Quick answer
If a customer's invoice is genuinely uncollectable, write it off in your accounts and claim two things back. On the invoice or hybrid GST basis, claim 3/23 of the written-off amount as a credit adjustment in that period's GST return. For income tax, deduct the debt in the year you write it off. The write-off must be recorded before your balance date, usually 31 March, and can't be backdated.
Key points
- Two tests for both GST and income tax: the debt must be genuinely bad, and it must actually be written off in your records.
- GST: claim 3/23 of the amount written off as a credit adjustment, but only if you already paid GST on the sale (invoice or hybrid basis).
- Payments basis: no GST adjustment, because GST was never paid on money you never received.
- Income tax: the deduction falls in the year the write-off is recorded, so it must happen before balance date. It can't be backdated.
- If the customer pays later, you return the GST (3/23 of the recovery) and count the money as income.
Every business that sends invoices eventually meets the customer who doesn’t pay. The job is done, the materials are used, and the money isn’t coming. What many owners don’t realise is that on most GST setups they have already paid Inland Revenue 15% of an invoice they’ll never collect.
You can get some of that back, along with an income tax deduction. But there are two tests and one deadline, and the deadline catches people every year. October is a good time to sort it out: there’s still time to chase properly before 31 March, and to write off what can’t be saved.
Why does an unpaid invoice cost more than the invoice?
On the invoice basis (and on the hybrid basis, which treats sales the same way), you account for GST when you issue the invoice, not when you’re paid. A $23,000 invoice in May means $3,000 of GST in that period’s return, whether the customer pays or not. The sale also goes into your income for the year, so you’re taxed on profit you never banked.
That’s why a bad debt hurts twice. You’ve lost the money, and you’ve paid tax on it. Our page on payments, invoice and hybrid basis explains why the invoice basis exposes you to this. The write-off rules are how you fix it.
When is a debt “bad” enough to write off?
Inland Revenue’s public ruling on bad debts, BR Pub 18/07, sets the bar for both GST and income tax. Three things have to be true:
- The debt is bad. Not slow, not annoying. The test is whether a reasonably prudent business person would conclude there’s no reasonable likelihood of being paid.
- You’ve decided to write it off. That’s a real decision, made by whoever runs the books.
- It’s recorded. The bookkeeping entry exists in your accounts, dated when you made it.
Signs a debt has crossed the line include a customer in liquidation or bankruptcy, a business that has closed and can’t be traced, a Disputes Tribunal order that has been ignored with no assets to pursue, or a collection agency that has returned the file. A customer who’s 60 days late but still answering the phone usually hasn’t crossed it. Keep chasing using a fixed reminder timeline.
Two points from the ruling catch people out. Claiming the GST adjustment on your return doesn’t count as writing the debt off, because the entry has to be in your books. And there’s no rule that you must write a debt off in the year it went bad. The deduction simply follows the year you record it.
How much GST do you get back?
The credit adjustment is 3/23 of the amount written off. That fraction pulls the GST out of a 15% GST-inclusive figure. Inland Revenue’s guidance says to “include 3/23 of the amount you have written off in the credit adjustments box of your GST return.”
| Amount written off (incl GST) | GST credit adjustment (3/23) | Amount excl GST |
|---|---|---|
| $2,300 | $300 | $2,000 |
| $11,500 | $1,500 | $10,000 |
| $46,000 | $6,000 | $40,000 |
The adjustment goes in the return covering the period in which you wrote the debt off. You don’t send supporting documents, but Inland Revenue says you must “keep a record of the steps you took to recover the debt”. So keep the reminder emails, call notes and demand letter.
On the payments basis there’s nothing to claim. You never paid GST on money you didn’t receive, so Inland Revenue says you can’t claim a deduction. Hire purchase and door-to-door sales are the exceptions. Payments-basis businesses still get the income tax deduction, covered next.
What about income tax, and why does 31 March matter?
The sale was counted as income in the year you invoiced it. Writing it off gives you a deduction for the GST-exclusive amount, but only in the income year the write-off is recorded. The ruling is blunt that writing off a bad debt can’t be backdated.
For most businesses the income year ends on 31 March. If you go through your debtors list in April while your accountant prepares the accounts and decide a February invoice was hopeless, it’s too late for that year. The deduction moves to the next year, which pushes back the tax saving by twelve months.
| Step | When it counts |
|---|---|
| GST credit adjustment (invoice or hybrid basis) | The GST period in which the write-off is recorded |
| Income tax deduction | The income year in which the write-off is recorded, before balance date |
| Customer later pays some or all | GST debit adjustment of 3/23 of the recovery in that period; income in the year received |
The practical fix is a debtor review in early March, before balance date, rather than leaving it to whoever does the annual accounts. If you already do a monthly numbers check, the March one becomes the write-off meeting.
Can you write off part of a debt?
Yes. If you reasonably expect to recover some of it, you can only write off the part you don’t expect to see. That’s common when a liquidator indicates a small dividend to unsecured creditors, or a customer agrees to pay a reduced amount by instalments. You write off the shortfall now and keep the rest on the books.
If more money does turn up later, it’s not a problem, just paperwork. Inland Revenue requires a debit adjustment of 3/23 of the amount recovered in the GST return for that period. For income tax, the recovery is income in the year you receive it.
An illustrative example: an Invercargill engineering shop
This is a made-up example to show the arithmetic, not a real business.
An Invercargill engineering company files GST two-monthly on the invoice basis and has a 31 March balance date. In June 2026 it invoiced a farm contractor $11,500 including GST for repairs. The customer stopped responding in October, and in February 2027 the contractor’s company went into liquidation. The liquidator’s first report says unsecured creditors are unlikely to receive anything.
The owner writes the full $11,500 off in the accounts on 10 March 2027.
| Amount | |
|---|---|
| GST credit adjustment, March 2027 return (3/23 × $11,500) | $1,500 |
| Income tax deduction, 2026–27 year (GST-exclusive) | $10,000 |
| Tax saved at the 28% company rate | $2,800 |
| Total tax recovered | $4,300 |
| Real loss after tax | $7,200 |
Two things stand out. Writing off before 31 March brings the $2,800 into this year instead of next. And the $7,200 that remains is a sales problem: at a 12% net margin, the business needs $60,000 of extra GST-exclusive sales just to earn it back. That’s why tighter terms and deposits matter more than the write-off. Our pages on 20th-of-the-month terms and margin vs markup work through both.
If the liquidator later pays a dividend of $1,150, the company returns $150 of GST in that period and counts $1,000 as income. That’s the fair result.
What should you do between now and 31 March?
- October–November: list every invoice more than 60 days overdue. Chase them firmly before the summer close-down, when the trail goes cold.
- December–January: decide which accounts go to a collection agency or the Disputes Tribunal, and put every step in writing.
- Early March: hold the debtor review. Write off what’s genuinely gone, record the entry with a date, and note the reason.
- Your March GST return: include 3/23 of the write-offs (invoice or hybrid basis).
- After balance date: give your accountant the list so the income tax deduction lands in the right year.
Whatever you recover in GST, don’t spend it before the next bill. The GST & provisional tax set-aside planner shows what to keep aside each week. If a large unpaid invoice has left a hole in this month’s cash, you can see what funding you could qualify for in about a minute.
When a customer’s unpaid bill becomes your cash problem
The tax rules soften a bad debt, but they don’t refill the bank account. You get roughly a third back, months later, while wages, suppliers and Inland Revenue still want paying on time. A business that has just lost a big invoice often needs a bridge, not a lecture about credit control. That’s especially true going into the summer close-down, when a cash reserve is already being stretched.
That’s the gap we work in. We help New Zealand owners cover the distance between what’s been lost and what’s coming in. That includes unsecured options for trading businesses, typically $5,000 to $500,000 and sized on turnover and bank statements, and property-secured lending from $20,000 to $5,000,000. Bad credit and IRD debt are looked at case by case, and lending is for business purposes only.
The enquiry takes about 60 seconds, and there’s no credit check when you first enquire. We don’t send your details to a pile of lenders, so you won’t get a week of calls from strangers. One team keeps your enquiry. A real person reads your situation, including the customer who didn’t pay, and rings you to talk it through. Please fill the form in accurately, with turnover, the size of the gap and when it bites, so we can match the right option first time.
Frequently asked questions
How much GST can I claim back on a bad debt in New Zealand?
3/23 of the amount you write off, which is the GST portion of a 15% GST-inclusive price. Write off $11,500 and the credit adjustment is $1,500. It goes in the credit adjustments box of the GST return for the period you wrote the debt off.
Can I claim GST back on a bad debt if I'm on the payments basis?
No. On the payments basis you only pay GST when the customer pays you, so an invoice that's never paid never had GST paid on it. Inland Revenue says you can't claim a deduction in that case. Hire purchase and door-to-door sales are exceptions.
Can I write off a bad debt after 31 March and still claim it for that year?
No. For income tax the debt must be written off in your records before the end of the income year you claim it in, and Inland Revenue's ruling says a write-off can't be backdated. Miss the date and the deduction moves to the next year.
Does writing off a debt mean I have to stop chasing the customer?
No. Writing off is a tax and accounting step based on whether you reasonably expect to be paid. If money arrives later, you make a GST debit adjustment of 3/23 of what you recover and include it as income in the year you receive it.
Can I write off only part of a debt?
Yes, if you reasonably expect to recover some of it. You can only write off the part you have no reasonable expectation of collecting, for example the balance left after a liquidator signals a partial payment.
What records do I need for a bad debt write-off?
Inland Revenue doesn't need documents with your GST return, but you must keep a record of the steps you took to recover the debt. Keep reminders, call notes, demand letters and any liquidator or Disputes Tribunal correspondence, plus the dated accounting entry showing the write-off.