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Tax Deductions Denied For Bad Debts

Australia
The Australian Government has announced it would amend the Income Tax Assessment Act 1997 (ITAA 97) to deny a tax deduction for a bad debt written off in circumstances where the debtor and creditor are related parties not within the same tax consolidated group. Taxand Australia explores the tax treament of bad debts.

Under the current law, a creditor is entitled to a deduction for a bad debt which the creditor writes off as such in an income year, if the amount that gave rise to the bad debt was included in the creditor's assessable income.

The new proposal is that a creditor will be denied a tax deduction for writing off a bad debt where the debtor is a related party and the amount that gives rise to the bad debt has not been included in the creditor's assessable income. Instead, the creditor may have a capital loss in respect of the written-off bad debt.

The stated purpose of the proposed change is to introduce better symmetry between the tax treatment of the creditor and debtor where they are related parties but not members of a consolidated group.

Discover more: Tax treatment of related party bad debts

Taxand's Take


These proposed changes to the taxation of bad debts for related parties means that mulitnational with subsidairies in Australia will not be allowed tax deductions on debts acquired between these companies. Where this used to be a useful loophole when it came to taxation in Australia, it will now become a capital loss.

Your Taxand contact for further queries is:
Stewart Grieve
T: +61 3 9672 3443
E: stewart.grieve@corrs.com.au

Taxand's Take Author