Bad Debts — When Can an Unpaid Customer Invoice Become a Tax Deduction?

An unpaid invoice can become a deductible bad debt, but only if you've already declared that income for tax purposes, genuinely believe it's uncollectible, and formally write it off before the end of the income year. Miss any one of these three conditions and the deduction generally isn't available — and can't simply be claimed the following year instead.

This is the condition that catches out businesses using cash-based accounting. If you account for GST and income on a cash basis, an unpaid invoice was never included in your assessable income in the first place — so there's nothing to “write off” for tax purposes, even though the loss is genuinely real for your cash flow. Businesses using accruals accounting, who declared the income when the invoice was raised, are the ones this deduction is actually designed for.

An invoice that's simply late doesn't qualify — a bad debt requires a genuine, considered judgement that recovery is unlikely through any reasonable means. Acceptable grounds typically include:

• the customer has entered liquidation, administration or bankruptcy;

• the customer is genuinely untraceable despite reasonable effort to locate them;

• further recovery action would cost more than the debt is worth; or

• you've made real, documented attempts to collect — reminders, calls, a formal letter of demand — without success.

A debt under active dispute or genuine negotiation generally doesn't qualify yet — the ATO expects the debt to be genuinely, not just conveniently, considered unrecoverable.

1. Confirm the invoice was genuinely issued and included in your assessable income.

2. Make and document reasonable recovery attempts — reminders, calls, a formal demand.

3. Make a genuine commercial judgement that recovery is unlikely, based on the evidence — liquidation, untraceability, or cost of recovery exceeding the debt.

4. For a company, have the write-off formally approved — typically by the directors.

5. Record the write-off in your accounts before the end of the income year — debiting bad debt expense, crediting accounts receivable.

6. Keep all correspondence and approval documentation as evidence.

Timing matters more than people expect: the write-off needs to genuinely occur, in your records, before 30 June — backdating a write-off after the fact is exactly the kind of thing the ATO's compliance activity specifically looks for.

If you've already paid GST on the original sale — which is common under accrual-based GST accounting — writing off the bad debt may allow you to claim a decreasing adjustment on a future BAS, recovering the GST you've already remitted on income you never actually received.

A business raises a $5,500 invoice (including GST) in October, declares the income and remits the GST via that quarter's BAS. By May, despite multiple follow-ups and a formal letter of demand, the customer has vanished and is untraceable. Before 30 June, the business's directors formally approve writing off the debt, and it's recorded in the accounts accordingly — both the bad debt deduction and a GST decreasing adjustment become available.

• Was this income actually declared for tax purposes — am I on accruals, not cash, accounting?

• Have I made and documented genuine attempts to recover the debt?

• Is there a real, evidence-based reason to believe it's uncollectible — not just overdue?

• Will the formal write-off be recorded in my accounts before the end of this income year?

• you have a genuinely uncollectible debt and want it written off correctly before year-end;

• you're not sure whether your accounting method allows a bad debt deduction at all;

• you want to claim the associated GST adjustment correctly on your next BAS; or

• you have several old, uncollected invoices and want a proper review of which genuinely qualify.

→ My Customers Aren't Paying Me — What Should I Do?

→ Cash vs Accrual Accounting for GST — What's the Difference?

→ What Accounting Records Do I Need to Keep — and for How Long?

SKC Accounting | Knowledge Centre | Knowledge Guide 064

Last reviewed: August 2026

General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.