Private ruling: Deductions - bad debts
Date of advice: 12 September 2025
Published: 17 November 2025
Ruling period: 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are youentitled to a deduction for a bad debt for an unpaid invoice under paragraph 25-35(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in 2023-24 income year? | A1: Yes, you are entitled to a deduction for a bad debt from your future business income.

Relevant facts and circumstances: During earlier income tax years. you operated a consulting business as a sole trader. Your business activity was inactive during the relevant income year. Your business was a Personal Services Business (PSB) after passing the unrelated client test. Whilst operating your business, you issued an invoice on a specified date for a specified amount to a client for consulting services. The income was reported as business assessable income in your income tax return for an earlier income tax year. You received a partial specified amount from your client in the same income year that you reported the business income in your income tax return. In the relevant income tax year, the outstanding balance remained unpaid. You attempted to recover this balance amount, but you were unsuccessful. You have sent emails and followed up with phone calls to recover the debt. On a specified date in the relevant year, further recovery was deemed uneconomical, and the amount was written off as a bad debt. Your consulting business has been inactive since the year prior to the relevant income year. You currently derive income exclusively from employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 25-35(1) | Income Tax Assessment Act 1997 paragraph 25-35(1)(a) | Income Tax Assessment Act 1997 subsection 35-10(1) | Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2A)

Reasons for decision: Summary: Subsection 25-35(1) of ITAA 1997 provides the circumstances that must exist so that you can deduct a bad debt that you have written off in an income year. These circumstances are: (a) it was included in your assessable income for the income year or for an earlier income year; or (b) it is in respect of money that you lent in the ordinary course of your business of lending money. In your case, • The unpaid invoice was included in your assessable income in an earlier income tax return. • You attempted to recover the amount, and after determining that further recovery was not economically viable, you wrote it off as a bad debt in the relevant income year. • You are entitled to report the bad debt as a business expense in the Business and Professional Income section of your relevant income year tax return. • Your business is no longer active and your only income in the relevant income year is from employment. Section 35-10 sets out the rules for when an individual can offset a loss from a business activity against other assessable income in the same income year-specifically, where an exception applies: • Subsection 35-10(1) states it applies to individuals who carry on a business activity, either alone or in partnership. • Subsection 35-10(2) provides that if the individual's allowable deductions from the business activity exceed the assessable income from that activity in a given income year, the resulting loss cannot be deducted in that year. Instead, the loss is deferred and may be deducted in a later year when the business activity is carried on. • However, Subsection 35-10(2A) outlines exceptions that may allow the individual to offset the loss against other non-business assessable income in the same income year the loss is incurred. In your case, you wrote off the bad debt in the relevant income year while not carrying on a business. Although you are entitled to claim a deduction for the bad debt, you will not be able to offset the resulting loss against your other income . You would defer the business loss to a later year in which you are carrying on your business again and offset the loss against assessable income generated by that business activity.