Goods and Services Tax: adjustments for bad debts

This Ruling describes the circumstances in which adjustments arise for taxable supplies or creditable acquisitions where a debt is written off as bad or is overdue for 12 months or more. In particular, the Ruling explains the requirements for making adjustments to net amounts.

These requirements are set out in Division 21 and Division 136 of A New Tax System (Goods and Services Tax) Act 1999 ('GST Act').

All legislative references in this Ruling are to the GST Act unless otherwise stated.

This Ruling applies if: • you have made a taxable supply; • you have attributed the GST payable on the supply on a Business Activity Statement (BAS); [F1] • you have not received the whole or part of the consideration; and • you have written off as a bad debt the whole or part of the debt, or the whole or part of the debt has been overdue for 12 months or more.

This Ruling also applies if: • you have made a creditable acquisition; • you have claimed an input tax credit for the acquisition on a BAS; • you have not provided whole or part of the consideration that is due and • the supplier of the acquisition has written off as bad the whole or part of the debt, or the whole or part of the debt has been due for 12 months or more.

The bad debts adjustment provisions outlined in Division 21 do not apply to entities accounting for GST on a cash basis. [F2] However, there are special provisions that apply to adjustments for bad debts when you start to account on a cash basis or cease to account on a cash basis. [F3] This Ruling does not consider these provisions.

The provisions of Division 21 do not apply if you have a bad debt arising from a gambling supply. Bad debts arising from a gambling supply are dealt with in Division 126. This Ruling does not consider this Division.

If you have a bad debt relating to a taxable supply of real property under the margin scheme, Division 21 will apply. However, the calculation of the adjustment is subject to a special rule in section 75-25, discussed in paragraphs 30 and 81 to 85 of this Ruling.

An adjustment for a bad debt can arise under section 15G of the A New Tax System (Goods and Services Tax Transition) Act 1999 (the Transition Act). If you have a decreasing adjustment under this section, then section 21-5 of the GST Act does not apply to the taxable supply. This Ruling does not deal with adjustments for bad debts arising under section 15G.

This Ruling applies [to tax periods commencing] both before and after its date of issue. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Note: The Addendum to this Ruling that issued on 27 April 2005 applies from 8 July 1999. You can rely on the amendments to GSTR 2000/2, for the purposes of section 37 of the Taxation Administration Act 1953 , from the date of issue of the Addendum.

If you account for GST other than on a cash basis, you may attribute the GST on the taxable supply before you receive any or all of the consideration for the supply. If subsequently: • you write off as bad some or all of the consideration you were due to receive for the supply; or • the whole or part of the debt has been overdue for 12 months or more, you will have attributed the GST but will not have received an amount for that GST from the recipient of the supply.

Conversely, if you make a creditable acquisition, you may attribute the input tax credit before you pay any or all of the consideration for the acquisition. If the whole or part of the debt is subsequently written off as bad by the supplier, or has been overdue for 12 months or more, you will have attributed the input tax credit but have not paid an amount equivalent to that input tax credit to the supplier.

If the circumstances outlined in paragraph 10 apply, you will have attributed too much GST. If the circumstances described at paragraph 11 apply, you will have claimed too much input tax credit. Consequently, in either of these circumstances you need to make an adjustment to your net amount to reflect the correct amount.

If you make a taxable supply and the related debt is subsequently written off as bad, or the debt has been overdue for 12 months or more, you have a decreasing adjustment to your net amount. However, if you subsequently recover the whole or part of the debt for which you previously had a decreasing adjustment, you will have an increasing adjustment to your net amount.

If you make a creditable acquisition and the related debt is subsequently written off as bad, or the debt has been overdue for 12 months or more, you have an increasing adjustment to your net amount. However, if you subsequently repay some or all of the debt for which you previously had an increasing adjustment, you have a decreasing adjustment to your net amount.

A decreasing adjustment for a bad debt can arise in respect of a supply if either : • you attributed the GST on the supply on your BAS in a previous tax period, or • you are attributing the GST on the supply in the same period as you write off of the related debt (this means that you account for the GST payable and the bad debt adjustment separately on your BAS).

You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have a decreasing adjustment in the tax period in which the debt is written off, or, if the debt has not been written off, in the tax period in which you become aware that the debt has been overdue for 12 months or more. [F4]

If a debt, or part of a debt, is recovered for which you previously had a decreasing adjustment, you attribute the corresponding increasing adjustment to the tax period in which the debt is recovered.

The adjustment note provisions of the GST Act do not apply to bad debts. The writing off of a bad debt, or a debt becoming overdue for 12 months or more, is not an adjustment event.

If the supply you make is only partly taxable, the amount of the decreasing adjustment is reduced to the proportion of the supply that is taxable.

If you recover an amount that relates to a supply that was only partly taxable, and for which you previously had a decreasing adjustment as described in paragraph 19, you have an increasing adjustment. The increasing adjustment is calculated on the amount that relates to the part of the supply that was a taxable supply.

An increasing adjustment for a bad debt can arise in respect of a creditable acquisition if either : • you attributed the input tax credit on the acquisition on your BAS in a previous tax period, or • you are attributing the input tax credit on the acquisition in the same period as you are aware that the related debt is written off (this means that you account for the input tax credit and the bad debt adjustment separately on your BAS).

You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have an increasing adjustment in the tax period in which you become aware that the debt is written off, or if the debt has not been written off at the time when the debt has been overdue for 12 months or more, in the tax period in which you become aware that the debt has been overdue for 12 months or more.

If you pay a debt or part of a debt for which you previously had an increasing adjustment, you attribute the corresponding decreasing adjustment to the tax period in which the debt or that part of the debt is paid.

If you make an acquisition that is only partly for a creditable purpose, or for which you provide only part of the consideration, the amount of the increasing adjustment is reduced to take into account the extent of creditable purpose or consideration.

If you subsequently pay an amount that relates to an acquisition that was only partly for a creditable purpose, and for which you previously had an increasing adjustment as described in paragraph 24, you have a decreasing adjustment. The decreasing adjustment is calculated by taking into account the extent of creditable purpose or consideration.

If you have a bad debt relating to an acquisition of a motor vehicle for which a reduced input tax credit applied, the amount of the increasing adjustment is also reduced. [F5] Any subsequent decreasing adjustment in relation to the vehicle is also reduced.

Whether a debt is bad is ultimately a question of fact to be determined from all of the relevant circumstances. If you make a bona fide commercial decision that the debt is unlikely to be recovered, we will accept that the debt is bad for the purposes of Division 21.

A debt will be written off if there is some form of written record which evidences the decision by you to write off the debt from your accounts. The mere fact of making a decreasing adjustment on your BAS does not mean the debt has been written off.

A debt must still be owing to the entity which made the taxable supply for that entity to be able to write off the debt and have a decreasing adjustment.

If you have a bad debt relating to a supply that you made under the margin scheme, the bad debt adjustment cannot exceed 1/11 of the margin for the supply.

An adjustment arises if you make a taxable supply and the debt relating to the supply is subsequently written off as bad or has been overdue for 12 months or more.

You have a decreasing adjustment if the following criteria are met: • you have made a taxable supply; • you have attributed the GST to a tax period; • you have not received all or part of the consideration; and • you have written off the debt or the debt has been overdue for 12 months or more.

If you make taxable supplies, you include GST in the price of those supplies and attribute that GST to the relevant tax period. However, no GST is payable on supplies that are wholly GST-free or wholly input taxed and consequently you cannot make adjustments under Division 21 for those supplies.

The GST relating to the supply must be attributed to a tax period. There may be cases where the GST is attributable to the same tax period as the period in which the debt is written off as bad. In these situations, you account for the amount of GST payable on the supply and the amount of the adjustment separately on your BAS. The amounts are not to be offset against each other.

For you to have a decreasing adjustment, it is necessary that you have not received whole or part of the consideration for the taxable supply. The decreasing adjustment is calculated on the consideration that has not been received.

You must have written off whole or part of the debt as bad. Alternatively, the whole or part of the debt has been overdue for 12 months or more.

In order to make a decreasing adjustment where the debt has been overdue for less than 12 months, the debt must be bad. This requires you to make a bona fide assessment, based on sound commercial considerations, that the debt is bad.

Sound commercial judgement cannot be exercised in relation to determining that a debt is bad if there is still a real and continuing dispute in relation to the sum. [F6]

The Commissioner's views on when a debt may be considered to have become bad for income tax purposes are set out in Taxation Ruling TR 92/18. [F7] These views also apply to when a debt may be considered to be bad for the purposes of Division 21. Whether a debt is bad depends upon an objective consideration of all the relevant circumstances of each case.

The main circumstances are set out in paragraphs 26 to 33 in TR 92/18. Some of the relevant factors include: • the debtor, if incorporated, is in liquidation with insufficient funds to pay the debt; • the supplier is unable to trace the debtor; and • an objective examination of all the facts indicates that there is little or no likelihood of recovering the debt.

To establish that there is little or no likelihood of recovering the debt, a supplier should take appropriate steps to recover the debt instead of simply writing it off as bad. The appropriate steps undertaken will vary according to the size of the debt and the resources available to the creditor to pursue the debt. The steps would generally be expected to include one or more of the following, depending upon the circumstances: • issuing reminder notices and attempting telephone/mail or e-mail contact; • issuing a formal demand notice; • issuing a summons; • ceasing the calculation and charging of interest and closing the account; • allowing a reasonable period to elapse since the original due date for payment of the debt.

The debt must be more than merely doubtful. If, for example, you have a 90-day credit period and the debt is still outstanding at the end of that period, the debt will not (in the absence of other factors) be accepted as bad.

Before you are entitled to make a decreasing adjustment under Division 21 for a debt that has not been overdue for 12 months or more, the debt must be written off.

Writing off will generally be evidenced if there is some form of written record to that effect. The debt may, for example, be written off by journal entries in the books of account.

Under the bad debt provisions of the income tax legislation, a debt cannot be written off after it has been settled, compromised or otherwise extinguished. [F8] In these situations, there is no longer a debt in existence that may be written off. [F9]

These same principles apply to Division 21. For example, if you settle a debt before writing it off, or before the 12 months have elapsed, there will be no debt in existence for the application of Division 21. The settling or compromising of a debt may be treated as an adjustment event for the purposes of paragraph 19-10(1)(b) which deals with adjustments for changes in consideration.

If you assign the debt to another party, the provisions of Division 21 cannot operate. [F10] Under Division 21 only the entity that makes the supply can make the adjustment for any bad debt relating to that supply. For example, if a debt is assigned, the assignee has no entitlement to a bad debt adjustment under Division 21.

You attribute an adjustment to the tax period in which you become aware of it. Therefore, you attribute the decreasing adjustment to the tax period in which you write off the debt. If the debt has been overdue for 12 months or more, you attribute the decreasing adjustment to the tax period in which you become aware that the debt had become overdue for 12 months or more.

[Deleted]

Adjustment notes are required for adjustments arising from adjustment events. [F11] The writing off of a bad debt, or a debt becoming overdue for 12 months or more, is not an adjustment event. Therefore adjustment notes are not required when making adjustments for bad debts.

Furthermore, there is no requirement for suppliers to notify the recipient of a supply that a debt has been written off.

For a wholly taxable supply, the amount of the decreasing adjustment is 1/11 of the amount that has been written off as bad, or is overdue for 12 months or more.

Continuing with Example (a) in paragraphs 49AA to 49AD, Marcus has a decreasing adjustment in the tax period ending 30 June 2002 of $50 ($550 / 1/11).

However, if the supply you made was partly taxable, the decreasing adjustment is to be calculated according to the following formula: full adjustment * taxable proportion [F12] Where: • 'full adjustment' is what would be the amount of the adjustment worked out under sections 21-5, 21-10, 136-30 or 136-35 if section 136-5 did not apply. • 'taxable proportion' is the proportion of the value of the supply (worked out as if it were solely a taxable supply) that the taxable supply represents.

ABC Pty Ltd supplies breakfast cereals in plastic containers intended for re-use. These supplies are partly taxable and partly GST-free. [F13] ABC Pty Ltd determines that the proportion of the value of the supply that the taxable supply represents is 40%. ABC Pty Ltd makes a supply to a retailer for $660. The related debt is subsequently treated as bad. ABC Pty Ltd makes a decreasing adjustment based on the formula: full adjustment * taxable proportion ($660 x 1/11) * 40% = $24.00

Under Division 21, the adjustment is based on 1/11 of the consideration for a supply which is subsequently written off as bad or overdue for 12 months or more and excludes interest.

Where you have previously made a decreasing adjustment for a bad debt and subsequently recover the whole or a part of the debt, you account for the amount recovered. You make an increasing adjustment to your net amount equivalent to 1/11 of the amount recovered. The increasing adjustment is made in the tax period in which the debt is recovered.

If the amount that is recovered relates to a supply that was partly taxable, the increasing adjustment is calculated according to the formula outlined at paragraph 54.

An adjustment arises if you make a creditable acquisition and the debt relating to the acquisition is subsequently written off as bad or has been overdue for 12 months or more.

You have an increasing adjustment if the following criteria are met: • you have made a creditable acquisition; • you have attributed an input tax credit to a tax period; • the whole or part of the consideration for the acquisition has not been paid; and • you are aware that the debt has been written off as bad or it has been overdue for 12 months or more.

A creditable acquisition is an acquisition you use in your enterprise to make taxable supplies or GST-free supplies. Acquisitions that relate solely to making input taxed supplies, or that are solely of a private or domestic nature, cannot be subject to increasing adjustments under Division 21. Acquisitions of this nature are not creditable acquisitions as they were not made for a creditable purpose.

The input tax credit relating to the acquisition must be attributed to a tax period. There may be cases where the input tax credit is attributable to the same tax period in which the debt is written off as bad. In these situations, if you are aware that the debt has been written off as bad, you account for the amount of input tax credit on the acquisition and the amount of the adjustment separately on your BAS. The amounts are not to be offset against each other.

For you to have an increasing adjustment, some or all of the consideration payable on the acquisition must not have been provided. The increasing adjustment is calculated on the consideration that has not been provided.

You attribute an adjustment to the tax period in which you become aware of it. Therefore, if you become aware that a debt has been written off, you attribute the increasing adjustment to the tax period in which you become aware that it has been written off. If the debt has been overdue for 12 months or more, you attribute the increasing adjustment to the tax period in which you become aware that the debt had become overdue for 12 months or more.

Continuing with example (a) from paragraph 49AA to 49AD. Russell does not account on a cash basis and uses 3 monthly tax periods .

Russell receives Marcus' letter threatening legal action on 20 April 2002. Russell has an increasing adjustment in relation to the debt as it has become overdue for 12 months or more. The adjustment is attributable to the tax period ending 30 June 2002.

If the creditable acquisition is wholly for a creditable purpose, the increasing adjustment is 1/11 of the amount written off or 1/11 of the amount that remains overdue after 12 months.

However, if you make an acquisition that is partly creditable, your increasing adjustment is calculated according to the following formula: full adjustment * extent of creditable purpose * extent of consideration [F14] Where: • 'full adjustment' is what would be the amount of the adjustment under section 21-15, 21-20, 136-40 or 136-45 if section 136-10 did not apply. • 'extent of creditable purpose' is the extent of creditable purpose last used to work out the amount of input tax credit for the acquisition, expressed as a percentage. [F15] • 'extent of consideration' is the extent to which you provide, or are liable to provide, the consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition.

If you make an 'annual apportionment election' under Division 131, section 136-10 will not apply to the adjustment under Division 21 if the requirements of subsection 136-10(3) are met. [F15A]

Isabella operates a gardening business and is registered for GST. She does not account for GST using the cash basis. She acquires a computer for $3,300. The computer is used 60% for business purposes and 40% for private purposes. Isabella's extent of creditable purpose is 60%. Therefore, she claims an input tax credit of $180 ($3,300 x 1/11 x 60%). She pays $2200 of the debt and subsequently experiences financial difficulties.

The supplier writes off $1100 of the debt and makes a decreasing adjustment of $100 ($1100 x 1/11). When Isabella makes her increasing adjustment she uses the following formula : full adjustment * extent of creditable purpose * extent of consideration $1100 * 1/11 * 60% * 100% = $60

If you make an acquisition that is partly creditable because you are not liable to provide the total consideration for the acquisition and you have only paid part of your liability, your increasing adjustment is calculated having regard to the extent to which you are liable to provide the outstanding consideration.

X makes a taxable supply for $11,000 to Y and Z. Y is liable for 20% of the consideration, Z is liable for 80% of the consideration. Y pays $1,100 and Z pays $5,500 towards the debt for the supply. X subsequently writes off the balance of $4,400 as a bad debt. X makes a decreasing adjustment for the supply and Y and Z make increasing adjustments. The increasing adjustments for Y and Z are calculated having regard to the extent to which each is liable to provide the outstanding consideration, rather than to the extent to which each was originally liable for the total consideration. Y still owes $1,100 and Z owes $3,300. Y calculates its increasing adjustment according to the following formula: full adjustment * extent of creditable purpose * extent of consideration $4400 * 1/11 * 100% * 1,100/4,400 = $400 * 25% = $100

If you have an adjustment for a bad debt under section 21-15, 21-20, 136-40 or 136-45 in relation to a reduced credit acquisition [F16] and it was not partly creditable (that is, it is wholly for a creditable purpose because of Division 70), the amount of that adjustment is reduced to the following amount: full adjustment * percentage credit reduction * extent of consideration [F17] Where: • 'full adjustment' is what would be the amount of the adjustment worked out under section 21-15, 21-20, 136-40 or 136-45 if section 136-10 did not apply. • 'percentage credit reduction' is the reduced input tax credit percentage prescribed for the purposes of subsection 70-5(2) for an acquisition of that kind. • 'extent of consideration' is the extent to which you provide, or are liable to provide, the consideration for the acquisition, expressed as a percentage of the total consideration for the acquisition.

Under section 20 of A New Tax System (Goods and Services Tax Transition Act) 1999 ('Transition Act') input tax credits will not be allowed for the acquisition or importation of specified vehicles made before 23 May 2001. [F18]

If you acquire a motor vehicle for which you are not entitled to an input tax credit under section 20 of the Transition Act, you cannot have a bad debt adjustment.

[Deleted]

Where you have previously made an increasing adjustment for a bad debt and subsequently pay to the supplier the whole or part of the amount written off or overdue for 12 months or more, you account for the amount paid. You make a decreasing adjustment to your net amount equivalent to 1/11 of the amount paid. The decreasing adjustment is made in the tax period in which the amount is paid.

If the payment relates to an acquisition which was partly creditable, the decreasing adjustment is calculated according to the formula outlined at paragraph 68.

However, if your extent of consideration has altered between the time you made the acquisition and the time of the payment, the formula outlined at paragraph 68 should reflect the extent to which you provided the further consideration. The calculation should not be based on the original extent of consideration.

X makes a taxable supply for $11,000 to Y and Z . Y is liable for 20% of the consideration, Z is liable for 80% of the consideration. Each entity only pays a portion of its respective liability and X subsequently writes off the balance as a bad debt. X makes a decreasing adjustment for the supply and Y and Z make increasing adjustments. Y and Z subsequently agree to alter their extent of consideration so that each entity is liable for 50% of the outstanding amount. After paying the outstanding amounts Y and Z should use 50% as the extent of consideration for the acquisition when making their decreasing adjustments

For supplies of freehold interests in land, stratum units and long-term leases, you may choose, under Division 75, to apply the margin scheme for working out the amount of GST on the supply.

Under the margin scheme, you calculate GST on the supply as 1/11 of your margin on the sale of the property. The margin is calculated as your tax inclusive sale price less your original purchase price. However, if you held the property at 1 July 2000, your margin is the sale price less the value of the real property at the specified date. [F19]

If you have a bad debt relating to a taxable supply of real property to which you apply the margin scheme, you have an adjustment under Division 21. However if the amount of the adjustment would otherwise exceed 1/11 of the margin for the supply, the amount of the adjustment is limited to 1/11 of the margin for the supply. [F20]

ABC Pty Ltd, a registered land developer, makes a taxable supply of real property under an instalment contract for $150,000. It held the land at 1 July 2000, when it was valued at $95,000. It chooses to apply the margin scheme and the margin for the supply is $55,000. ABC Pty Ltd subsequently writes off as a bad debt $66,000 associated with the supply. In this case, the amount of the adjustment, calculated under Division 21, is $6,000 (1/11 of $66,000). This amount exceeds 1/11 of the margin for the supply ($5,000). The amount of the adjustment is, therefore, limited to 1/11 of the margin. The decreasing adjustment is $5,000.

If you acquire property where GST on the supply was calculated on the margin, the acquisition is not a creditable acquisition. This means you cannot have an increasing adjustment if the debt relating to the supply is subsequently written off as bad or overdue for 12 months or more. [F21]

Terms used in this Ruling have the following meanings:

Below is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Entities and arrangements to which this Ruling applies 4 Date of effect 9 Background 10 Ruling 15 Entities making taxable supplies 15 GST must have been attributed 15 Attribution of adjustment 16 Adjustment notes 18 Partly taxable supplies 19 Entities making creditable acquisitions 21 Input tax credit must have been attributed 21 Attribution of adjustment 22 Partly creditable acquisitions 24 When is a debt a 'bad debt'? 27 Margin scheme 30 Explanations 31 Entities making taxable supplies 31 When do you have an adjustment 32 You have made a taxable supply 33 Attribution 34 Consideration not received 35 Writing off the debt as bad or debt overdue for 12 months or more 36 When a debt is bad 37 Writing off a bad debt 43 When do you attribute your adjustments 48 Example 49 Adjustment notes 50 The amount of the decreasing adjustment 52 Example 53 Example 55 Adjustment not to exceed 1/11 of consideration 56 Increasing adjustment 57 Entities making acquisitions 59 When do you have an adjustment? 60 Creditable acquisition 61 Attribution 62 Consideration not paid 63 When do you attribute your adjustment? 64 Example 65 The amount of the increasing adjustment 67 Example 69 Example 72 Phasing in input tax credits for motor vehicles 74 Decreasing adjustment 77 Example 80 Application of Division 21 to supplies of freehold interests under Division 75 (the "margin scheme") 81 Example 84 Definitions 86 Detailed contents list 87