doubtful Debt Expense, credit Provision for Doubtful Debts) is not the same as a bad debt write-off. The provision is a balance sheet estimate and does not trigger an income tax deduction or a GST adjustment. Many clients and some bookkeepers conflate the two.
Under AASB 9 Financial Instruments, entities applying the simplified expected credit loss model can use a provision matrix, but this accounting entry has no tax effect until the debt is individually assessed as bad and written off against the provision (debit Provision for Doubtful Debts, credit Accounts Receivable). Only the actual write-off triggers the tax deduction and BAS adjustment.
Practically speaking, small business entities often skip the provisioning step entirely and move straight to write-off. That is acceptable from a tax perspective — the deduction arises from the write-off, not the provision.
Recovery of a Previously Written-Off Debt
If a debt that was written off and claimed as a deduction is subsequently recovered — partially or in full — the recovered amount is assessable income in the year of recovery under section 20-30 of the ITAA 1997. The corresponding GST position is an increasing adjustment on the BAS: you must remit GST on the recovered amount.
The journal entry on recovery of $550 (partial recovery, GST-inclusive):
- Debit Bank $550
- Credit Bad Debt Recovered $500
- Credit GST Collected $50
The Bad Debt Recovered account should appear as assessable income in the P&L, not as a credit to Bad Debt Expense.
Documentation Requirements
The ATO expects contemporaneous evidence of the write-off decision. This typically means a board minute, a director's resolution, or a written instruction from management directing the bookkeeper to write off specific debts. A spreadsheet printout of aged receivables with debts circled in red is not adequate documentation.
For larger debts, you should also retain evidence of collection attempts: copies of demand letters, a debt collector's report confirming the debt is unrecoverable, or a solicitor's advice that legal action is uneconomic. The ATO's audit risk on bad debt deductions is non-trivial — they match debtors' records against creditors' deductions, and a deduction that does not correspond to a write-off the debtor can confirm will attract scrutiny.
Keep the documentation in the client's file with a clear cross-reference to the journal entry date and the BAS period in which the GST adjustment was claimed.