Bad Debts and Failed Payments: How to Claim Back GST and Tax

Every business that bills on account ends up with a few customers who never pay. For subscription businesses it's usually a mix of failed card payments, cancelled direct debits and clients who simply disappear.

The money's gone. But if you reported the GST and the income when you raised the invoice, the tax you paid on it doesn't have to be. This guide, from BPAG Accountants, explains the two sets of rules, income tax and GST, as at October 2026.

First question: cash or accruals?

Everything depends on how you account.

• Cash basis. You report income and GST when you're paid. If you were never paid, you never reported it, so there's nothing to claim back.
• Accruals (non-cash) basis. You report income and GST when you invoice. If the customer never pays, you've paid tax on money you didn't receive. These are the businesses the bad debt rules help.

You can use different methods for GST and income tax, so check both. Your BAS settings in Xero or MYOB show your GST method. Your tax agent can confirm your income tax method.

Income tax: deducting a bad debt

The ATO's conditions for a bad debt deduction come down to four things.

1. It was income first. You can only deduct an amount you've already included in your assessable income, this year or an earlier one. You can't deduct a loan you made or a deposit you never booked as income.
2. It's written off in writing before year end. The decision to write it off must be recorded in writing before the end of the income year you claim it in. For most businesses, that means before 30 June. A minute, an email to your bookkeeper or a dated note in your accounting file can do it, but it has to exist before 1 July.
3. It's genuinely bad. The debt must not be merely doubtful. The ATO says it must be unlikely to be recovered through reasonable and commercial attempts. What's reasonable depends on the circumstances, and formal legal action isn't always needed.
4. It still exists. You can't write off a debt you've forgiven or set off against something else.

What counts as reasonable recovery attempts?

For a typical subscription or service business, we'd expect to see:

• Reminder emails and texts after the failed payment or due date.
• A phone call or two.
• A final demand letter, ideally saying what happens next.
• A decision about whether a debt collector or tribunal claim is worth it for the amount.

Keep a record of all of it with the invoice. If the ATO ever asks, the trail is your evidence that the debt was bad, not just inconvenient.

GST: the 12-month rule

If you account for GST on a non-cash basis, the ATO says you can make a decreasing adjustment for a bad debt when:

• you made a taxable sale and reported (attributed) the GST on it, and
• you haven't been paid all or part of it, and
• you've written the debt off as bad, or it's been overdue for 12 months or more.

You make the adjustment in the BAS period you write it off or become aware it's been 12 months overdue. The adjustment is one-eleventh of the unpaid GST-inclusive amount.

Note the difference from income tax: for GST you don't have to write it off if it's 12 months overdue. You can claim the GST back while still chasing the customer.

If you recover it later

If the customer pays after you've made the adjustment, you have an increasing adjustment in the period you recover it. Same for income tax: an amount recovered after a bad debt deduction is generally assessable when received.

The other side: unpaid suppliers

The rules work in reverse too. If you claimed a GST credit on a purchase and haven't paid the supplier for more than 12 months (or the debt is written off), you generally need to make an increasing adjustment to pay that credit back.

A worked example

A GST-registered software business on accruals reports both GST and income tax when it invoices.

On 1 March 2025 it invoiced a client A$2,200 (incl. A$200 GST) for an annual plan. The client paid nothing. After reminders, calls and a final demand, the business decides on 20 June 2026 to write it off, and records that in a dated note.

It could also have claimed the GST a quarter earlier, once the debt passed 12 months overdue, without writing it off. If the business had waited until 2 July 2026 to record the write-off, the income tax deduction would fall into 2026–27 instead.

(If the plan's income was being deferred as unearned under the Arthur Murray principle, only the part already returned as income can be deducted. The rest was never taxed. See prepaid subscription income and tax.)

Failed subscription payments

Most failed recurring payments are involuntary churn: expired cards, insufficient funds, a bank blocking a charge. Many are recovered within days through retries and reminder emails.

For tax, think about them in three buckets:

1. Recovered within the billing cycle. No tax issue. It was just late.
2. Never recovered, service stopped. If you invoiced (accruals basis) and the customer never paid, you have a debt. Chase it and apply the bad debt rules if it goes bad.
3. Never recovered, but you kept providing service. Stop doing this. Every month you keep a non-paying customer active, you're adding to a debt you'll likely write off.

Your billing system matters here. Some platforms create an invoice before trying to charge the card, which is a sale on an accruals basis. Others only create an invoice once payment succeeds. Know which yours does, because it decides whether a failed payment ever hit your BAS. The tactics to recover them are in our guide to involuntary churn and failed payments.

Your year-end bad debt checklist

1. In May, run an aged receivables report.
2. For each old debt, record your recovery attempts and decide: keep chasing, or write off.
3. Write off bad debts in writing before 30 June for an income tax deduction this year.
4. Make GST decreasing adjustments for debts written off or 12+ months overdue.
5. Check your unpaid suppliers for GST increasing adjustments.
6. Keep the evidence for five years.
7. Fix the process that created the debts: payment upfront, card on file, automatic retries, a clear policy to pause service.

Free Subscription Profit Review

Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:

• whether a subscription model could work for your business
• how recurring revenue could cover your fixed costs each month
• how it could lift what your business is worth

Book my free review Call 1300 272 422

No cost, no obligation. General information only until we understand your situation.

Frequently asked questions

Written by BPAG Accountants

This guide was written by the tax team at BPAG Accountants, a Sydney accounting firm that helps Australian business owners with tax, structuring, cash flow and business advice. Reviewed by Robert Coorey, a Director at BPAG and author of The Subscription Playbook. Talk to BPAG on 1300 272 422 or at bpag.net.au.