Circumstances where Irrecoverable Debts are Not Allowed as Deductions
Forgiving or waiving payment of debt – A decision to forgive or to waive payment of a trade debt (either wholly or in part) should not be regarded as a valid business or commercial consideration for tax purposes. The amount written off for the above reasons shall not be allowed as a deduction against the gross income since the decision to write off such debt is not based on the possibility of recovery of the debt.
Non-trade debts – Non-trade debts that are written off as bad, or provisions made in respect of non-trade debts that are doubtful, either specific or general, are not deductible in the computation of adjusted income. Similarly, recoveries relating to nontrade debts written off earlier are not taxable. Suitable adjustments should be made in the tax computation if such amounts are included in the Income Statement.
Debt due from related or connected person – A stringent examination should be made before making a decision to write off (or to extinguish by any other means) a trade debt arising from a related or connected person as bad debts that can be considered for deduction for tax purposes. Similarly, when making a specific provision for a trade debt due from a related or connected person, a stringent examination has to be conducted.
There should also be evidence to prove that the decision made to write off a trade debt is made at an arm's length basis and for valid business or commercial reasons. Strong evidence must show that the decision is not made based on private, personal or other non-commercial reasons.
Settlement of Trade Debt with Assets
A debt may be settled by the foreclosure of an asset held as security for the debt or by an asset (such as a property or shares in a company) given in exchange for the debt. In such a case, the net proceeds from the sale of the asset or the market value of the asset given in exchange is the value to be taken as settlement for the debt.
If you need further clarification, please do not hesitate to contact our tax team.
Welcome to Letter Box! A tiny space with lots of big ideas to share with everyone!
The Mail Room