legal action on bad debts for tax deduction?

Sad to see so many companies close down with many people are retrenched and unemployed in this pandemic. Is it right?

With the implementation of conditional movement control MCO 3.0, one of the key tax concerns that businesses will face during this period is the tax treatment of bad debts.

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 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.

Reasonable consideration under S34(2) of the ITA

Reasonable consideration should be taken before writing off a trade debt as bad and then allowed as a deduction in ascertaining the adjusted income of a business.

Reasonable steps to recover the debt should be taken before any decision is made to write off the debt. Subsection 34(2) of the ITA allows a trade debt which is reasonably estimated to be irrecoverable either wholly or partly, to be deducted from gross income in computing the adjusted income of the business

Inland Revenue Board Malaysia Public Ruling 4/2019 Tax Treatment of Wholly and Partially Irrecoverable Debts & Debt Recovery

Public Ruling No 4/2019 states bad debt is defined as a debt that is considered not recoverable after appropriate steps have been taken to recover it.

Public Ruling No 4/2019 described the basis of writing off a debt as bad and the actions to be taken to recover the debt as well as the evidence to prove such actions have been taken.

Determination Of Bad Debt

The bad debts written off are allowed as deduction, if:

* The debt is a debt that arises from the course of carrying on a business (i.e. trade debt).

* Trade debt shall be included in the gross income prior to the relevant YA.

Circumstances when a debt can be considered as irrecoverable

Debts which are irrecoverable become bad (either wholly or partly) when all reasonable steps have been taken to recover such debt. As long as there are any other reasonable steps for recovery , such debt cannot be written off as bad.

After reasonable steps for recovery as in paragraph 5.3.1 have been taken, a debt can be considered as wholly irrecoverable or bad on the occurrence of any one of the followings:

* Trade debt cannot be recovered.
* The debtor has died
* The debtor is a bankrupt
* The debt is statute-barred
* The debtor cannot be traced despite various attempts
* Any other circumstances where there is no likelihood of cost effective recovery

Reasonable steps have been taken to recover the trade debt:

All reasonable steps based on sound commercial considerations should be taken to recover the debt.

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:


* Issuing reminder notices
* Debt restructuring scheme
* Rescheduling of debt settlement
* Negotiation or arbitration of a disputed debt
* Legal action

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legal action on bad debts for tax deduction?

legal action on bad debts for tax deduction?

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