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Inland Revenue

Tax Policy

Chapter 7 - Credit notes

7.1 Credit or debit notes are issued in a range of circumstances to reflect that the payment for a supply may have been incorrectly stated and to allow the issuer to adjust their position accordingly.[12]

7.2 One of the requirements of issuing a credit note under section 25(1) is that there must be a “supply of goods and services” by a registered person. The section arguably does not apply when no supply has taken place, but GST has nevertheless been charged. For example, a registered person issues an invoice for an amount, plus GST, to a person on the assumption that a supply has taken place. However, it is later determined that the payment actually represented liquidated damages, which is not a “supply” for GST purposes.

7.3 Under the current wording of section 25(1), the person that has provided the invoice is arguably not required to remedy the situation by providing a credit note. Although it may be possible for the Commissioner to return the GST to the “supplier” by amending the relevant assessment, the amount may not be passed on to the person who actually bore the GST cost, providing the supplier with a windfall gain. A requirement to issue a credit note would achieve the right policy outcome of returning the GST to the person who originally paid it.

7.4 It has been suggested that section 25(1) does not cater clearly for situations when a supplier is simply mistaken about the GST treatment of a supply – for example, if a supply is incorrectly zero-rated or treated as exempt for GST purposes. These situations may result in an alteration of consideration for the purposes of section 25(1)(b), but it is not immediately apparent that that is the purpose of the provision.

7.5 Section 25(1)(ab) was introduced to cater for land transactions incorrectly accounted for. Although that section was directed at changes relating to land, there is nothing in theory that makes land a special case when it comes to issuing credit/debit notes.

7.6 We are aware that a provision requiring credit/debit notes to be issued when there has been no supply or when GST was incorrectly accounted for would operate as a general “unjust enrichment” rule. However, if the GST treatment between the parties to a supply is incorrect the outcome should, in our view, be the same as for a change in consideration or value.

Suggested solution

7.7 We consider section 25(1) should be amended to clarify that it also applies in situations when the GST treatment of a supply has been incorrectly accounted for.

7.8 Consequential amendments may also be necessary to section 25(3) (relating to the specific requirements of credit and debit notes) so that credit and debit notes that deal with the instances set out above are valid.

7.9 When credit/debit notes are issued in the circumstances set out above, there is a question as to whether the adjustment should be treated as taking place in the same period as the original supply. Submissions on this point would be welcome.

7.10 One issue that may require further consideration is that of the compliance costs that might arise if the incorrect GST accounting were minor and spread over a wide customer group. The requirement for debit or credit notes needed, in order to deal with such cases, could be limited to situations when the supplier has sought an adjustment in their favour in their return.


12 Section 25(1), Goods and Services Tax Act 1985.