The end of a financial year — whether 30 June for most Australian businesses or December for those on a calendar year — is the natural checkpoint for a thorough review of the debtors ledger. This review serves multiple purposes: it ensures the balance sheet accurately reflects collectable receivables, it captures tax-deductible bad debt write-offs before the year closes, and it identifies accounts that should be referred for external recovery rather than carried indefinitely.
Step 1: Pull the aged trial balance
Start with a current aged trial balance showing all outstanding invoices by debtor and by age bucket (current, 30, 60, 90, 120+ days). This gives you the complete picture. If your accounting system can also show the date of the last contact or last payment activity per account, include that — it tells you which accounts have been actively managed and which have been sitting idle.
Step 2: Categorise accounts
Divide the outstanding accounts into three categories:
- Collectable — no action required: current or recently overdue accounts where the customer relationship is intact and payment is expected in the ordinary course.
- Doubtful — active recovery required: accounts that are 60+ days overdue, where internal follow-up has not produced payment, and where the debtor has not confirmed a dispute. These need external referral or escalation.
- Uncollectable — write-off: accounts where the debtor is in liquidation, cannot be located, or where the amount is too small to justify further recovery costs. These should be written off.
Step 3: Bad debt write-offs and GST adjustments
A bad debt write-off is deductible for income tax purposes in the year the decision is made, provided the debt was previously included in assessable income and is genuinely irrecoverable. The write-off should be documented with the basis for the decision — for example, confirmation that the debtor is in liquidation, or a file note recording the attempts made and the reason for the write-off decision.
If you remitted GST on the invoice when it was issued, you are entitled to a GST bad debt adjustment under Division 21 of the GST Act — a credit for the GST component of the written-off amount. This requires the debt to have been unpaid for 12 months, or for the debtor to be insolvent, and you must have previously remitted the GST. The adjustment is made in the BAS for the period in which the write-off decision is made.
Step 4: Refer the doubtful accounts
Accounts categorised as doubtful — overdue, not disputed, and not responding to internal collection — should be referred to an external recovery provider. The beginning of a new financial year is a natural moment to clear the internal backlog and place these accounts with a provider who can pursue them without the competing priorities of your AR staff.
Refer your year-end accounts to Merion or speak to us about a structured review of your debtors ledger before the year closes.