Unpaid invoices are one of the most frustrating realities of running a trade business. You did the work, issued the invoice, followed up multiple times — and still the client hasn't paid. When all reasonable attempts at collection fail, the ATO allows you to write off the debt as a business deduction.

But the rules around bad debt write-offs have specific requirements. Getting it wrong means missing out on a legitimate deduction — or worse, triggering an ATO review. This guide explains exactly how bad debt write-offs work for Australian tradies.

What Is a Bad Debt?

A bad debt is a receivable (money owed to your business) that you've determined is genuinely uncollectable. It's different from a slow-paying client or a disputed invoice — it's a debt you've determined, after reasonable efforts, will never be recovered.

For tax purposes, the ATO allows you to claim a deduction for a bad debt written off in the same year it's written off — provided specific conditions are met.

The Conditions for Claiming a Bad Debt Deduction

The ATO's requirements for a valid bad debt deduction are:

1. The Amount Must Have Been Included in Your Income

You can only write off as a bad debt an amount that was previously included in your assessable income. For tradies who account on an accruals basis (which most GST-registered businesses should use), this means the invoice was issued and included in your business income for a prior period.

Important: If you account on a cash basis (income reported only when received), you cannot claim a bad debt deduction — because you never included the unpaid invoice in your income in the first place. The deduction would be a double benefit.

Most GST-registered tradies use accruals accounting. If you're unsure which method you use, ask your accountant.

2. The Debt Must Be Written Off During the Year

To claim the deduction, you must formally write the debt off in writing before 30 June of the year you're claiming it. A written-off debt is documented in your books as bad — moved from "accounts receivable" to "bad debts expense."

You cannot claim it simply by thinking "that invoice is probably not going to be paid." It must be a formal accounting action.

3. You Must Have Taken Reasonable Steps to Recover the Debt

The ATO expects you to have genuinely tried to collect before writing off. Reasonable steps include:

  • Sending multiple payment reminders (email, SMS, letters)
  • Calling the client directly
  • Applying late fees or interest per your terms
  • Engaging a debt collection agency
  • Issuing a formal letter of demand
  • Considering or commencing legal action where economically viable

You don't need to exhaust every possible avenue — just reasonable efforts for the size of the debt. A $2,000 invoice doesn't warrant expensive legal proceedings, but you should have at least issued formal demand.

The GST Adjustment — Getting Your GST Back

This is the part many tradies miss completely. If you're registered for GST and have paid GST to the ATO on the invoice (included it in a previous BAS lodgement), you're entitled to a credit for the GST component of the written-off debt.

Under GST rules, you can make an "increasing or decreasing adjustment" on your BAS in the period the debt is written off.

Example: You issued an invoice for $11,000 (including $1,000 GST). You included the $1,000 GST in your June quarter BAS. The client has never paid after 18 months of attempts.

When you write off the bad debt in June next year:

  • You claim a $10,000 income tax deduction (the ex-GST amount)
  • You make a "decreasing adjustment" on your BAS to claim back the $1,000 GST previously paid

This double benefit — income tax deduction AND GST credit — means bad debt write-offs are more valuable than most tradies realise.

How to Write Off a Bad Debt (Step by Step)

Step 1: Document Your Collection Attempts

Keep records of all contact with the client: email threads, phone call notes (date, who you spoke to, what was said), letters sent, debt collector correspondence. If the matter ever goes to audit, this evidence supports your position that the debt is genuinely irrecoverable.

Step 2: Make a Business Decision to Write Off

The business decision is yours — the ATO doesn't require a court judgment or a debt collector's formal notice. What it requires is that you've made a genuine commercial decision that the debt is uncollectable.

This might be because:

  • The client has died with no estate
  • The client has gone into bankruptcy or liquidation
  • The client cannot be located after reasonable searches
  • The amount is too small to justify further collection costs
  • The client has clearly indicated they won't pay and enforcement isn't economically viable

Step 3: Write Off in Your Accounting System Before 30 June

Before the financial year ends (30 June), update your accounting records:

  • In Xero or MYOB, create a "bad debt" expense account
  • Write a credit note or directly adjust the invoice to show it written off as bad
  • The invoice moves from "accounts receivable" to "bad debt expense"

This is the formal action that makes the deduction valid.

Step 4: Claim the Deduction and GST Adjustment

For income tax: The written-off amount (ex-GST) appears as a bad debt expense in your accounts and is automatically included as a deduction in your tax return when your accountant prepares it, or in the "business income and expenses" section if you self-prepare.

For GST: In your next BAS after the write-off, include the GST component as a decreasing adjustment at label G11 (decreasing adjustments for bad debts). Your accounting software should prompt this if set up correctly.

Practical Example: A Plumber's Unpaid Invoice

Jake is a sole trader plumber, registered for GST, accounting on an accruals basis. In October 2024, he completed a bathroom renovation for a client and invoiced $16,500 (including $1,500 GST).

He included the $1,500 GST in his December 2024 quarter BAS. He included the $15,000 in his 2024–25 taxable income.

By April 2026, despite 12 months of follow-ups, 3 formal demand letters, and a debt collector engagement, the client (a private individual) has paid nothing and is not responding.

June 2026 actions:

  1. Jake writes off the debt in Xero before 30 June 2026
  2. Jake claims a $15,000 bad debt deduction in his 2025–26 tax return
  3. Jake includes a $1,500 decreasing adjustment on his June 2026 BAS

Tax outcome: At a 32.5% marginal rate, the $15,000 deduction saves Jake approximately $4,875 in income tax. He also recovers $1,500 in GST. Total effective recovery from the write-off: $6,375 — not nothing.

What Happens If the Client Pays Later?

If you've written off a debt and the client subsequently pays, you need to include the recovered amount as assessable income in the year received. You also need to pay GST on the recovered amount (remit back the GST credit you previously claimed).

This is the "bad debt recovery" rule. You can't permanently avoid tax on income just because you wrote it off — if it's eventually collected, it's taxable.

When You Can't Claim a Bad Debt Deduction

Several situations preclude a bad debt deduction:

You're on a cash accounting basis. If you don't report income until you receive it, unpaid invoices were never in your income. There's nothing to write off.

The debt is between related parties. If you've "loaned" money to a family member through a business transaction and it's gone unpaid, the ATO scrutinises these arrangements carefully. Related-party bad debts face higher scrutiny.

You haven't documented your recovery attempts. If you've taken no steps at all to collect, the ATO may challenge whether you genuinely believe the debt is uncollectable.

The debt is for a non-income-producing activity. A bad debt deduction is only available for commercial trading debts — amounts owed in the ordinary course of business.

Using a Debt Collector Before Writing Off

For invoices over $2,000–$3,000, engaging a debt collection agency before writing off is both a practical collection strategy and evidence of reasonable recovery attempts.

Australian debt collection agencies typically work on a "no collection, no fee" model, taking 15–25% of recovered amounts. For a $10,000 invoice, this means you net $7,500–$8,500 if they collect — far better than a tax deduction.

Only write off the debt if the debt collector also fails to recover. At that point, the deduction is well supported.

Small claims (under $10,000–$20,000 depending on your state) can be pursued through VCAT, NCAT, QCAT, or equivalent state tribunals. Filing costs are relatively low, hearings are simplified, and you don't necessarily need a lawyer.

However, even winning a judgment doesn't guarantee payment if the client is bankrupt, has no assets, or disappears. A court judgment that can't be enforced is still ultimately a bad debt.

The economic threshold for legal action is generally:

  • If the debt is over $5,000 and the client appears to have assets
  • If the matter sets a principle (e.g., contract dispute that could affect future dealings)
  • If industry reputation is at stake

Below these thresholds, the write-off is usually the practical outcome.

Record-Keeping for Bad Debt Deductions

The ATO recommends keeping:

  • Copies of all invoices that were written off
  • Correspondence with the client — emails, letters, SMS, call logs
  • Debt collection agency correspondence and final reports
  • Written record of the decision to write off (note in accounting software, director resolution for companies, or business journal entry)
  • BAS adjustment records confirming the GST credit was correctly claimed

Keep these records for 5 years from the date of lodgement of the relevant tax return.

Comparison: Bad Debt Options for Tradies

  • Client owes $500, slow paying — Continue chasing, no write-off yet — No deduction yet
  • Client owes $5,000, disappeared — Attempt collection, then write off — Deduction + GST credit
  • Client in bankruptcy — Write off — no collection possible — Deduction + GST credit
  • Client disputes the invoice — Resolve dispute first — not yet a bad debt — No deduction until resolved
  • Client owes $15,000+, has assets — Legal action before write-off — Pursue first; write off if judgment uncollectable
  • Client paid 6 months later — Income recovery — add back to assessable income — No net benefit

Frequently Asked Questions

Q: Can I write off an invoice from last year?
You can only claim the deduction in the year you formally write it off. If you write off a 2022 invoice in June 2026, the deduction is in 2025–26 — not 2021–22. You cannot amend prior year returns for bad debt write-offs not taken in that year.

Q: Do I need to prove the debt is completely unrecoverable?
The ATO requires that you've made a genuine decision based on available evidence that the debt is unlikely to be recovered. You don't need a court judgment or final proof — just reasonable commercial judgment supported by documentation.

Q: My client is in bankruptcy. Can I still chase the debt?
You can file a proof of debt with the bankruptcy trustee. If there are any assets to distribute, you may receive a partial payment. Any amount recovered reduces your bad debt deduction. Once bankruptcy is finalized with no distribution, the remainder is uncollectable and fully deductible.

Q: What if I issue a credit note instead of writing off as bad debt?
A credit note reduces the invoice amount — this is different from a bad debt write-off. A credit note is typically used when you've agreed to reduce the price, not when the client has simply refused to pay. Using a credit note for an uncollected debt rather than a formal bad debt write-off may result in losing the GST adjustment opportunity if not processed correctly. Ask your accountant for the right approach.