GST and Bad Debts

Under GST Ruling 2002/2, a decreasing GST adjustment needs to be made to account for the writing off of bad debts. In order to do so, the ruling states that:

GST must have been attributed

A decreasing adjustment for a bad debt can arise in respect of a supply if either :

  • you attributed the GST on the supply on your BAS in a previous tax period, or
  • you are attributing the GST on the supply in the same period as you write off of the related debt (this means that you account for the GST payable and the bad debt adjustment separately on your BAS).
  • The GST adjustment is to take place in the period when the bad debt is written off or when the owner becomes aware that the debt is bad. For the debt to be considered bad, it needs to be overdue for 12 months.

When do you account for the adjustment?

You attribute an adjustment to the tax period in which you become aware of it. Therefore, you attribute the decreasing adjustment to the tax period in which you write off the debt. If the debt has been overdue for 12 months or more, you attribute the decreasing adjustment to the tax period in which you become aware that the debt had become overdue for 12 months or more.

Remember that a debt, in most circumstances, should be outstanding for at least 12 months before it should be declared as ’bad’. 

How much GST is adjusted?

For a wholly taxable supply, the amount of the decreasing adjustment is 1/11 of the amount that has been written off as bad, or is overdue for 12 months or more.

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