Published: October 2025
Credit notes are an essential part of business accounting that many Australian business owners struggle to understand properly. When invoicing goes wrong, products get returned, or customers deserve adjustments, credit notes provide the formal mechanism to correct these situations without creating chaos in your books.
This guide explains everything Australian businesses need to know about credit notes, from what they are to how to issue them correctly.
A credit note (also called a credit memo) is a formal document issued by a business to a customer showing that money is owed back to them. It essentially reverses all or part of a previous invoice, reducing the amount the customer needs to pay.
Think of a credit note as the opposite of an invoice. While an invoice says "you owe us money," a credit note says "we owe you money or credit."
The amount shown on a credit note can either be refunded to the customer as cash or applied as credit toward future purchases. This flexibility makes credit notes practical for maintaining customer relationships while keeping accurate financial records.
In Australia, both the terms "credit note" and "credit memo" are understood and used interchangeably, though "credit note" is more common in Australian business practice.
When you issue a credit note, you're formally acknowledging that you need to reduce what a customer owes you. This might happen for several reasons, which we'll explore shortly.
Here's the basic process:
The credit note should clearly state the amount being credited and why. This creates a proper paper trail for both your records and the customer's.
If the customer hasn't paid the original invoice yet, the credit note simply reduces what they owe. If they've already paid, you can either refund the money or let them use the credit for their next purchase.
Australian businesses issue credit notes in several standard situations:
When a customer returns products, you need to credit them for the value of those items. This is probably the most common reason for credit notes. The customer sends back the product, and you issue a credit note for the sale value plus any GST.
Mistakes happen. You might have charged the wrong price, duplicated an invoice, or added items the customer didn't actually order. A credit note corrects these errors without having to delete or void the original invoice, which maintains a complete audit trail.
If a customer receives damaged goods or discovers faults after delivery, a credit note compensates them for the issue. This might be for the full amount if the product is unusable, or a partial credit if the customer agrees to keep it despite the defect.
Sometimes services don't meet expectations or aren't delivered as promised. Rather than disputes, smart businesses issue credit notes to maintain goodwill. This might be a full credit if the service was completely unsatisfactory or a partial credit for delays or minor issues.
If you and a customer agreed on one price but the invoice shows another, a credit note can correct the difference without reissuing the entire invoice.
You might approve a discount after an invoice has been sent, perhaps for bulk orders or to match a competitor's price. A credit note applies this discount formally.
During promotions or special offers, you might need to credit customers who purchased just before the promotion. This goodwill gesture maintains customer relationships.
Many business owners confuse credit notes with refunds, but they work differently.
A refund returns money directly to the customer, typically through the original payment method. The customer's bank account or credit card receives the funds back, and the transaction is essentially reversed.
A credit note creates a balance in the customer's favour with your business. This credit can be used for future purchases or refunded if the customer requests. The credit note itself doesn't involve money changing hands immediately.
Think of it this way: a refund is immediate money back, while a credit note is a formal acknowledgement that the customer has credit available with your business.
Some businesses prefer credit notes because they keep the money within the business, encouraging future purchases. However, if a customer requests a refund for a faulty product or service failure, you generally must provide one rather than forcing them to accept store credit.
Creating a proper credit note requires including specific information to maintain clear records and compliance.
If your business is registered for GST, credit notes must show GST separately just like invoices. The credit note reduces both your sales and your GST collected. This matters for your BAS reporting.
When you issue a credit note that includes GST, you'll claim that GST back through your next Business Activity Statement. This reduces your GST liability for the reporting period.
Proper accounting for credit notes ensures your financial statements remain accurate and your tax reporting is correct.
Credit notes reduce your sales revenue for the period. If you sold $10,000 worth of products but issued $500 in credit notes, your net sales revenue is $9,500.
If the customer hasn't paid yet, the credit note reduces their outstanding balance. If they already paid, it creates a negative balance (credit balance) on their account, which can be refunded or applied to future invoices.
Credit notes affect your BAS calculations. The GST component of credit notes reduces your total GST collected for the period. This means you'll owe less GST to the ATO or potentially receive a larger refund.
Modern accounting software like Xero, MYOB, and QuickBooks has built-in credit note functions that automatically handle the accounting treatment. You create the credit note within the software, and it adjusts all the relevant accounts automatically.
The software links the credit note to the original invoice, making it easy to track the audit trail and understand why the adjustment occurred.
Like all business records, credit notes must be kept for at least five years under Australian Taxation Office requirements. This applies whether you store them digitally or in paper form.
The five-year period starts from when you prepared the credit note or completed the transaction, whichever is later. In most cases, this means five years from the date shown on the credit note.
If a credit note relates to a capital purchase or business asset, you may need to keep it longer. The ATO can require records for the period of review for any assessment that uses information from the credit note.
Store credit notes with their related invoices for easy reference during audits or when customers query their accounts. Digital storage in your accounting software satisfies these requirements provided you maintain secure backups.
Australian businesses often make these errors when handling credit notes:
Always keep evidence of why you issued the credit note. This might be a returns authorisation, email from the customer, or internal notes about the billing error. Without documentation, the ATO might question whether the credit note was appropriate.
If you're registered for GST, ensure credit notes show GST at the same rate as the original invoice. If the original invoice included GST, so must the credit note for the same items.
Every credit note should clearly reference which invoice it relates to. This creates the audit trail necessary for compliance and makes it easier to understand transactions later.
Never simply delete an invoice that needs correction. Issue a credit note instead. This maintains a complete record of all transactions, which is required for proper bookkeeping and tax compliance.
If you issue a credit note for a customer with outstanding invoices, apply the credit to reduce their balance. Don't let credit notes sit unused on the account indefinitely.
Credit notes can strengthen or damage customer relationships depending on how you handle them.
When issuing credit notes, communicate clearly about:
Process credit notes promptly. Customers appreciate fast resolution when things go wrong. Delays in issuing credit notes create frustration and damage trust.
Be transparent about your policies. Some businesses allow credit notes to be used like cash for any purchase, while others place restrictions. Make these terms clear from the start to avoid disputes.
Different Australian business structures handle credit notes similarly, but with some variations:
Credit notes are straightforward for sole traders. They simply reduce your business income for the year. If you're on a cash basis, the credit note matters when you actually refund the money or the customer uses the credit.
Credit notes still reduce revenue, but you need to ensure proper authorisation procedures. Who in your business has authority to issue credit notes? Clear policies prevent fraud and misuse.
Service providers should be particularly careful with credit note documentation. Unlike returned products, services can't be "returned," so you need clear records of why the service didn't meet expectations and what rectification was offered.
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Can I issue a credit note for services already provided?
Yes, you can issue credit notes for services if they didn't meet agreed standards, weren't delivered as promised, or if you otherwise agree to credit the customer. However, you should document the reasoning carefully since services can't be "returned" like physical products.
Do I need to issue a credit note for a refund?
Yes, best practice is to issue a credit note even when providing a cash refund. The credit note creates the necessary paper trail showing why the revenue was reversed and provides proper documentation for both your books and the customer's.
How long do I have to issue a credit note after the original invoice?
There's no specific time limit in Australian tax law for issuing credit notes. However, if you're registered for GST, credit notes should be issued in the BAS period when you discover the need to adjust the transaction. Delays can complicate your GST reporting and create questions during audits.
Can a customer demand a credit note for any reason?
No. You're only required to issue credit notes when contractually obliged or when Australian Consumer Law requires refunds for faulty products or services. However, many businesses choose to issue credit notes for customer goodwill even when not legally required.
What if I issued a credit note by mistake?
If you mistakenly issue a credit note, you can reverse it by issuing a debit note (sometimes called a debit memo) for the same amount. The debit note increases what the customer owes by the same amount the credit note decreased it, effectively cancelling out the mistake.
Do credit notes affect my profit and loss statement?
Yes, credit notes reduce your revenue in the period they're issued. This directly affects your profit and loss statement by decreasing sales. If the credit note relates to a previous financial year, you may need to consider whether it's material enough to require adjustment of prior period figures.
Can I set an expiry date on credit notes?
For store credit used instead of refunds, you can set reasonable expiry dates, though Australian Consumer Law provides protections for consumer credits. For business-to-business transactions, expiry terms should be clearly agreed upon. However, if the credit note relates to faulty goods or service failures, you generally can't impose expiry dates that override consumer rights.
Do I need to charge GST on a credit note?
You don't charge GST on a credit note. If the original invoice included GST, the credit note reduces the GST you collected on that sale. The credit note should show the GST component separately, and you'll adjust your GST liability on your next BAS accordingly.
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