Most GST-registered businesses account for GST on an accruals basis — meaning GST is remitted to the ATO when an invoice is issued, not when it is paid. If that invoice is never paid, the business has funded the ATO's share of the receivable out of its own pocket. The good news is that Australian GST law provides a mechanism to claim it back. The conditions are specific, and the timing matters.
The adjustment event
Under the A New Tax System (Goods and Services Tax) Act 1999 (Cth), a bad debt write-off is an "adjustment event" that allows the supplier to make a decreasing adjustment — essentially claiming back the GST component of the unrecovered debt. The adjustment reduces the net GST payable for the period in which the adjustment is made.
The conditions
To make a bad debt adjustment, all of the following must apply:
- The supply was a taxable supply — GST was charged and included in a BAS
- The consideration has not been received — part-payment cases require proportional calculation
- The debt has been written off as bad in your accounts
- More than 12 months have passed since the due date, OR the debtor is insolvent (in liquidation, administration, or subject to a bankruptcy order)
The 12-month rule is the one most businesses miss. You cannot make the adjustment immediately when you decide the debt is probably uncollectable — you must wait until 12 months have passed from the due date (or establish insolvency). Early write-off for accounting purposes does not accelerate the GST adjustment.
Insolvency exception
Where the debtor has entered liquidation, voluntary administration, or personal bankruptcy, the 12-month rule does not apply — you can make the adjustment immediately. This is the most common practical scenario: a debtor goes into administration, the administrator notifies creditors, and the creditor is entitled to make the GST adjustment in that BAS period.
The calculation
The adjustment amount is 1/11th of the unpaid amount (reflecting the GST component of a GST-inclusive amount). If the invoice was $11,000 GST-inclusive and remains completely unpaid, the adjustment is $1,000. If $5,500 has been received, the adjustment is $500.
Record-keeping
The ATO requires that the write-off be properly recorded in your accounts — a note in the general ledger or accounts receivable system that the debt has been written off as bad, on a specific date. The adjustment should be reported in the BAS for the period in which the write-off occurs. Keep supporting documentation: the original invoice, evidence of the debt being outstanding, and the write-off record.
Recovery after adjustment
If you make a bad debt adjustment and subsequently recover all or part of the debt, you must make a corresponding increasing adjustment in the BAS period in which the recovery occurs. Recovery by a third-party debt collector on your behalf counts as recovery for this purpose.
If you have significant aged receivables that may qualify for a GST adjustment, speak to your accountant and contact Merion about whether recovery action should precede or coincide with the write-off decision.