Key facts
- IRAS lists bad debts from trade debtors as deductible and bad debts from other debtors as not deductible.
- If you recover a debt you claimed for, the reversal is taxed.
- GST bad debt relief needs the debt written off, 12 months from supply (or the debtor insolvent) and reasonable steps to recover it.
- The GST claim must be made within 5 years from the date of supply, in Box 7 and Box 11 of your GST return.
- IRAS gives reminders, calls, emails, a formal demand notice or a summons as examples of reasonable steps.
Two separate claims
A customer who never pays can cost you twice: the income you booked, and the GST you already paid IRAS on the invoice. There are two separate claims for this. One is an income tax deduction for the bad debt. The other is GST bad debt relief, which gives back the output tax. Each has its own conditions.
Income tax: when a bad debt is deductible
IRAS lists bad debts from trade debtors as a deductible business expense. Bad debts from debtors outside your trade, such as loans and advances, are not deductible.
For companies on the FRS 109 or FRS 39 tax treatment, impairment losses on debts are deductible as long as the debts relate to the trade or business and are revenue in nature. Any reversal of those losses is taxed, so if a customer later pays a debt you claimed, that amount comes back into income. A company that kept the older pre FRS 39 treatment can deduct only a specific provision for doubtful debts. A general provision is not deductible.
You do not file supporting documents with your Corporate Income Tax Return for this. You must keep them and hand them over if IRAS asks. Where the impairment on trade debts owed by related parties is more than $250,000, IRAS asks for more detail, including whether steps were taken to recover and enforce the debts.
For sole proprietors and partnerships, IRAS lists trade debts that become bad and irrecoverable during the accounting year as an allowable expense. Legal fees spent recovering trade debts are also allowable.
GST bad debt relief: the six conditions
A GST registered supplier can claim bad debt relief only if all of these are met:
| Condition | What it means in practice |
|---|---|
| GST paid on the supply | You supplied goods or services for money, and accounted for and paid GST on that supply. |
| Written off in your accounts | You have written off the whole or part of the amount as a bad debt in your books. |
| 12 months or insolvency | 12 months have passed from the date of supply, or the debtor became insolvent before then. |
| Reasonable steps to recover | You tried to collect the debt instead of simply writing it off. |
| Open market value | The value of the supply is equal to or less than its open market value. |
| Ownership passed | For goods, ownership has passed to your customer. |
IRAS explains insolvency with examples: an individual debtor made bankrupt, or a company ordered by the court to be wound up or placed under judicial management.
Time limits and how to claim
You must claim within 5 years from the date of supply. IRAS gives this example: for a tax invoice dated 28 Jun 2023, the last accounting period in which you can claim is 1 Apr 2028 to 30 Jun 2028.
- Complete the IRAS checklistFill in the Bad Debt Relief Checklist for Self Review of Eligibility of Claim. Do not submit it unless IRAS asks.
- Claim in your GST returnPut the GST amount in Box 7. In Box 11, select Yes and enter the bad debt relief amount included in Box 7.
- Use the right rateWork out the relief at the GST rate that applied at the time of supply.
- Keep the recordsKeep the checklist and supporting records. IRAS may ask for them during an audit.
What counts as reasonable steps
IRAS says the steps can vary with the size of the debt and the resources you have to pursue it. Its examples are reminder notices, attempts to make contact by telephone, mail or email, and a formal demand notice or summons.
This is where a written trail matters. Dated reminders, a statement of account, call notes, a letter of demand and a collector's report on what was tried all show that you did not just give up. They also support the income tax position if IRAS asks how the debt became irrecoverable.
Before you write off, it is worth one more serious attempt. Our debt recovery service is success based: no recovery, no fee. Either way, you end up with a record of the steps taken. If the customer will simply not pay, our guide to unpaid invoices sets out what to try first.
Records IRAS expects you to keep
- The tax invoice, plus records showing when you supplied, what, to whom and for how much.
- Proof you accounted for and paid the GST, and proof you wrote off the debt.
- Evidence of every reasonable step you took to recover the debt.
- A Refund for Bad Debts account listing each claim: invoice number and date, GST charged, payments received, the amount still owed and the GST claimed.
Keep these for 5 years from the accounting period of the supply, or 3 years from the date of your claim, whichever is later.
If the customer pays later
If a customer pays after you have claimed GST bad debt relief, you must repay IRAS the GST portion of what you received. Include the repayment in Box 6 of your GST return for the period in which you got paid. For income tax, the reversal of a deducted loss is taxed. Ask your accountant to record both when a written off debt is recovered.