The IRD is currently consulting on the update to its public ruling considering the writing off of debts as bad for Income Tax and GST purposes.

The ruling is not new but rather an update of the existing BR Pub 05/01 and the Commissioner has stated that her position has not changed however, the old statement has become out dated and needs to be updated.

While the statement is not intended to change the tax position, it is a good reminder that bad debts need to be considered with some care as there are some procedural grounds which need to be considered before a deduction can be claimed.

These mainly relate to the requirement that the bad debt must be "written off" before a deduction can be taken and in particular, this must occur "in the income year". What this means is that while a debt may be bad, a deduction is not available until the income year in which it is written off. If you wait until completing the annual accounts to do this, the deduction may not be available until the following year.

What constitutes "written off" will vary from taxpayer-to-taxpayer however, the statement provides a number of examples and guidance depending on the taxpayers' systems. The moral of the story is that good debtor management will not only help with your business and cash-flow, but will also assist in making sure all potential deductions are available.