What is a write-off?

When money owed to you cannot be collected, or an asset has lost all its value, you record a write-off so the books reflect reality. For a bad debt, you remove the receivable from the balance sheet and record a bad debt expense in the profit and loss. For an asset that is scrapped, stolen, destroyed or sold for less than its carrying amount, you clear the asset and its accumulated depreciation and recognise a loss on disposal, net of any sale proceeds. For stock, the write-off reduces closing stock and increases cost of goods sold.

A write-off is final for the amount removed. A write-down, or impairment, only reduces the carrying amount partly, for example marking slow-moving stock down to what it will now sell for, and it may be reversible under the accounting standards.

Not every accounting write-off is deductible. The ATO applies three tests to a bad debt: the amount was included in your assessable income for the current or an earlier income year, the debt is genuinely bad on reasonable evidence such as insolvency, bankruptcy or failed recovery steps, and it is physically written off in your accounts before the end of the income year you claim it. Businesses accounting on a cash basis get no bad debt deduction: the income was never brought to account. Debts of a capital nature and related-party debts are treated differently and closely scrutinised.

GST needs a separate adjustment. If you account for GST on a non-cash basis and reported GST on the sale, you can claim a decreasing adjustment when you write the debt off as bad, or once it is 12 months or more overdue. Businesses reporting GST on a cash basis have nothing to adjust. The income tax deduction is the GST-exclusive amount, and any later recovery is income when received.

The ATO expects a paper trail. For a bad debt, keep the original invoice, an aged receivables listing showing the debt overdue, reminders, final demand letters and any correspondence, and any bankruptcy or insolvency notices. Record the date you wrote the debt off in the accounts, because the deduction belongs to the income year in which the write-off is made.

For asset write-offs, keep disposal documents such as sale receipts and scrap forms, management approvals for significant write-offs, the asset register and depreciation schedule, and your BAS and GST adjustment records. Related-party or intra-group debts, large impairments and disposals that affect capital gains are worth running past an accountant or tax agent before you finalise them.