Provision for Doubtful Debts
8.69. Another difference between tax and financial treatment frequently arises in the case of provision for doubtful debts. Business prudence normally demands that adequate provision be made for doubtful debts in determining the results of any period. In addition Australian company legislation requires directors to take reasonable steps to ensure that adequate provision is made for losses which may arise in the recovery of debts owing at the end of a financial period. However, income tax law permits a deduction only for bad debts written off. The amount of provision necessary to provide for doubtful debts is a matter of judgment, experience with bad debt differing from one industry to another and from year to year.
8.70. It would be possible for the law to prescribe limits, varying from industry to industry, as to the amount of a provision which might be deducted. But inconsistencies could hardly be avoided, and there would inevitably be arguments as to what proportion of the outstanding debts of a company operating in several fields related to each industry classification. For these reasons the Committee does not recommend that a provision for doubtful debts be allowed as a deduction.