If a debt is truly irrecoverable, the next best option is to classify it as a “Bad Debt” and write it off from your tax obligations.
Under Section 34(2) of the Income Tax Act 1967, trade debts that are reasonably proven to be irrecoverable can be deducted from your gross income when calculating adjusted income for tax purposes.
To qualify, you must show that you took reasonable steps to recover the debt before writing it off.
Examples include cases where:
- The debtor has died and left no assets.
- The debtor is bankrupt or liquidated with no assets left.
- The claim is time-barred.
- The debtor cannot be traced.
- Recovery attempts failed and litigation costs outweigh potential recovery.
- Any other scenario where recovery is clearly not cost-effective.
In practice, most auditors will accept a legal Notice of Demand as sufficient proof. Some may ask for a written legal explanation to substantiate the write-off.
Bottom line: Even if you cannot recover the debt, you can still save 15–30% of the invoice value through tax relief.
Rudi Cheu (rudi@rulecolaw.com) is a content creator under the Newswav Creator programme, where you get to express yourself, be a citizen journalist, and at the same time monetize your content & reach millions of users on Newswav. Log in to creator.newswav.com and become a Newswav Creator now!
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