IRRECOVERABLE & DEBT RECOVERIES (PART 1)

Trade debt is a debt that arises from the sales of goods or services and has been included in the gross income of the business. Subsection 34(2) of the ITA allows a trade debt which is reasonably estimated to be irrecoverable either wholly or partly, to be deducted from gross income in computing the adjusted income of the business.

​Reasonable consideration should be taken before writing off a trade debt.
 

Steps taken to recover the debt:

• Issuing reminder notice
  
• Debt restructuring scheme
  
• Rescheduling of debt settlement
  
• Negotiation or arbitration of a disputed debt
  
• Legal action (filing of civil suit, obtaining of judgement from the court and execution of the judgement)

The evidence showing the following must also be made available in the event of a tax audit to qualify for a deduction for tax purposes:

• Each debt has been evaluated separately
• When and by whom this was done
• The specific information used in arriving at the evaluation

Circumstances when a debt can be considered as irrecoverable:

• The debtor has died without leaving any assets from which the debt can be recovered
• The debtor is a bankrupt or under liquidation and there are no assets from which the debt can be recovered
• The debt is statute-barred
• The debtor cannot be traced despite various attempts and there are no known assets from which the debt can be recovered
• Attempts at negotiation or arbitration of a disputed debt have failed and the anticipated cost of litigation is prohibitive
• Any other circumstances where there is no likelihood of cost-effective recovery

​If you need further clarification, please do not hesitate to contact our tax team.

Source: lampiran1.hasil.gov.my/pdf/pdfam/PR_04_2019.pdf
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