Credit Note / Credit Invoice in Australia

Quick answer

A credit note (also called a credit invoice or, in ATO language, an adjustment note) is a document that reverses or reduces a previously issued invoice. You issue one when an invoice was overcharged, a refund is owed, goods or services were returned, or a contract was cancelled after invoicing. If the original invoice charged GST, the credit note must reverse the GST too — this becomes important at the next BAS.

When you actually need one

Common situations where a credit note is the right tool:

• Overcharge on an invoice. You billed $2,200 but the correct amount was $2,000. A credit note for $200 (plus any GST) cleans it up without you cancelling and re-issuing the whole invoice.
• Returned goods. A retailer or trade business invoices for stock that’s later returned. The credit note reverses the sale.
• Cancelled work / partial completion. You invoiced for the full scope but only some of it was delivered or accepted. The credit note adjusts for the unfinished portion.
• Refund of a deposit. A client paid a deposit; the engagement is cancelled within the cooling-off period; you owe the deposit back. A credit note plus a bank transfer closes it.
• Volume discounts or rebates after invoicing. Quarterly rebates and promised discounts settled after the fact go through credit notes.

Credit note vs. void: which to use

Two different operations:

• Void an invoice when the invoice was never sent (draft, mistake, wrong client). Voiding keeps the invoice number reserved but marks it void so you don’t break sequential numbering. No credit note needed.
• Issue a credit note when the invoice has been sent, the client has it in their accounting system, or any payment has been received against it. A credit note is the only paper trail that satisfies the client’s bookkeeper, your bookkeeper, and the ATO.

For sequential numbering rules, see how to number invoices.

The required fields (ATO “adjustment note”)

For GST-registered businesses, the ATO calls a credit note an “adjustment note” when it changes the GST treatment of an earlier supply. Required fields:

• Your business name and ABN
• The words “Adjustment Note” (or “Credit Note”)
• Date issued
• Unique credit note number
• Reference to the original tax invoice number
• Buyer’s identity and ABN if the adjustment is $1,000+
• The reason for the adjustment (refund, return, cancellation, etc.)
• The difference in the price (the reduction)
• The difference in GST

For non-GST credit notes (e.g. you’re not GST-registered, or the original invoice was for a GST-free supply), the structure is the same minus the GST adjustment line.

Worked example

You issued INV-0042 for a $3,300 design job (incl. $300 GST). After delivery, the client flagged that one section of the brief wasn’t delivered, worth $500 of the contract. You agree to credit the $500 portion. The credit note:

ADJUSTMENT NOTE (CREDIT)
CN-0007 — 12 June 2026

From:  Acme Design Pty Ltd
       ABN 12 345 678 901

To:    Client Name Pty Ltd
       ABN 98 765 432 109

Adjusts: INV-0042 dated 28 May 2026
Reason:  Section 3 of original scope not delivered — mutual agreement
         to credit the affected portion.

———————————————————————————————————————————————————————————
Credit — partial scope (Section 3 not delivered)    -$500.00
———————————————————————————————————————————————————————————

Subtotal adjustment:                                  -$500.00
GST adjustment (10%):                                 -$ 50.00
Total credit (AUD):                                   -$550.00

Resolution:
   [ ] Credit against future invoice
   [X] Refund to client (bank transfer pending)

A few things worth noting:

• Negative signs everywhere. Both the line item and the GST line are negative. The total at the bottom is the amount being credited back.
• The original invoice is unchanged. INV-0042 stays at $3,300. The credit note is the adjustment.
• The resolution is explicit. Either credited against a future invoice or refunded by bank transfer. Don’t leave this ambiguous.

How the GST adjustment flows through BAS

When you issued INV-0042, your BAS for that quarter reported:

• $3,000 in sales
• $300 in GST collected

When you issue the credit note in the same or a later quarter, that quarter’s BAS reports a corresponding reduction:

• -$500 in sales
• -$50 in GST collected

You’ll pay $50 less GST to the ATO than you otherwise would have. The client’s GST credits adjust by the same amount in the other direction. Full BAS mechanics in how to prepare for BAS.

Refund vs. credit against future work

Once you’ve issued the credit note, there are two ways to settle it:

• Refund by bank transfer. Cleanest from a cash-flow perspective; the client expects to see the money back. Your bank reconciliation shows the outgoing transfer linked to the credit note number.
• Credit against a future invoice. Useful for ongoing clients. The next invoice subtracts the credit on a clearly labelled line. Reference the credit note number so the audit trail is clean.

For ongoing clients, credit-against-future is the path of least resistance. For one-off clients or contracts that have ended, refund.

What if you wrote off a bad debt instead?

A bad debt (an invoice you’ve given up trying to collect) is different from a credit note. The invoice stays outstanding but you write it off internally and claim the GST back on a future BAS via the bad debt adjustment line. You don’t issue a credit note to the client because the work was delivered and the invoice is legitimate — the client just isn’t paying. See late fees and bad debts for the full path.

Record-keeping

Credit notes are part of the audit trail and must be kept for at least 5 years per the ATO — the same retention rule as regular invoices. Both the original invoice and the credit note are required to evidence the adjusted GST. See how long to keep invoices for the broader retention rules.

How Free Invoice App handles credit notes

From any invoice, you can issue a credit note that automatically references the original invoice number, copies the client details, and lets you enter the negative line items. The credit note appears in your records linked to the original invoice. GST is handled correctly on both sides and reflected in your P&L and BAS summary. Get started free.

Frequently asked questions

What is a credit note in Australia?

A document that reverses or reduces a previous invoice. In ATO language, it’s called an “adjustment note” when GST is involved.

When do I issue a credit note vs. just cancelling the invoice?

Issue a credit note once the invoice has been sent or paid. Void unsent drafts directly without a credit note.

Does a credit note need to show GST?

Yes, if the original invoice charged GST. The credit note shows the GST being reversed, adjusting both your BAS and the client’s GST credits.

How do I number credit notes?

Own sequence (CN-0001…) or a suffix on the original invoice number (INV-0042-CR). Either is fine; both must reference the original invoice.

How long do I keep credit notes?

5 years — same as regular invoices under ATO rules.