Advivo Partner, Dale Edwards shares insights into whether it’s worth the effort of chasing overdue invoices before the EOFY.
This question and variations around the timing of invoicing are ones that we get asked often.
Commercially, our answer is always that you’d rather get paid sooner than later (or not at all), so yes, chase, chase, chase!
However, speaking with our tax hats on, the answer often depends on the exact circumstances of the business owner asking the question. Why is that?
Income Tax – Cash or Accrual
Most businesses account for their income on an accrual basis, that is when the invoice is issued to your customer or client. For these businesses, collecting an overdue invoice is beneficial because the income is already reported but not received, so you will want to be paid because otherwise, you will be paying tax on money that hasn’t hit your bank account yet. Ouch!
Some very small businesses, however, are allowed to and choose to report their income on a cash basis. For these, overdue invoices will only be income when the money is received, so there can be circumstances where pursuit is briefly deferred close to 30 June. This pushes back the time that this income is included in a tax return for another 12 months.
GST – Cash or Accrual
Similarly to income tax, GST can be reported on either basis. The GST laws make it much easier to choose to report and pay GST on a cash basis, with a $10m turnover threshold before a business must report on an accrual basis.
Those on an accrual basis will pay GST on their outstanding invoices when they lodge their BAS for the period when the invoice was raised. Those on a cash basis will pay the GST when they lodge their BAS for the period that they get paid for the invoice.
This difference would clearly incentivise the business on an accrual basis to more actively pursue their unpaid invoices sooner and more rigorously, as they have to pay the GST on an invoice that they have not been paid for. This creates much bigger cashflow management challenges for those businesses on an accrual GST basis.
Bad Debts
If the overdue invoice has been outstanding for a long time, one option is to write the invoice off as a bad debt. Provided you report income on an accrual basis, this would allow you to claim a deduction for the net GST amount outstanding, and an adjustment on the BAS for the period that the bad debt is declared for the GST component.
To claim the amount as a bad debt you should have decided that the amount is not recoverable and cease any further recovery action. There is no specific form required to record this, you merely need to have a written record evidencing your decision to write off the debt.
If a debt that you have written off ends up being paid at a later date, you will need to input that amount as income (again) as the bad debt write-off canceled out the previous income.
Writing off bad debts can reduce your business’s taxable income and resultant tax bill for a year, so it is a good time of year to consider if there are any bad debts being carried in the lead up to 30 June when doing your tax planning for the year.
