Q: My client, a sole trader, got audited for claiming high expenses. He works on an accrual basis and did a job for a restaurant in 2015 but never got paid. He still hasn't been paid. The restaurant was struggling financially, so my client agreed to invest in it, hoping to make a profit when it sells in the future. Now the tax office says he has to pay GST and penalties on that unpaid income. Can he claim the expenses he spent to keep the restaurant running against the income the tax office is chasing him for?
A: Firstly, since the restaurant can't repay the debt, my client can claim a deduction for the bad debt. If the tax office insists the restaurant income is taxable (which makes sense), my client still gets relief for the bad debt. Then, the income from the restaurant is considered separately. Any expenses related to earning that income can be deducted under tax law.
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