Note: this article is general guidance only and is not tax advice. Always check your specific case with an accountant or tax adviser.
Selling a debt for less than its face value has tax consequences — generally reasonable and often favourable for the seller. These are the key points in Australia.
Companies and sole traders: the loss is generally deductible
If you sell a AU$10,000 invoice for AU$6,000, you crystallise a AU$4,000 loss. For trade debts, that loss is generally deductible for company tax or income tax purposes, since it arises from a real, arm's-length disposal of the receivable.
A sale to an independent third party objectively documents the impairment of the receivable — often more robust before the ATO than internal bad-debt provisions.
What about the GST on the unpaid invoice?
Careful with this point: the GST rules let you make a decreasing adjustment to recover GST on a debt written off as bad or unpaid for 12 months or more — but one of its conditions is that the debt has not been assigned. If you plan to recover the GST, consider timing: the relief should be assessed before selling the receivable. Once the debt is sold, in general you can no longer claim bad debt adjustment on it (and if you already claimed it, selling the debt may require an adjustment).
GST on the assignment itself
The transfer of debts is a financial transaction input-taxed / not subject to GST. The buyer does not pay GST on acquiring the receivable.
Individuals
For an individual selling a private receivable, the difference between the sale price and the amount lent is generally a capital loss; simple loans to friends or family have specific rules (irrecoverable loans may qualify for relief under certain conditions). Keep the loan agreement and the assignment as evidence.
For the buyer
The buyer is taxed when they collect more than they paid: that difference is income or gain. Until they collect, there is no taxable profit.
Practical summary
Selling an uncollectable debt not only brings in cash: it lets you crystallise the loss for tax purposes and close the file. Coordinate the transaction with your adviser to optimise GST relief and deductibility for your situation.
