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Under Section 34(2) of the Income Tax Act 1967, lays down the conditions for deduction for bad debts. Specific provision for bad debts would be given a deduction if:

  • Specific debtors are identified
  • Debts are partly / wholly irrecoverable
  • Such debts had been reasonable estimated to be bad

As per Public ruling 1/2002 issued on 2 April 2002, deals with the following:

  • specific provision for bad debts
  • general provision for bad debts
  • bad debts written off

Taxpayer are require to adhere to the following before a specific provision for bad debts is granted a tax deduction:

  • an evaluation of each debt separately. This required the evaluation of the period of which the debt has been outstanding, the current status and the credit record of the debtor
  • the extensiveness of doubtfulness was evaluated. the debtor’s history of bad debts, experience for the industry involved, and the age-analysis of the debts must also be considered
  • the person who evaluated the debt and date of such evaluation
  • any specific information used in arriving at that evaluation

Tax authorities expressly state that general provision of bad debts which is based on a percentage of sales or outstanding debts is not allowable for tax purposes even though the taxpayer is require by law or acounting convention to do so.

Bad detbs written off require one or more of the following actions before it can be allowed as a deduction:

  • issuing reminder notices
  • debt restructuring scheme
  • reschduling of debt settlement
  • negotiation or arbitration of a disputed debt
  • legal action

A trading debt can be bad if any one of the following occurs:

  • the debtor had died without leaving any assets from which debt can be recovered
  • the debtor is a bankrupt or in liquidation and there are no known assets from which the debt can recovered
  • the debt is stature-barred
  • the debtor cannot be traced despite various attemps and there are no known assets from which the debt can recovered
  • attempt at negotiation or arbitration of a disputed debt failed and the anticipated cost of litigation is prohibitive
  • and other circumstances where there is not likelihood of cost effective recovery


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