Bad Debt Expense in Australia 2025: Definition, Impact & Strategies

Bad debt expense isn’t just an accountant’s headache—it’s a financial reality that affects businesses, individuals, and the broader Australian economy. As we enter 2025 with new financial pressures and regulatory updates, understanding bad debt expense has never been more crucial.

What Is Bad Debt Expense and Why Does It Matter?

At its core, bad debt expense is the portion of receivables or loans that are deemed uncollectible and written off as a loss. For a business, it’s the sales made on credit that never get paid. For individuals, it might mean personal loans to friends that go unpaid. In 2025, with cost-of-living pressures and tighter lending rules, bad debts are on the rise.

• For businesses: It directly reduces profits and can distort cash flow projections.
• For individuals: It may mean never seeing repayment on money lent, impacting personal budgets.
• For the economy: Rising bad debts can signal economic stress and tighten lending across the board.

According to the latest ASIC insolvency statistics, business-related bad debts in Australia increased by 12% in FY24, with small businesses in construction, hospitality, and retail being hit hardest. This uptick has prompted many companies to revisit their credit policies and collection processes.

Bad Debt Expense and 2025 Policy Updates

This year, the Australian Taxation Office (ATO) implemented new guidelines for claiming bad debt deductions. Now, businesses must provide clearer evidence that a debt is truly unrecoverable before writing it off for tax purposes. Documentation like correspondence, legal notices, and evidence of collection attempts are required. The ATO’s focus is sharper on ensuring bad debt deductions are genuine and not used to artificially reduce taxable income.

Additionally, the Banking Code of Practice has tightened consumer protections. Lenders must demonstrate more rigorous affordability checks, making it harder for risky borrowers to obtain credit. For businesses, this means fewer new customers with weak credit profiles—but also less opportunity for growth in some sectors.

• ATO requirement: Must prove the debt is irrecoverable before claiming as an expense.
• Banking regulation: Stricter lending standards may reduce the pool of potential bad debts, but also slow sales growth.

Managing and Minimising Bad Debt Expense

Whether you’re a business owner or simply lending money to friends, managing bad debt is about prevention and smart response. Here’s how Australians are tackling bad debt in 2025:

1. Tighten credit assessments: Use credit checks and request upfront deposits, especially in sectors with higher default rates.
2. Use digital invoicing and payment reminders: Automated systems like Xero or MYOB help chase overdue accounts before they become irrecoverable.
3. Review credit terms: Shorten payment windows or introduce late fees to encourage prompt payment.
4. Act quickly on overdue debts: The longer a debt remains unpaid, the less likely it will be collected. Early intervention with payment plans or debt collection services is key.
5. Document everything: From signed contracts to email reminders, keep thorough records to support any future tax deduction claims or legal action.

Consider the case of an Australian landscaping business that, after a tough 2023, overhauled its credit policy. By requiring 50% deposits on new jobs and using automated payment reminders, they cut their bad debt expense by 40% in 2024—even as overall sales grew.

Bad Debt Expense: Looking Ahead

With the Reserve Bank holding interest rates steady but inflationary pressures lingering, both businesses and consumers will need to stay alert to the risk of bad debts in 2025. The key is vigilance: know your customers, track your receivables, and be ready to act decisively if payments slow.

While bad debt expense is an inevitable part of doing business or lending money, smart management can keep it from undermining your financial health. As regulations evolve and economic conditions shift, staying informed and proactive is your best defence.