Invoices and records
Credit note
A credit note is a document a seller issues to reduce or cancel an earlier invoice, such as for returned goods or a discount, and it can serve as an adjustment note.
A credit note is a document issued by a seller to a buyer which reduces the amount owing on an earlier invoice. It is used when goods are returned, an error is found on an invoice, a discount is agreed after the sale, or a service is cancelled. The credit note either reduces the amount the buyer must pay or confirms a refund if the buyer has already paid.
For GST, the main significance of a credit note is that it can work as an adjustment note. When a sale changes after a tax invoice has been issued, the law requires the seller and buyer to adjust their GST reporting, and the supporting document is the adjustment note. A credit note that contains the right information, including that it records the change, the amount of the change and the GST, can be used for that purpose. So businesses often use credit notes as the standard way to record post-sale changes.
A credit note should have a number, the date, the seller's name and ABN, the buyer's identity, a reference to the original invoice, a short reason for the credit, the amount credited excluding GST, the GST amount and the total. Linking it to the original invoice by number makes the audit trail clear. Accounting software normally has a credit note template that generates these details.
Both parties report the effect of the credit note on their BAS. The seller makes a decreasing adjustment for the GST on the credited amount, which reduces the GST payable. The buyer makes an increasing adjustment, reducing the credits claimed. If the buyer is not registered, there is no adjustment on their side. The timing depends on when the credit note is issued, and both should keep it with the original invoice.
A credit note does not have to be issued in cash. It can be applied against a future invoice, in which case the buyer simply pays less next time. The GST adjustment is still made when the credit note is issued, even if the money is not refunded straight away. A refund then simply follows the credit note.
Common mistakes include changing the original invoice instead of issuing a credit note, issuing a credit note without GST details, and not telling the buyer. A credit note that does not show GST may not work as an adjustment note. If a credit note is issued in error, it can be cancelled by a further invoice, but the records should show the history.
This is general information. For complex adjustments, check the position with the ATO or a registered tax professional.
Worked example
A registered hardware supplier sells $2,200 of materials including $200 GST. The buyer returns $440 of the goods, which includes $40 of GST, calculated as $440 divided by 11. The supplier issues a credit note for $440 referencing the original invoice, and makes a decreasing adjustment of $40. The registered buyer makes an increasing adjustment of $40 and reduces its payment next month by $440.
Practical tips
- Always reference the original invoice number on a credit note and show the GST amount separately.
- Use a credit note, not an edited invoice, when a sale changes after it has been issued.
- Tell the buyer promptly, since they usually need to adjust their own credits.