Some invoices go overdue and then get awkward. A week passes. Then a month. You send a reminder, leave a voicemail, and check the bank feed one more time hoping the payment has turned up.

Then it becomes the invoice you keep noticing every time you open Xero or MYOB.

For a lot of small business owners, that unpaid amount sits in the background longer than it should. It inflates accounts receivable, makes the balance sheet look healthier than reality, and muddies cash flow decisions. You might delay a supplier payment, hold off on hiring, or think a slow month is recoverable because the debtors figure still looks strong on paper.

Writing off bad debts isn’t admitting defeat. It’s recognising the numbers as they are, cleaning up the file properly, and handling the tax and GST side the way the ATO expects.

That One Unpaid Invoice You Can’t Stop Thinking About

There’s usually one debtor that sticks in your mind more than the rest. Maybe it was a good customer who suddenly went quiet. Maybe it was a larger invoice from a job that stretched your team, tied up materials, and left you carrying the cost. Maybe you’ve already spent more time chasing it than the invoice was worth.

That pressure isn’t unusual. In Australia, SMEs wrote off an estimated $5.2 billion in bad debts in the 2022 to 2023 financial year, and that was a 12% increase from the previous year, with construction and retail heavily affected. In those sectors, credit sales account for over 60% of bad debt incidents, according to Esker’s write-up on strategies to reduce bad debt write-offs.

For trade businesses, service firms, and growing online sellers, that rings true. You finish the work, send the invoice, report the sale, pay GST, and expect the cash to follow. When it doesn’t, the problem isn’t just emotional. It changes what your books are telling you.

Why leaving it there causes trouble

An old unpaid invoice can distort more than one report:

• Accounts receivable looks stronger than reality because money that probably won’t arrive is still sitting as an asset.
• Profit can look cleaner than cash flow feels because the sale was recorded, but the bank account never caught up.
• Decision-making gets harder when you’re relying on debtor balances that aren’t likely to convert to cash.

Practical rule: If an invoice is no longer realistically collectible, leaving it on the ledger doesn’t make your business safer. It just makes the reporting less honest.

A proper write-off brings the numbers back into line. It also creates a clear point where you stop treating that invoice like a future receipt and start treating it like a business loss that needs to be documented and handled correctly.

Writing it off is a cleanup task, not a moral judgement

Small business owners often delay writing off bad debts because it feels personal. That’s understandable. You delivered the work. You earned the money. You don’t want to reward poor customer behaviour by giving up too early.

But writing it off in your books isn’t the same as saying the customer did nothing wrong, and it isn’t always the same as ending collection efforts altogether. It means you’re no longer pretending the receivable is healthy.

That shift matters. Clear books support better BAS prep, cleaner year-end reporting, and less second-guessing about what cash is available. Done properly, writing off bad debts is part bookkeeping, part cash flow discipline, and part compliance.

When Is a Debt Actually a Bad Debt

You know the invoice. It has been sitting in aged receivables for months, the customer keeps saying they will sort it out, and every time you look at Xero or MYOB you wonder whether to keep chasing it or clear it out.

An overdue invoice is not automatically a bad debt. Late payment is common in small business. A bad debt is different. It is a debt you have good reason to believe will not be recovered, in full or at all.

For Australian tax purposes, that judgement needs to be based on facts you can point to later. The ATO is not looking for guesswork or frustration. It wants a reasonable conclusion supported by your records.

What counts as a bad debt in practice

The legal position in Australia is not complicated, but it is stricter than many generic accounting articles suggest. A debt is generally treated as bad when recovery is no longer likely after you have considered the circumstances and taken sensible steps to collect it.

That does not mean you need to sue every customer before writing off a balance. In many small business files, that would be commercially pointless. It does mean you should be able to show why you stopped expecting payment.

Good evidence often includes things like repeated unanswered reminders, failed phone calls, returned mail, a customer entering liquidation, or a payment arrangement that has clearly broken down.

The collection work to do before writing it off

In my experience, this is the part that separates a clean write-off from a messy one. If the file only shows an old invoice and no follow-up, the decision looks weak. If the file shows a clear chase process, the write-off is much easier to justify.

A practical sequence looks like this:

1. Send an early reminder a few days after the due date. Some late invoices are still admin delays.
2. Issue firmer overdue notices as the debt ages. Keep the dates and copies.
3. Call or email directly and note what was said, who you spoke to, and any promise to pay.
4. Offer a payment plan or partial settlement if there is still a realistic path to recovery.
5. Review the cost of further action. If legal or collection costs are likely to exceed what you might recover, that matters.

This is not about being aggressive. It is about being methodical.

Signs the debt has probably gone bad

You are usually on solid ground if one or more of these apply:

• The customer has gone into liquidation, administration, or bankruptcy
• You have made repeated recovery attempts with no meaningful response
• The customer has stopped trading or cannot be contacted
• A dispute has no substance and the customer has effectively disappeared
• You have accepted a partial settlement and do not expect to recover the balance
• Further recovery action would cost more than the likely return

One factor on its own may not be enough. A pattern usually is.

What does not hold up well

Writing off a debt because it is old is not enough. Writing it off because year-end is approaching is not enough either. I also would not rely on the common rule that anything over 90 days is bad. Age can be a warning sign, but it is not proof.

Here is the practical difference:

Weak approach	Better approach
“It’s been sitting there for ages”	Record the failed follow-ups and why recovery is now unlikely
“They said they’ll pay one day”	Set a follow-up date, document the promise, and reassess if it is missed
“I’ll clear it out at tax time”	Review aged receivables regularly and write it off when the facts support it
“I don’t want to upset the customer”	Keep communication professional and document each attempt

Keep the paperwork together. The strongest file usually includes the invoice, your trading terms, reminder emails, call notes, any settlement offer, and a short note explaining why the amount is no longer collectible.

That level of documentation matters in Australia because the accounting decision and the tax treatment need to line up. It also makes the software step easier later, especially when you need the write-off reflected properly in Xero or MYOB rather than buried in a vague adjustment.

Your ATO Obligations for Writing Off Bad Debts

One of the more frustrating year-end conversations goes like this. The invoice is clearly not getting paid, but nobody can tell me when the business determined that, whether it was written off in the file, or whether GST has been dealt with properly. That is where a valid write-off can turn into a messy tax position.

The ATO's position is straightforward in practical terms. To claim a deduction for a bad debt, the amount must have been included in assessable income earlier, and it must be written off in your accounts during the income year in which it becomes bad.

Both parts matter. If the sale was never brought to account as income, there is usually no deduction. If the debt was bad but sat in accounts receivable until a later year, the tax treatment can fall over on timing.

The two rules that matter most

A bad debt is only deductible under Australian tax law if it was previously included in your assessable income and is formally written off in your accounts in the same income year it becomes bad.

That sounds technical, but the working test is practical.

It must have been included in assessable income

Many small businesses report income on an accrual basis for tax and accounting, so the invoice has already been counted as revenue before the cash arrives. In that case, a deduction may be available later if the debt becomes unrecoverable.

If you are dealing with an amount that was never recognised as income, the position is different. Deposits held, loans to staff, or private amounts sitting in the ledger do not automatically qualify just because they are unpaid.

It must be written off in the books

The ATO expects more than a view that the customer probably will not pay. The receivable needs to be removed properly in your accounting records, with a clear date and a clear transaction trail.

In practice, that means a real write-off through Xero or MYOB, or a properly documented entry supported by the customer file. A vague year-end journal with no notes is where trouble starts.

What the ATO will expect to see

If your file is ever reviewed, the question is simple. Can you show why the debt was bad, when that conclusion was reached, and how it was recorded?

Keep these records together:

• The original invoice and customer details
• Evidence the sale was recognised as income
• Your follow-up history, including reminder emails, statements, and call notes
• Any settlement offers, insolvency notices, or recovery correspondence
• The accounting transaction showing the date the debt was written off
• Notes explaining who approved the write-off and why recovery was no longer likely

That last point helps more than business owners expect. A short internal note dated at the time of the decision often does more for the file than a long explanation reconstructed months later.

Common ATO problems I see in small business files

Late write-offs

A debtor is reviewed after 30 June, everyone agrees it was never going to be recovered, and the write-off is processed then. The commercial conclusion may be right, but the tax year can be wrong.

Weak support

Plenty of businesses know the debt is gone, but they cannot show the steps taken before that conclusion. No saved emails. No notes. No record of the bounced calls or failed payment plans. That makes an ATO review harder than it needs to be.

Software clean-up that does not match the tax story

This is common in cloud files. An old invoice is cleared with a credit note, a suspense account, or a loose journal, but the customer ledger no longer tells a clear story. The numbers may balance, but the write-off trail is poor. If you are still deciding which platform gives you better control over debtor workflows and audit history, this comparison of Xero and MYOB accounting software options is a useful reference.

Direct write-off and allowance method

For most small Australian businesses, the direct write-off method is the one that matters for tax. You identify a specific invoice as bad and write off that amount.

Some larger businesses also use an allowance for doubtful debts for reporting purposes. That approach estimates likely losses across the receivables ledger, rather than waiting for one invoice to fail completely. It can be useful for management reporting, but it does not replace the ATO requirement to write off a debt properly if you want a deduction for a specific bad debt.

The accounting method and the tax outcome are related, but they are not identical. Good files make both line up.

The Practical Steps for Writing Off Debts in Xero and MYOB

The bookkeeping principle is the same no matter which software you use. You need to remove the receivable cleanly and send the loss to the right expense account.

For a straightforward direct write-off, the accounting entry is:

• Debit Bad Debt Expense
• Credit Accounts Receivable

That’s the universal logic. In cloud software, though, it’s usually better to process the write-off through the customer file rather than post a loose journal and hope everything ties back.

Before you touch the invoice

Check four things first:

1. The debt is uncollectible, not just late.
2. Your follow-up trail is saved. Emails, notes, statements, and any settlement correspondence matter.
3. Your chart of accounts has a Bad Debts expense code.
4. You’ve considered GST, because the write-off can affect your BAS position.

If you’re still deciding which platform suits your business, this comparison of Xero and MYOB accounting software options is useful background before standardising your process.

Writing off a bad debt in Xero

Xero gives you a clean workflow if you process the write-off through a credit note against the unpaid sales invoice.

Step 1

Open the customer’s contact record and find the unpaid invoice. Confirm you’re looking at the correct document, amount, and invoice date.

Step 2

Create a credit note for the amount you’re writing off. Use your Bad Debts expense account on the line item rather than a sales code.

You’re not reversing a sale for commercial reasons; you’re recognising that the receivable won’t be collected.

Step 3

Apply the credit note to the specific unpaid invoice. Once allocated, the invoice balance should reduce or clear, depending on whether you’re writing off the full amount or only part of it.

Step 4

Save a note inside the file. Include the reason for the write-off and the date the debt was determined to be bad.

A good note is short but clear. Example: customer uncontactable after repeated reminders and direct calls, no payment plan agreed, amount approved for write-off on a given date.

Step 5

Attach the supporting documents if you use file storage inside Xero or Hubdoc. This keeps the audit trail close to the transaction.

The cleanest software files are the ones where another person can open the debtor, see the history, and understand exactly why the write-off happened without asking you to explain it.

Writing off a bad debt in MYOB

MYOB can achieve the same result, but the exact screens may vary a little depending on your version. The principle stays the same. You want the receivable cleared against the customer record and the amount sent to a bad debts account.

A simple MYOB flow

• Locate the original unpaid invoice in the customer sales list.
• Create a customer credit or adjustment for the amount being written off.
• Code the transaction to Bad Debts in the expense accounts.
• Apply the credit to the open invoice so the debtor balance is cleared correctly.
• Add notes and retain evidence in your document workflow.

Some bookkeepers prefer journals in MYOB for edge cases, but for trade debtors and ordinary customer invoices, customer-linked credits usually leave a tidier receivables history.

Full write-off versus partial write-off

Not every bad debt is all or nothing. Sometimes a customer pays part of the invoice after negotiation, or you agree to settle for less to close the matter.

In that case, only the unrecoverable portion should be written off.

Scenario	Treatment
Full amount won’t be recovered	Write off the entire outstanding invoice
Customer pays part and the rest is abandoned	Record the payment, then write off the balance only
Settlement agreed for a reduced amount	Match the receipt to the agreed amount and write off the shortfall
A dispute affects only one line item	Adjust only the unrecoverable portion, not the whole invoice

Later in the process, video can be useful for seeing the workflow in motion:

What works well and what creates mess

What works:

• Use customer-linked transactions, not random journals where possible.
• Name the expense account clearly as Bad Debts.
• Document the reason for the write-off inside the software file.
• Reconcile the debtor ledger after the entry so aged receivables reflect reality.

What doesn’t work well:

• Deleting the invoice. That destroys history.
• Recoding old sales casually. That can confuse reporting and GST.
• Leaving the amount half-cleared with unapplied credits.
• Waiting until year-end and bulk-adjusting debtor balances without notes.

A note on the allowance method in software

For businesses with larger receivables ledgers, the allowance method can give a more realistic period-end position. That means reviewing the aged receivables listing, assessing collectibility by ageing bucket, and adjusting the allowance account rather than reacting only when a specific invoice dies.

That approach can improve reporting accuracy because it matches likely bad debt expense to the same period as the related revenue. But it does require discipline, a consistent review process, and someone who understands how the allowance balance should move over time.

For many smaller operators in Xero or MYOB, a practical routine is enough. Review overdue debtors monthly, chase them properly, and process specific write-offs cleanly once the facts support that call.

Claiming Back GST on Bad Debts Through Your BAS

When you issued the original invoice, you probably reported the GST on that sale in your BAS even though the customer hadn’t paid you yet. If the debt later becomes bad and you write it off, there’s a GST consequence many owners miss. You may be able to reclaim the GST already remitted.

Under ATO Ruling GSTR 2000/6, when a debt is written off, you can make a decreasing adjustment on your BAS to recover GST previously paid. The same verified data says up to 40% of SMEs mishandle this, which means some businesses miss a legitimate cash flow benefit and others create compliance problems. The source for that rule is ATO Ruling GSTR 2000/6 on bad debts and adjustments.

When the GST adjustment becomes available

The timing matters. You don’t claim the decreasing adjustment just because the invoice is old or because collection looks doubtful.

You claim it once the debt has been written off in your accounts.

That’s one reason the software step matters so much. If the transaction hasn’t been processed properly in Xero or MYOB, the BAS treatment can end up unsupported.

What to keep on file

The GST side should be backed by the same discipline as the income tax side. Keep:

• The original tax invoice
• The customer ledger showing the outstanding balance
• The write-off entry or credit note
• Your recovery notes and communication history
• A record of the BAS period where the adjustment was made

The practical BAS mindset

This isn’t about hunting for obscure tax wins. It’s about correcting GST you paid on money you never received.

If you’ve already handed GST to the ATO on a sale that later proves uncollectible, the BAS should reflect that reality too.

If you need a refresher on how activity statements work more broadly, this plain-English guide to what an ATO activity statement is gives helpful context.

Common BAS mistakes around bad debts

The patterns are familiar:

• Claiming the GST adjustment before the write-off is processed
• Forgetting to claim it at all
• Using unclear transaction coding in software
• Not being able to show the debt was uncollectible
• Failing to reverse things later if the customer unexpectedly pays

That last one is important. A bad debt isn’t always the end of the story.

What to Do If a Written-Off Debt Is Unexpectedly Paid

A payment hits your bank feed from a customer you gave up on months ago. You already wrote off the invoice, adjusted the books, and may have claimed the GST adjustment in a previous BAS. Good news for cash flow, yes, but it also means you need to reverse part of what was done earlier.

The main rule is simple. Do not post the money to random income just to clear the bank rec.

If the debt was properly written off, the recovery should be tied back to that same customer account so your ledger shows the full story. That matters for year-end accounts, for BAS accuracy, and for anyone reviewing the file later, including your accountant or the ATO.

Record the recovery in the right order

The clean accounting treatment is a two-step process:

1. Reinstate the receivable
   Debit Accounts Receivable, Credit Bad Debt Expense

2. Record the payment
   Debit Cash, Credit Accounts Receivable

That approach keeps the customer ledger intact instead of hiding the recovery in a general income account.

In practice, Xero and MYOB do not always require a manual journal if there is a better transaction trail available through the customer file. The key point is the same either way. The original invoice, the write-off, and the recovery should all be visible against the debtor record.

How this usually works in Xero or MYOB

If you use Xero, start by checking how the write-off was done. Some files use a credit note, some use a journal, and some use a direct adjustment through the invoice history. Before you allocate the new payment, make sure the old debt can be traced clearly. If the invoice was fully removed from receivables, you may need to reinstate it or use a recovery entry that puts the payment back against the customer rather than treating it as fresh sales income.

In MYOB, the same principle applies. Use the customer card and sales history where possible so the recovery sits against the original debtor trail. If you bypass receivables and drop the amount straight into a bank deposit or income account, the audit trail gets messy fast.

That is usually where later BAS errors start.

GST and BAS need to be reversed too

If you claimed back GST when the debt was written off, a later payment means you need to return the GST on the amount recovered in the BAS period when the money comes in. The recovery changes the GST position because the sale is no longer fully uncollectible.

The income tax side also needs attention. A recovered bad debt is generally brought back in as assessable income, so do not treat it as free cash that sits outside the P&L.

A simple check helps here. Ask:

• Did we previously write this amount off in the accounts?
• Did we claim a GST adjustment on BAS?
• Has this recovery been linked back to the customer ledger?
• Will the current BAS reflect the recovered amount correctly?

A practical example

Say you wrote off a $2,200 invoice from last year, including $200 GST. At the time, you cleared it from receivables and adjusted your BAS. Six months later, the customer pays the full amount.

The bookkeeping job is not finished when you match the bank feed. You need to record the recovery against that customer, restore the tax treatment for the amount received, and make sure the BAS for this period includes the GST effect of the recovery.

This is one of those moments where tidy bookkeeping protects cash flow twice. You get the money in, and you avoid a cleanup job at BAS or year-end. If debtor problems are becoming a pattern rather than a one-off, it is worth tightening your cash flow management process so recoveries, write-offs, and follow-up happen on purpose rather than in a panic.

From Reactive Write-Offs to Proactive Cash Flow Management

Writing off bad debts is part of running a real business. It isn’t always a sign that your invoicing is poor or that your clients are all risky. Sometimes customers fail, projects unravel, and cash doesn’t arrive.

But a clean write-off process should also push you toward better habits upstream.

The practical shift that reduces future pain

Businesses usually get into trouble with bad debts when receivables are treated as an afterthought. The stronger approach is routine and a bit boring:

• Set clear payment terms before work starts
• Issue invoices promptly
• Review aged receivables every month
• Follow a consistent reminder process
• Escalate problem accounts early
• Keep notes inside Xero, MYOB, or your document system

These aren’t glamorous fixes. They work because they remove hesitation and make follow-up normal rather than emotional.

What proactive looks like in the books

Some owners only look at debtor balances when cash gets tight. By then, the old invoices have usually been sitting too long, the trail has gone cold, and decisions are reactive.

A better rhythm is to review your receivables before BAS, before month-end reporting, and before year-end. That way you can spot collection issues early, assess whether a debt is merely overdue or uncollectible, and keep GST and tax treatment aligned with what has occurred.

If improving debtor control is part of a wider push to steady the business, this guide to cash flow management for small business is a useful next step.

The real takeaway

Good bookkeeping doesn’t eliminate bad debts. It helps you identify them sooner, respond properly, and stop one unpaid invoice from distorting the rest of the business.

Writing off bad debts well means doing three things right:

1. Make a defensible call that the debt is unrecoverable
2. Process the write-off correctly in your software
3. Handle the tax and BAS consequences cleanly

That gives you better numbers, fewer surprises, and a clearer picture of what cash is available to run the business.

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If you want a second set of eyes on overdue debtors, BAS treatment, or whether your Xero or MYOB file is recording write-offs properly, Ideal Calculations can help with a bookkeeping health check and practical support that keeps your records clean and your cash flow decisions grounded in actual numbers.