Write off debts before 30 June to reduce tax

Businesses should write off their bad debts prior to the new financial year in order to reduce their tax liability.

Roger Mendelson, CEO of Prushka Fast Debt Recovery, says business owners often aren’t fully aware of what they can and can’t claim at tax time and typically put off dealing with their outstanding debt until well after 30 June.

“Most SMEs hold onto their bad debt and wait until after the new financial year to try and recover it when, in reality, if they write off unrecoverable debt prior to 30 June, then only the debt that is genuinely recoverable will be treated as taxable income,” Mr Mendelson said.

“If bad debts are written off after June 30, then the deduction can’t be claimed until the following tax year and the same applies to GST. If the debt is bad, it is better to write it off and get a credit for the GST which has been charged but not collected from the customer”.

Many factors contribute to bad debt so it is important businesses act promptly to avoid paying tax on income they are unlikely to receive.

Mr Mendelson advises business owners to follow these tips to write off debt:

  • obtain a print-out of your debtors ledger well before June 30


  • delete those debts where bankruptcy or liquidation has occurred


  • note on a ledger the debts which are being treated as ‘bad’, ensuring the entry is dated


  • go through debts which are over six months old and refer them to a debt collection agency


  • physically write off all debts which have been marked - the journal entry MUST be made prior to June 30


  • debts which are referred to a no recovery, no charge debt collection, can still be chased and, if recovered, the net recovery will be brought back to account when received.


Further to this, following a small business-friendly Federal Budget, Mr Mendelson said SMEs should be looking to spend before the end of financial year.

“In my opinion the budget is a step in the right direction for the SME sector, particularly with the tax deduction for assets costing less than $20,000,” he said.

“As a whole, SMEs should feel more confident about spending thanks to the government’s efforts and businesses should look to take advantage of this initiative prior to 30 June in order to receive the benefits this financial year.

“The 1.5 per cent corporate tax break for businesses earning less than $1 million announced in the budget won’t provide as much support as the government is indicating.

“Most SMEs operate as an individual or trust, not a corporation, meaning the vast majority won’t benefit from the corporate tax break.”

Mr Mendelson encourages businesses to plan ahead for the end of financial year in order to successfully begin a new year.

“Being prepared for 30 June means you can start the new financial year off on a positive note and move forward with confidence,” he said.