Bad Debt to a Deceased Estate (Deductibility)

Whether a bad debt is deductible to a deceased estate.

No. A bad debt is not deductible to a deceased estate, because the debt has been included in the deceased's assessable income and not in the deceased's estate's assessable income.

The deceased taxpayer operated a business returning income on an accruals basis. At the date of death, the deceased taxpayer had returned as income a fee billed but had not received this payment. The executors of the estate commenced legal action for recovery of the fees. The debt was settled, with a lesser amount than the total debt to be paid in consecutive payments.

The executors of the estate considered that the part of the fee not recovered was deductible from the income of the estate as the amount represented an economic loss to the estate that, but for the taxpayer's death, would have been incurred by the taxpayer.

Income Tax Assessment Act 1997, section 25-35 deals specifically with bad debts. Income Tax Assessment Act 1997 subsection 25-35(1) states that you can deduct a debt (or part of a debt) that you write off as bad in the year of income if: (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 (see also Taxation Ruling TR 92/18 Income tax: bad debts).

Income Tax Assessment Act 1997 section 25-35 does not apply in this case as the debt had not been brought to account as income of the trust estate. It had been included in the assessable income of the deceased taxpayer.

The deduction is also denied because a debt cannot be written off as bad under Income Tax Assessment Act 1997 section 25-35 after it has ceased to exist after being settled, compromised, otherwise extinguished or assigned ( Point v FC of T 70 ATC 4021; 1 ATR 577).

A deduction for a bad debt may be allowable under Income Tax Assessment Act 1997 section 8-1 ( FC of T v Marshall and Brougham Pty Ltd 87 ATC 4522; 18 ATR 859). However, no deduction is allowable in this case under Income Tax Assessment Act 1997 section 8-1 as the loss had not been incurred in gaining or producing the assessable income of the trust estate or was not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The case of Administrators of the Estate of Late Daniel Stewart v Commissioner of Taxation ((NSW) (1935) 3 ATD 271) is distinguished as it deals with bad debts in respect of a business of money lending. In that case it was held that the administrators of the estate continued to carry on the business of money lending previously carried on by the deceased person and the loss could be likened to a loss of 'trading stock'.

No deduction is therefore allowable for the difference between the settlement amount and the full amount of the debt.