GST core
Decreasing adjustment
A decreasing adjustment is a GST adjustment that reduces the GST a business must pay or increases the credits it can claim, commonly after a refund, discount or bad debt write-off.
A decreasing adjustment is the favourable direction of a GST adjustment. It either reduces the GST you owe on your sales or increases the input tax credits you can claim. It exists because GST is reported on the basis of what was originally charged, and when the original sale changes, the GST you reported can end up more than the economic outcome supports.
The classic example is a refund to a customer. You sold an item for $1,100 including GST, reporting $100 of GST. The customer returns it, and you refund the full price. You no longer have a taxable sale, so you reduce the GST you owe by $100 through a decreasing adjustment. The same logic applies if you give a partial refund, allow a discount after the invoice date, or cancel a service you have not performed.
Bad debts are another important source. If you reported GST on a sale and the customer never pays, you may be able to claim a decreasing adjustment once the debt is written off as bad, provided you have accounted for the GST and certain other conditions are met. For accounting on a cash basis, this does not arise in the same way because GST is only reported when you receive payment. The conditions can be technical, so consider professional advice for large debts.
Decreasing adjustments also arise on the purchase side. If a supplier charges you more than the original price because of a later price rise, the extra GST in that additional charge is something you can generally claim, so your credits increase. Likewise, if you start using an asset more for business than you first expected, a favourable adjustment may be available over the relevant period.
You usually need documents to support the claim. For sales, you should issue the customer an adjustment note or credit note recording the change. For purchases where the price rises, you should receive a note or revised invoice from the supplier. On the BAS the decreasing amount is reported through the standard labels in the period in which the adjustment is made, depending on your accounting method.
A common mistake is simply deleting the original sale from your accounting records, which hides the reporting trail. Another is claiming a decreasing adjustment without the paperwork to support it. Also, remember there are time limits, and in general you cannot claim adjustments many years after the event.
This information is general only. If you are not sure whether an adjustment is available to you, ask the ATO or a registered tax professional.
Worked example
A registered cafe sold a $2,200 GST-inclusive catering package and reported $200 GST. The client cancels and receives a full refund in the next quarter. The cafe issues an adjustment note for $2,200 and makes a decreasing adjustment of $200 on that quarter's BAS. That reduces the GST payable by $200, so the cafe does not pay GST on a sale it no longer keeps.
Practical tips
- Issue an adjustment note or credit note whenever you refund or discount after the original invoice.
- Do not delete the original invoice from your records. Add the adjustment so there is a clear trail.
- Check that bad debt claims meet the conditions before reporting a decreasing adjustment.