Deductions
Bad debt adjustment
A bad debt adjustment lets a GST-registered supplier recover GST previously paid on a sale that has been written off as bad, and requires buyers who never paid to repay credits.
A bad debt adjustment is a GST correction that applies when a sale has been invoiced, GST has been reported on it, and the customer never pays. Without an adjustment the supplier would have paid 10% GST to the ATO on money it never received. The adjustment allows that GST to be reclaimed, which means the supplier is not left out of pocket for the tax portion of an unpaid sale.
The adjustment is a decreasing adjustment for the supplier. To claim it, the supplier must have accounted for the GST in an earlier BAS, and the debt must have been written off as bad in the business's accounts. The amount of the adjustment is the GST fraction, being one eleventh, of the amount written off. If only part of the debt is written off, only the GST on that part can be adjusted.
Whether you can use this adjustment depends on your GST accounting method. A business accounting for GST on a cash basis only pays GST when it is paid, so on an unpaid sale it has never reported GST and has nothing to adjust. The adjustment is therefore most relevant to businesses accounting on an accruals basis, where GST is reported when the invoice is issued, regardless of payment.
The buyer has obligations too. A business that claimed a GST credit on a purchase but has not paid the supplier within a prolonged period may have to make an increasing adjustment, effectively handing the credit back. When the buyer later pays the supplier, they can generally claim the credit again through a corresponding adjustment. These rules prevent the buyer keeping a credit on an expense they have not actually paid.
The adjustment is reported on your BAS for the period in which you write off the debt or in which the adjustment is otherwise attributable. Time limits apply to claiming adjustments, so do not leave them for years. Keep the records of the original tax invoice, the evidence of attempts to collect, and the write-off entry.
Common mistakes include claiming an adjustment for a debt that has not actually been written off, applying it on a cash basis where it is not needed, or forgetting to account for the GST again if the customer later pays. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered accruals-basis plumber invoices a client $2,200 including GST, reporting $200 GST on the BAS. The client goes into liquidation and the plumber writes off the full $2,200 as bad. The bad debt adjustment is $2,200 / 11 = $200. The plumber reports a decreasing adjustment of $200 in the BAS for the period of write-off, reducing the net GST amount payable.
Practical tips
- Check your accounting method first. Cash-basis businesses generally never reported the GST and have nothing to adjust.
- Keep the original tax invoice and a record of your collection efforts to support the write-off.
- If the customer later pays, you will generally need to account for the GST again, so keep the adjustment details on file.