The income bit is quite settled. It is any money coming in and to the extent it is interest, they withhold RWT.
The question is whether bad debts are deductible and the answer is murky and probably depends on the individual investors personal situation so not something Harmoney can answer (and neither can the IRD unless they put your account into dispute - you cant even get a binding ruling as the more I think about it, the answer is a question of fact, not law).
Re their 'annual net income', I think this is misleading as most think of net interest as after tax but they only mean net of defaults. It is not a tax effected number.