Bad debts require attention now

SMALL business operators need to pay attention to their bad debts as the financial year draws to a close.

A bad debt written off before June 30 becomes an income tax deduction for the business.

Writing off a bad debt is not hard, but the decision needs to be made and recorded before the end of the financial year if the tax concession is to be received.

Businesses also have to remit the GST it has made on the sale to the Australian Tax Office whether the debt is paid or not. In the case of bad debts a business is out of pocket for the GST it has already remitted.

Moore Stephens BG tax consulting partner Syd Jenkins said the primary implications for businesses if they did not get it right were that they would be “doing themselves out of cash”.

“On the GST front, if the business has decided there is a bad debt it can reverse the GST transaction at the end of the financial year,” Mr Jenkins said.

Hayes Knight GTO partner John Miniello said debts that remained unpaid for 12 months from when the debt fell due would also be deemed bad debts for GST purposes.

“The ATO will grant a business a decreasing adjustment at the end of the tax year, which means a business will have the net GST it has to remit reduced,” Mr Miniello said.

“But the opposite is also true. If a business has bought something and claimed an input tax credit on that purchase but not paid the bill for 12 months, it will receive an increasing adjustment.”

This means the business will have to pay the GST money back.

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