Income you can’t recover, or money you’re owed that’s unlikely to be paid back — otherwise known as a bad debt — can sometimes be claimed as a deduction, depending on the accounting method you use.
The nitty gritty is covered by section 25-35 of the Income Tax Assessment Act 1997 and Taxation Ruling TR 92/18, which formally sets out the circumstances and conditions in which a deduction for bad debts will be allowable.
Put simply, the debt must be for an amount that’s been recorded as assessable income on a non-cash (accruals) basis, where revenue is recorded when it is actually earned, rather than when cash is received.
If you record your income on a cash basis, it’s going to be impossible to claim a deduction for a bad debt, as the amount would never have been recorded as income in the first place.
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