(Tax Update) Is bad debt tax deductible?

Non-trade debts that are written off as bad, or provisions made in respect of non-trade debts that are doubtful, either specific or general, are not deductible in the computation of adjusted income. Similarly, recoveries relating to non- trade debts written off earlier are not taxable.

This tax question has become increasingly common “Should taxpayers use legal action to recover any debts for tax purposes?”.

Let’s talk about the bad debts written off in a tax perspective :

What Is Bad Debts

Debts that are allowed as a deduction in ascertaining the adjusted income of a business is a trade debt that is irrecoverable either wholly or partly. Such debt is written off as bad. Trade debt is a debt that arises from the sales of goods or services and has been included in the gross income of the business.

1. Issue

What is the tax treatment for bad debts?

2. Conclusion

If reasonable steps have been taken to recover the irrecoverable debts but showing there is no

way to recover the debt, the amount of irrecoverable debts is tax deductible.

However, if there are still any other reasonable steps for recovery, such debt cannot be written off

as irrecoverable. Thus, it is not tax deductible.

3. Reasons

For a trade debt to be written off as bad and allowed as a deduction, generally two conditions

are to be fulfilled.

1. The debt shall be an amount that has been included in the gross income of a person for the

basis period for a YA before the relevant YA.

2. The debt is irrecoverable.

To support a claim for deduction of a bad debt written off for tax purposes, there should be

sufficient evidence of such steps taken, including one or more of the following:

a) issuing reminder notices;

b) debt restructuring scheme;

c) rescheduling of debt settlement;

d) negotiation or arbitration of a disputed debt; or

e) legal action (filing of a civil suit, obtaining judgement from the court, and execution of the judgement).

After reasonable steps for recovery have been taken, debt can be considered wholly irrecoverable on the occurrence of any one of the following :

a) the debtor has died without leaving any assets from which the debt can be recovered;

b) the debtor is bankrupt or under liquidation and there are no assets from which the debt can be recovered;

c) the debt is statute-barred;

d) the debtor cannot be traced despite various attempts and there are no known assets from which the debt can be recovered;

e) attempts at negotiation or arbitration of a disputed debt have failed and the anticipated cost of litigation is prohibitive; or

f) any other circumstances where there is no likelihood of cost-effective recovery.

4. Sources

Public ruling no. 4/2019 Tax treatment of wholly & partly irrecoverable debts and bad debts

PS : Authored by Ms SjChai, our audit/tax associate, in her personal LinkedIn post

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