Steps to get a deduction for bad debts

Grahame Allen • Apr 14, 2021

As many of the government's COVID-19 economic supports coming away, economists predict there'll be many business failures to follow. If your business is unable to obtain payment from a debtor, depending on the accounting method used by your business, you may be able to claim a tax deduction for the unpaid amount. If you account for your income on an accruals basis, you may be able to claim a tax deduction for a bad debt. In order to claim a deduction for a bad debt, you must have included the amount in your assessable income. You will also need to determine that the debt is genuinely bad, rather than merely doubtful, at the time you write it off. The next step in claiming a bad debt deduction is to write-off the debt as bad. This usually means that you have to record the decision in writing to write-off the debt before the end of the income year in which you intend to claim a deduction. In instances where you have dealt with the bad debt in other ways, for example, waived or forgiven the debt, extinguished the liability in another way, or sold the debt, the debt is no longer in existence and you cannot write it off as a bad debt . Companies that want to deduct bad debts will have the additional hurdle of satisfying the continuity of ownership test (COT). There may also be GST consequences for businesses when writing-off bad debts. For example, where the business accounts for GST on a non-cash basis, a decreasing adjustment can be claimed where you've made the taxable sale and have paid the GST to the ATO and have subsequently not received the payment. However, the debt will need to have been written off as bad and has been overdue for 12 months or more. Businesses that account for income on cash basis will not be able to claim a deduction for bad debts. This is because these businesses only include an amount in their assessable income when it is received, therefore, bad debts will have no income tax consequences. If non-payment from customers or debtors is getting your business down, we can help you sort out the bad debts from the others and help you get a tax deduction or a GST adjustment when the time comes. Call us today for expert advice.

By Grahame Allen 28 Mar, 2024
Investment property owners beware! The ATO has signalled that its rental bond data matching program will continue to the 2025-26 income year. This program first commenced in 2005 and collected data dating back to 1985, the year that CGT was first introduced. It has continued since then. Rental bond data will be collected from the following State and Territory bond regulators twice a year for the 2023-24 to 2025-26 years: New South Wales Fair Trading – Professional Standards and Bonds; Department of Justice and Community Safety – Consumer Affairs, Victoria; Residential Tenancies Bond Authority – Consumer and Business Services, South Australia; Bond Administrator – Department of Mines, Industry Regulation and Safety, Western Australia; ACT Office of Rental Bonds – Access Canberra; Department of Justice – Office of the Residential Tenancy Commission, Tasmania; and Residential Tenancies Authority, Queensland. Specific data items collected will include: Individual client details (names, addresses, email addresses, phone numbers, unique identifier for the landlord). Landlord and Managing agent identification details (business names, addresses, contact names, email addresses, phone numbers, unique identifier of the managing agent). Rental bond transaction details (rental property address, period of lease, commencement of lease, expiration of lease, amount of rental bond held, number of weeks the rental bond is for, amount of rent payable for each period, period of rental payments, type of dwelling, number of bedrooms, and unique identifier of the rental property). According to ATO estimates, records relating to around 900,000 properties will be obtained each financial year. This data will be used to identify under-reporting or non-reporting of income in tax returns, the misapplication of CGT provisions leading to under or non-reporting in relation to sale of properties, and non-compliance with foreign investment laws. In combination with other data matching and compliance strategies, the ATO notes that the rental bond data matching program identified approximately 5,600 taxpayers where real property dealings had not been treated correctly in the 2022-23 financial year alone. This led to an additional$23m in revenue being raised. The identity matching process within any ATO data matching program employs over 60 sophisticated identity-matching techniques to ensure the correct taxpayer is linked to the data and uses multiple identifiers to obtain a match. An additional manual process may be undertaken in instances where a high confidence identity match does not occur and involves an ATO officer reviewing and comparing third-party data identity elements against ATO information on a one-on-one basis. Once an identity match is obtained, data analysts within the ATO then use various models and techniques to detect potential under-reported income or over-reported deductions. Higher risk discrepancy matches are then loaded into ATO’s case management system and allocated to compliance staff for actioning. Lower risk discrepancy match will be further analysed to discern whether further action is required. The compliance team will then contact the taxpayer usually by phone, letter or email to clarify or verify the discrepancy. Taxpayers will have up to 28 days to verify the accuracy of the information from the data matching and respond prior to the initiation of any administrative action. Taxpayers that disagree with any ATO decision regarding the information obtained from data matching programs can request a review by lodging an objection.
By Grahame Allen 01 Mar, 2024
With the year-on-year growth in the number of SMSFs in Australia, the ATO is finally rolling out a extra security feature for SMSFs that use the Small Business Superannuation Clearing House (SBSCH) in terms of bank account validation. Briefly, the SBSCH is a free, online superannuation payments service that small businesses can use to pay their super contributions in one transaction. It is designed to simplify the process of making superannuation contributions on behalf of employees. The service is available to small businesses with 19 or fewer employees or businesses with an annual aggregated turnover of less than $10 million. The SBSCH is part of ATO online services and allows employers to meet their superannuation guarantee obligations easily. By using the clearing house, employers can make a single electronic payment to the SBSCH, which then distributes the funds to each employee's super fund or SMSF. This service helps reduce the time and paperwork associated with superannuation contributions for multiple employees across different super funds. The rollout of the new security feature, expected around 15 March 2024, will check whether an employee’s SMSF bank account details match their SMSF records. Where there is a mismatch, or where an employee has not listed their bank account details, the employer will receive an “invalid super fund bank details” error on the SBSCH payment instruction. According to the ATO, where this error occurs, the SBSCH cannot accept payments to an employee’s SMSF until it is resolved. To resolve this error, the ATO recommends employers check with employees that their SMSF’s bank account details exactly match those listed on the SMSF records. If those details are incorrect, or if there are no details listed, the employee should approach the trustee of the fund or a tax professional associated with the fund to update the information through ATO online services. Employees with SMSFs are encouraged to ensure that fund details are correct ahead of the change to avoid any delays in their super. Where the discrepancy is resolved, employers will be able to update the employee’s SMSF bank details in SBSCH and submit payment instructions. To avoid delays for other employees, the ATO notes that SBSCH payment instructions can still be submitted for employees with valid super fund details ahead of resolution of any discrepancy. This security feature is just one of many that the ATO has been rolling out late last year and early this year to safeguard retirement savings held in SMSFs from fraud and misconduct. For example, the ATO commenced sending rollover alerts to members of SMSFs when a super fund uses the SMSF verification service to verify a fund’s details with the intent to roll super benefits into an SMSF. This alerts members of SMSFs to an unauthorised rollover and potentially stop it in its tracks. Other alerts for SMSF changes have also been implemented by the ATO to tackle fraudulent use of taxpayer details to register new SMSFs. These are often then used to commit further offences, such as illegal early release. Taxpayers that have been alerted by the ATO in relation to a change made to an existing SMSF should either contact the trustees or the tax professional associated with the fund to verify the change in the first instance. Where it is subsequently determined that the change was incorrect or unauthorised, taxpayers are encouraged to contact the ATO immediately.
By Grahame Allen 23 Feb, 2024
Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, chief among them being the unparalleled control and flexibility this type of fund can afford its members over their retirement savings. This control extends to the ability to tailor investment strategies to personal financial goals, risk tolerance and preferences, with access to a broader array of investment options than those typically available in retail or industry super funds. Such options include not just traditional stocks and bonds but also direct property, precious metals and even cryptocurrencies, allowing for a highly diversified investment portfolio. Beyond investment choices, SMSFs provide significant tax advantages. Members can employ strategic tax planning to minimise liabilities and enhance their retirement nest egg, benefiting from the ability to manage the timing of tax events and utilise imputation credits. In addition, SMSFs can offer enhanced estate planning flexibility, enabling members to specify how their assets are distributed upon their death, which can be particularly beneficial in complex family situations. The pooling of resources in an SMSF, which can include up to six members, allows for increased buying power, making it easier to invest in assets like real estate that might otherwise be out of reach for a single individual. Additionally, the direct ownership of investment assets through an SMSF can provide a sense of security and personal involvement not found in other superannuation arrangements. It is perhaps no surprise then that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of all the benefits offered. In the 5 years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876bn in assets, which accounts for around 25% of all super assets. However, taxpayers seeking to establish SMSFs should also be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF, as trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances. The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees' lack of experience or knowledge can lead to poor investment choices. It should also be noted that not all investments are created equal. SMSFs need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members. The sole purpose test may be contravened if a related party to the fund obtains a financial benefit (directly or indirectly) when making investment decisions. The SMSF will also fail the sole purpose test if it provides a pre-retirement benefit to an individual, for example, if one of the members engages in personal use of a fund asset. In addition to these potential drawbacks, there is the time commitment required to research investments, monitor fund performance and stay updated on regulatory changes; liquidity challenges for funds investing in real estate or other illiquid assets; and in most cases, more expensive or complex insurance (ie life, total and permanent disability [TPD], income protection) access to consider when starting an SMSF. Taxpayers thinking about starting an SMSF should carefully weigh these potential drawbacks against the benefits, and consult relevant qualified advisers for further advice where required.
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