Authored by Dylan Chong. You may email him at


ABC Sdn Bhd sells a product (raw material) to XYZ Sdn Bhd. A trade debt exists between both companies. When XYZ Sdn Bhd cannot make payment on the raw material supplied, a trade debt arises. The trade debts becomes bad debt.

ABC Sdn Bhd will have to record in its accounting book for the sale of the raw material as its revenue to XYZ Sdn Bhd. If ABC Sdn Bhd did not claim for bad debt, then ABC Sdn Bhd has to pay tax for the unclaimed debt to the tax authority (Lembaga Hasil Dalam Negeri or Jabatan Kastam).

How does trade debt arises?

Trade debt arises when ABC Sdn Bhd had issued an official invoice to the buyer and is not able to collect payment. The official invoice shows that ABC Sdn Bhd had generated such income regardless of whether or not ABC Sdn Bhd has collected the said sum. 

How can ABC Sdn Bhd claim for its bad debt?

The test to be applied is the “irrecoverable test”. A reasonable steps based on sound commercial considerations should be taken to recover the debt. Among the steps to be taken by ABC Sdn Bhd are to:

  • issue letter of demands via own company’s letterhead and law firm;
  • filling legal action (filling civil suit, obtaining judgment and execution of the judgment)

A legal action shows a sound commercial decision of a business owner to resort to its last mean in recovering for unpaid debt for its services rendered or product sold. Legal action may put the debtor in bankruptcy or company being wound up. It has serious legal repercussion to the individual or company.

Some of the legal proceedings that a creditor may consider to execute their judgment upon obtaining court’s order are:

  • bankruptcy proceeding;
  • judgment debtor summons;
  • winding up proceeding; and
  • mareva injunction

Legal fees incurred for the claim for bad debt is tax deductible as it is incurred in the production of gross income for that particular year of assessment.

Authored by Dylan Chong, Partner from JR Ng & Chin who specialises in tax appeal (Income Tax, Real Property Gains Tax, Service and Sales Tax, Custom Duties) and tax planning for companies’ directors and individuals. You may contact him at

The contents of this publication are given as general information for reference purposes only and do not constitute the firm’s legal advice. For any specific matter or legal issue, please do not rely on this publication but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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