An Australian Credit Note is a commercial and tax document issued by a supplier to a customer that records a reduction in the amount the customer owes — or a refund due — following the return of goods, the discovery of defective goods, a billing error, an agreed discount, or a cancellation. In Australian tax law, a credit note that reduces the GST on a previously issued tax invoice must also constitute, or be accompanied by, a valid adjustment note under Division 29 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).

The Credit Note serves two functions simultaneously. First, it is a commercial record that documents the commercial terms of the credit: what is being credited, why, and how the credit will be settled (as an offset against future invoices, a cash refund, or a credit on the customer's account). Second, it is a tax document that triggers an 'adjustment event' under the GST Act, requiring both the supplier and the customer to adjust their GST records: the supplier reduces its GST liability by the amount of the GST adjustment, and the customer reduces its input tax credit by the same amount and reports this in its Business Activity Statement (BAS).

Australian Credit Notes operate within the framework of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)), which provides consumers and businesses with statutory rights in relation to goods that are not of acceptable quality, not fit for purpose, or do not correspond to their description. Where goods are returned or credited because of an ACL failure, the Credit Note records the resolution of the customer's legal entitlement to a remedy.

For businesses, issuing Credit Notes promptly and accurately is important not only for maintaining good customer relationships but also for GST compliance. Failure to issue a required adjustment note may result in both the supplier and the customer having incorrect GST records and incorrect BAS lodgements, which can attract interest and penalties from the Australian Taxation Office (ATO).

A Credit Note should be issued by an Australian supplier in any of the following circumstances.

Return of goods. When a customer returns goods — whether because the goods are unwanted, the wrong product was delivered, or the goods do not meet the customer's needs — and the supplier accepts the return, a credit note should be issued to reduce the amount owed by the customer. The credit note should reference the original invoice and describe the goods being returned.

Defective or damaged goods. When goods delivered are found to be defective, damaged, or not of acceptable quality under the Australian Consumer Law, and the supplier resolves the issue by issuing a credit (rather than by repair or replacement), a credit note documents the credit. The credit note is evidence that the ACL issue has been resolved commercially.

Billing error or overcharge. If the original invoice contained an error — such as an incorrect price, an unintended duplication of line items, a discount that was agreed but not applied, or GST that was incorrectly charged — a credit note corrects the overcharge. The credit note should clearly describe the nature of the error.

Agreed price adjustment, volume rebate, or settlement discount. Where parties have agreed (after the original invoice was issued) to a price adjustment, a volume-based rebate, or a discount for early payment, a credit note documents the agreed reduction. This is common in distribution and wholesale arrangements where volume rebates are calculated periodically.

Cancellation of an order or service. Where an order is cancelled after the invoice has been issued but before payment is received, or where a service contract is terminated and a portion of prepaid fees is refundable, a credit note records the reduction in the amount owed.

GST correction. Where a GST error on an original tax invoice needs to be corrected — for example, where GST was charged on a GST-free supply — a credit note functioning as an adjustment note is the appropriate correction mechanism under the GST Act.

A well-drafted Australian Credit Note should contain the following key elements to satisfy both its commercial and GST compliance functions.

Credit Note number. A unique reference number for the credit note facilitates tracking and matching in the supplier's and customer's accounting systems.

Date of issue. The date the credit note is issued determines the BAS period in which the GST adjustment must be reported. In Australian accounting, adjustments are reported in the BAS period in which the adjustment note is received (for the customer) or issued (for the supplier).

Original invoice reference. The credit note must clearly identify the original tax invoice being adjusted — including its invoice number and date — to allow both parties to match the credit note to the correct invoice in their accounting systems.

Party identification with ABNs. The supplier's full legal name and ABN are mandatory for a valid adjustment note under the GST Act. The customer's identity and ABN must also be shown where the total credit amount (including GST) is AUD $1,000 or more.

Reason for the credit. A clear description of why the credit is being issued — return of goods, defective goods, billing error, agreed discount, or cancellation — is important for both commercial and GST records.

Itemised credit amounts. Each line item being credited should be separately identified with its description, quantity, and unit price exclusive of GST. This level of detail facilitates matching to the original invoice and assists the customer in verifying the credit.

GST adjustment. The credit note must show the GST adjustment amount (10% of the credit subtotal) separately from the net credit amount, and must state the total credit inclusive of GST. This information is needed by both parties to correctly complete their BAS.

Settlement method. The credit note should specify how the credit will be applied — whether as an offset against the customer's next invoice, a cash refund, or a credit on the customer's account. This avoids ambiguity and assists both parties' cash flow management.

Adjustment note statement. The credit note should include a statement that it constitutes an adjustment note for GST purposes under Division 29 of the GST Act, which is important for the customer's input tax credit adjustment obligations.