ADJUSTMENTS FOR BAD DEBTS - CHANGED PROVISIONS
18 May 2005
The Commissioner has released an addendum setting out some important changes to GSTR 2002/2. GSTR 2002/2 provides the ATO's interpretation of the law as it relates to the periods in which adjustments for bad debts are to be made. We set out here only those changes pertaining to the 12-month waiting period referred to in the ruling. TaxEd members will be provided with the full addendum on request.
The principal (but, not only) change relates to the identification of one of the tax periods in which bad debt adjustments can be made. Essentially, the tax period to be identified now is that in which the entity making the adjustment 'BECOMES AWARE that a debt has been oustanding for a twelve month period".
Before this addendum, the tax period that had to be identified was the tax period in which "the debt had been oustanding for a twelve month period".
This is a subtle change, but can have drastic consequences on cash flow and other matters.
These are some of the new paragraphs set out in the addendum:
" . Paragraph 16
In the second sentence delete 'when the debt has been overdue for 12 months.' and substitute with 'in which you become aware that the debt has been overdue for 12 months or more.' The paragraph now reads:
16. You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have a decreasing adjustment in the tax period in which the debt is written off, or, if the debt has not been written off, in the tax period in which you become aware that the debt has been overdue for 12 months or more.
3. Paragraph 22
Delete the third sentence and after 'written off' in the second sentence, add 'or if the debt has not been written off at the time when the debt has been overdue for 12 months or more, in the tax period in which you become aware that the debt has been overdue for 12 months or more'. The paragraph now reads:
22. You attribute an adjustment to the tax period in which you become aware of it. Accordingly, you have an increasing adjustment in the tax period in which you become aware that the debt is written off, or if the debt has not been written off at the time when the debt has been overdue for 12 months or more, in the tax period in which you become aware that the debt has been overdue for 12 months or more.
4. Paragraph 48
In the first sentence the word 'tax' is added before 'period' to clarify that the reference is to a tax period as required by section 29-20 of the GST Act. In the third sentence delete 'the debt becomes 12 months overdue' and substitute 'you become aware that the debt has been overdue for 12 months or more.' The paragraph now reads:
48. You attribute an adjustment to the tax period in which you become aware of it. Therefore, you attribute the decreasing adjustment to the tax period in which you write off the debt. If the debt has been overdue for 12 months or more, you attribute the decreasing adjustment to the tax period in which you become aware that the debt had become overdue for 12 months or more."