Expenses Incurred to Keep the Business Running

I am a sole trader and have been audited for claiming high expenses. I am registered on an accruals basis. I did a job for a restaurant in the 2015 financial year in which I invoiced but did not receive payment (I was required to report it as I invoiced his client). I still have not been paid to date. The restaurant owner was about to claim bankruptcy as they had too much debt until we both came to an agreement that I would fund the restaurant in the hope that it would succeed, then sell it for a profit in the future and hopefully recoup my money The ATO states that I need to pay GST and penalties on that. 

I would like to know whether it is possible for me to claim the expenses I incurred to keep the restaurant operating against the income the ATO is chasing me for. 

 

In the first instance, as this is a debt that the debtor is not able to repay, the taxpayer is entitled to a deduction for the bad debt (ITAA 1997 s 25-35; see also Taxation Ruling TR 92/18). If the ATO insists that the income from the restaurant is taxable (which is a reasonable position), then relief for the underlying bad debt must be given. The restaurant income can then be considered in its own right. Under s 8-1, a taxpayer is entitled to deduct expense incurred in earning assessable income, so all expenses associated with generating the restaurant income will be deductible.