Heritage Wines Ltd is a large winery. They are concerned about two of their accounts. Last year they sold two shipments of wine, the first to a young wine importer, Lye Swindler. The board has heard that Lye has been on a spending spree and spent $535,000 on a new Ferrari and lost $247,000 on gambling. They are doubtful that he will pay his bill. The second shipment was sold to a large well established wine exporting company. It has been reported in the financial press that they have entered voluntary administration. Both of these accounts are now due for payment, the board of Heritage Wine Ltd decided that it will write off both these debts. Which of the following statements are correct?

Select one:

a. No deduction is available as it has not yet been entered into company's book of accounts.

b. No deduction is available as no legal or equitable right to payment exists, because the debt has been waived.

c. A deduction will be allowed under Section 25-35 ITAA97 for the account with the large wine exporter as the debt is an existing debt, was previously included in the taxpayer’s income, was written off in the year in which the deduction is claimed and the Board has made a bona fide commercial decision that the debt is unlikely to be paid. However, not for the shipment to the young wine import as this debt is merely doubtful.

d. A deduction will be allowed under Section 25-35 ITAA97 for both these debts as the debts are existing debts, have been previously included in the taxpayer’s income, were written off in the year in which the deductions are claimed and the Board has made a bona fide commercial decision that the debts are unlikely to be paid.

Answer rating: 100% (QA)

Let us understand what the Income Tax Assessment Act 1997 Section 2535 Bad debts provision is all about Sec 25351You can deduct a debt or part of a de... View the full answer