Private ruling: Bad debt
Published: October 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction under section 25-35 of the Income Tax Assessment Act 1997 (ITAA 1997) for an amount paid to an online seller for machinery? | A1: No.

Relevant facts and circumstances: A machine was advertised on the internet for $X. This machine was manufactured overseas. The company purchased the machine. The total amount had been paid. The company requested extra specifications for the machine. The company cancelled the order as the specifications did not match up with the original machine that was advertised. A full refund was requested from the overseas entity. To date, this amount has not been recovered or been included in the company's assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-35

Reasons for decision: Summary: A deduction for a bad debt may be claimed under section 25-35 of the ITAA 1997. To qualify for a bad debt deduction under section 25-35 of the ITAA 1997, the debt, in addition to being bad, must satisfy two criteria: 1. There must be a physical writing off of the debt. 2. The debt must have been brought into account by the taxpayer as assessable income. This condition does not apply to taxpayers in the business of lending money. As the company has not brought the debt into account as assessable income and does not carry on a business of lending money, the bad debt cannot be claimed as a deduction under section 25-35 of the ITAA 1997.