Can you deduct bad debts as a business expense in Australia?

Yes. A bad debt can be claimed as a deduction in Australia if you have included the amount in your assessable income in a prior period and the debt has genuinely become uncollectable.

Conditions for deducting a bad debt:

• The debt must have been included in assessable income previously (i.e. you declared it as income when it was earned or invoiced). If you use cash accounting (you only declare income when received), you would not have declared the debt, so there is nothing to write off.
• The debt must be genuinely bad — not merely doubtful. You must have taken reasonable steps to recover the debt (e.g. sent reminders, engaged a debt collector, consulted a solicitor) and reasonably concluded that recovery is not possible. A debt owed by someone who has gone bankrupt or is in liquidation will typically qualify.
• You must write off the debt in your accounts by 30 June — the write-off must occur in the financial year in which you claim the deduction.

GST adjustment: If you are registered for GST and previously remitted GST on the bad debt (because you use accruals accounting), you may be able to claim a GST decreasing adjustment (i.e. get back the GST component) on your BAS once the debt is written off.

Not deductible: Loans you have made (as opposed to trade debts from selling goods or services) are generally not deductible as bad debts for most businesses — they are treated as capital.