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Bad debt + Sole Trader = Deduction?

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jay
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Hi,

If a sole trader has an unpaid invoice for a personal service that has been forgiven, then can that sole trader claim it as a deduction?  Normally a bad debt can only be deducted if it was counted as income before, so a business using cash-based accounting wouldn't encounter this usual deduction of bad debt.  As a sole trader, an employee was probably not paid to do the client's work, so there isn't an expense corresponding to the invoice, so the sole trader wouldn't be double-deducting.  If it makes a different the client is a family member, so not much effort would go into recovering the debt before it was forgiven.

Thanks,
Jay

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ATO Certified

Devotee

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Hi Jay,

Thanks for writing to us. If a sole trader is accounting on a cash basis, they would record income from a sale when the payment is received.  This means that if a debt is uncollectable, there will not be an amount of income to offset, so no deduction is available for the bad debt.

 

Writing off bad debts is something that only happens in accrual accounting, where you record the income when you perform the service. It becomes a bad debt when you can’t recover it. Even if you were using an accruals accounting method you would need to show that a debt was ‘unrecoverable’ rather than just ‘forgiven’ to be allowed a deduction.  The ATO has published Taxation Ruling TR 92/18 Income tax: bad debts which sets out the ATO’s view on when you can claim a deduction for a bad debt.

Thanks!

1 REPLY 1

Best answer

ATO Certified

Devotee

Replies 0

Hi Jay,

Thanks for writing to us. If a sole trader is accounting on a cash basis, they would record income from a sale when the payment is received.  This means that if a debt is uncollectable, there will not be an amount of income to offset, so no deduction is available for the bad debt.

 

Writing off bad debts is something that only happens in accrual accounting, where you record the income when you perform the service. It becomes a bad debt when you can’t recover it. Even if you were using an accruals accounting method you would need to show that a debt was ‘unrecoverable’ rather than just ‘forgiven’ to be allowed a deduction.  The ATO has published Taxation Ruling TR 92/18 Income tax: bad debts which sets out the ATO’s view on when you can claim a deduction for a bad debt.

Thanks!

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