Income Tax Assessment Act 1997

CHAPTER 2 - LIABILITY RULES OF GENERAL APPLICATION  

PART 2-5 - RULES ABOUT DEDUCTIBILITY OF PARTICULAR KINDS OF AMOUNTS  

Division 25 - Some amounts you can deduct  

Operative provisions  

SECTION 25-35   Bad debts  

25-35(1)    
You can deduct a debt (or part of a debt) that you write off as bad in the income year if:

(a) it was included in your assessable income for the income year or for an earlier income year; or

(b) it is in respect of money that you lent in the ordinary course of your ^* business of lending money.

Note:

If a bad debt is in respect of a payment that is required to be made under a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936 ): see subsection 63(1A) of that Act.

Writing off a debt you have bought

25-35(2)    
You can deduct a debt that you write off as bad in the income year if you bought the debt in the ordinary course of your ^* business of lending money. However, you cannot deduct more than the expenditure you incurred in buying the debt.

Writing off part of a debt you have bought

25-35(3)    
You can deduct a part of a debt if:

(a) you write off that part as bad in the income year; and

(b) you bought the debt in the ordinary course of your ^* business of lending money.

25-35(4)    
However, the maximum that you can deduct under subsection (3) for one or more income years is the amount (if any) by which:

• the expenditure you incurred in buying the debt;

exceeds:

• so much of the debt as has not yet been written off as bad.

Limit on deductions for bad debts under leases of luxury cars

25-35(4A)    

There is a limit to how much you can deduct under this section for debts you write off that relate to *luxury car lease payments that have become or will become liable to be made under a lease of a ^* car to which Division 242 (about luxury car leases) applies.

25-35(4B)    

The most you can deduct for an income year is:

• the interest for the notional loan you are taken to have made to the lessee;

reduced by:

• each amount that you have deducted, or can deduct, for an earlier income year under this section (or section 63 of the Income Tax Assessment Act 1936 ) for debts relating to *luxury car lease payments that have become or will become liable to be made under the lease.

25-35(4C)    
(Repealed by No 79 of 2010 )

Special rules affecting deductions under this section

25-35(5)    

The rules described in the table may affect your entitlement to deductions under this section, or may result in a deduction being reversed.

Provisions of the Income Tax Assessment Act 1997 are identified in normal text. The other provisions, in bold , are provisions of the Income Tax Assessment Act 1936 .

Rules affecting deductions for bad debts
Item	For the rules about this situation:	See:
1	A company cannot deduct a bad debt if there has been a change in ownership or control of the company and the company has not satisfied the business continuity test.	Subdivisions 165-C and 166-C
.
2	A company cannot deduct a bad debt in various other cases that may involve trafficking in bad debts.	Subdivision 175-C and section 63D
.
3	A deduction under this section is reduced if the debt is forgiven and the debtor and creditor are companies under common ownership and agree for the creditor to forgo the deduction to a specified extent.	section 245-90
.
4	If you receive an amount as recoupment of a bad debt that you can deduct under this section, the amount may be included in your assessable income.	Subdivision 20-A
.
5	Certain trusts cannot deduct a bad debt if there has been a change in ownership or control or an abnormal trading in their units	Divisions 266 and 267 in Schedule 2F
.
6	An entity that used to be a member of a consolidated group or MEC group can deduct a bad debt that used to be owed to a member of the group only if certain conditions are met	Subdivisions 709-D and 719-I

Note:

Subsections 230-180(3) , (5) and (6) and 230-195(3) , (5) and (6) provide that in certain circumstances a deduction for a loss in relation to a financial arrangement is to be treated, for the purposes of this Act, as a deduction of a bad debt. The rules referred to in this subsection apply to that deduction.