Recovery and the Tax Position

Why tax comes up

Unpaid debts and their recovery do not exist in a vacuum; they can interact with a client's tax and accounting position. Exactly how depends on the client's circumstances, how they account for income, and the specifics of the debt. The aim here is simply to flag that this dimension exists, so advisers prompt the right conversation rather than assume recovery is purely a legal and commercial matter.

This is general information only and not tax or legal advice. A client's tax position should be confirmed with their accountant or registered tax agent in light of their own facts.

The idea of a bad debt

When a debt becomes genuinely unrecoverable, businesses sometimes account for it as a bad debt. Whether and how this can be done depends on the rules and the client's circumstances, and there are conditions around it. The practical point for advisers is that writing off a debt is an accounting and tax question with its own requirements, not simply a decision to stop chasing — and it should be handled with the client's tax adviser.

Recovered amounts

If a debt that was previously treated as bad is later recovered, that recovery may need to be accounted for, because the earlier treatment assumed it would not be paid. This is one reason it is worth keeping clean records of how a debt has been treated over time. The interaction between writing off and later recovering is exactly the kind of detail a client's accountant is placed to handle.

GST and the bigger picture

For registered businesses, the goods and services tax treatment of a debt and any later recovery can also be relevant. The specifics depend on the rules and the client's situation. The overall message is that recovery and tax can intersect, so clients should loop in their tax adviser. On the recovery side, a current debt can be referred via refer a debt.