When do I need to write off debts

[brownbag]

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I purchased a consignment based business in January with some amounts owing to former clients of the business (these are people who had sold items through the shop). The idea was that we were expected to pay any of these amounts if the customer came in to collect. Some have been paid and now it’s EOFY time so time to work out if these debts should be written off and if so, when this should be done.

If I write them off, I presume that this will cause an increase in profits in any profit/loss statement so will affect my tax situation in that financial year.

If so, do I need to write them off, or can they be left as debts for a period of time (given that technically I still owe that money). Is there a period of time by which I am legally required to write them off?

[Precise Tax Solutions]

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Were there written/verbal contracts between the former business owners and the former clients?

[brownbag]

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yes there was. The contract of sale says that the purchaser does not assume any debt, liability or obligation of the Vendor, whether known or unknown, fixed or contingent. As the vendor paid us the amount she owed to her customers, we’ve been paying it to those who requested, but we have no obligation to do so, so at a certain time it could be written off.
Of course, my question is related to the fact that for tax reasons we may want to put off writing it off and if so, do we have a right to do this, or do we need to declare it, since we have no obligation to pay this debt?

[Dave Gillen – Former FS Concierge]

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Hi [USER=112769]@brownbag[/USER],

In the last post you’ve said (twice) that you have no obligation to pay the debts. I found that part confusing, can you clarify?

Dave

Dave Gillen | LinkedIn

[bb1]

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Dave – FS Concierge, post: 266157, member: 49676 wrote:

Hi [USER=112769]@brownbag[/USER],

In the last post you’ve said (twice) that you have no obligation to pay the debts. I found that part confusing, can you clarify?

Dave

I’m glad you said it dave, I read it the other day, and thought to myself how can you write off something that you have no responsibility for.

[brownbag]

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It’s a consignment business and the former owner owed some clients (who sold goods through the shop) money for items she’d sold for them. She gave us that money so that we could pay them if asked, so we put it into the system as ‘sundry creditors’ (money held on behalf of someone). Which is a debt, as far as I know (but I’m no accountant)
Technically, based on what I read in the the contract of sale yesterday, we don’t need to pay this. But I had already set these up as debts. But the fact is that we may never be able to get in contact with these people to pay them and they will probably never get in contact with us. So we’ll never have to pay most of it, if any.

So it’s a debt that we aren’t obliged to pay and will probably not even be asked to pay.
Therefore the mention of ‘writing’ it off.

Hope that makes more sense.

[Dave Gillen – Former FS Concierge]

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That does help to clarify.

I was confused because your actions say one thing, and your contract says another. If she’s given you the money, then she’s transferred the liability to you (you are holding the money owed). Yet you’ve come up with a contract that says you aren’t liable for those debts.

It just means if you “write off” the debts (i.e. keep the money), then someone comes and asks for it, both you and the previous owner will claim not to be liable. You will point to the contract. She will point to you having the money.

If technically she’s still liable (based on contract), then she likely should have kept the money to cover the debts.

Hope that makes sense. If your have a very clear understanding of your liability, you’ll avoid trouble later. People generally have a long time to claim money owed to them (6 years I think).
Dave

Dave Gillen | LinkedIn

[brownbag]

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Hi Dave. I’m not really concerned about whether we have to pay off the debts – the question is when to write them off according to our books. Maybe I’ll just ask my accountant. Cheers.

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