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Tax Treatment of Trade Debts

Updated: Mar 1, 2023

The directors must take reasonable steps to ascertain what action has been taken in relation to the writing off of bad debts and the making of provisions for doubtful debts and to cause all known bad debts to be written off and adequate provision to be made for doubtful debts.

Deductibility of Impairment Loss on Trade Debts

Impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature.

Impairment Loss on Trade Debts under Financial Reporting Standard (FRS) 39

The accounting standard FRS 39 sets out the principles for recognising and measuring financial instruments.

For income tax purposes, impairment losses on trade debts that are revenue in nature will be allowed deduction. Similarly, any reversal of such losses will be taxed.

Opting for pre-FRS 39 Tax Treatment

However, for companies that opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts will be deductible for tax purposes.

General provision for doubtful debts is still not tax-deductible.

Claiming Tax Deduction

Companies claiming tax deduction do not need to submit any supporting documents with their Income Tax Return. They must, however, keep the following documents and submit these to IRAS upon request:

· Details of debts (name and amount owing by each debtor) which were not incurred in respect of the trade or business such as loans and advances;

· Details of debts which were taken over in the case of a transfer or merger of business;

· Details of debts in respect of a trade that had ceased, including any activity granted with pioneer incentive that had ceased; and

· Segregation of debts relating to the different tax rate categories.

The following additional information is required for trade debts owing by related parties, where the amount of impairment loss exceeds $250,000:

· Relationship between the company and the trade debtor;

· Whether normal credit policy and terms were extended to the related party. If not, please provide the reasons for the extended credit policy and terms;

· Whether steps were taken to recover and enforce the debts. If not, please provide the reasons for not enforcing the debts; and

· Reasons the related party was unable to repay the trade debt.

Bad Debt

A bad debt situation occurs when money owed cannot be collected. You can apply to the Comptroller of GST for bad debt relief for a refund of output tax previously accounted and paid by you.

On the other hand, if you as a customer do not pay your suppliers within 12 months from the payment due date, you will be required to reimburse the Comptroller for your previously claimed input tax (if any). See If I have applied for GST before paying my supplier for details.

Eligible for Bad Debt Relief

To qualify for bad debt relief, you must meet the following criteria:

  1. You supply goods or services for monetary consideration and have accounted for and paid GST on the supply;

  2. You have written off all or part of the supply consideration as bad debt in your accounts;

  3. The 12-month period from the date of supply has elapsed, or the debtor becomes insolvent before the 12-month period elapses;

  4. You have taken reasonable steps to recover the debt;

  5. The value of the supply is at or below its open market value; and

  6. For goods, ownership must have passed to your customer

Time Limit for Claiming Bad Debt Relief

Claims for bad debt relief must be made within 5 years of the date of your supply.

Repaying IRAS after Recovering Bad Debts

When you collect bad debts, that is, when you receive payment from customers after you claim bad debt relief, you are supposed to pay back the tax fraction amount to the Comptroller.

Dealing with debtors

The provision for bad debts is governed by IAS 39, Financial Instruments: Recognition and Measurement for International stream students or FRS 26, Financial Instruments: Measurement for UK stream students.

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