• GST and product recalls

    Introduction

    How GST applies to goods that have been recalled depends on who the goods are returned to, and if they are exchanged for money or replacement goods. GST may only apply in product recall transactions for consumers or businesses that are registered, or required to be registered, for GST.

    (Refer GST definitions: business.)

    Terms we use

    When we say:

    • wholesaler, we mean the business that produces or supplies the goods or services to a retailer in the first instance
    • retailer, we mean the business that purchases goods or services from a manufacturer, or wholesaler, to sell them to a consumer
    • consumer, we mean the business or individual who purchases the goods or services for end use
    • increasing adjustments, we mean adjustments which increase your net GST liability, and decrease your GST credits, for a reporting period
    • decreasing adjustments, we mean adjustments which decrease your net GST liability, and increase your GST credits, for a reporting period.

    When recalled goods are returned to the retailer

    Refunding returned goods

    When recalled goods are returned to the retailer who has sold the goods to the consumer, it is considered a cancellation of that sale from the retailer to the consumer. As GST will have been paid to us previously by the retailer and a GST credit claimed by the customer, it is necessary that both parties make adjustments.

    If a consumer returns recalled goods to a retailer who refunds their money, the retailer:

    • will have a GST credit for the GST component of the goods returned that were included in a previous activity statement, (generally, the credit is reflected in the next activity statement, known as a decreasing adjustment)
    • may be required to issue an adjustment note to the consumer returning the goods.

    The consumer will need to make an increasing adjustment on their next activity statement if:

    • they are registered, or required to be registered, for GST
    • they have previously claimed a GST credit for the GST they paid in the price of the goods they have returned.

    (Refer GST definitions: GST credits, sales.)

    Example

    Alpha Manufacturing, a GST registered business, sold goods to Zeta Pharmacy, also a GST registered business, for $2,200 including GST.

    Alpha Manufacturing issued a tax invoice and both businesses reported the transaction on their activity statements.

    Due to a product recall, Zeta Pharmacy returns the goods to Alpha Manufacturing and receives a $2,200 refund. Both businesses will have to adjust their next activity statement.

    Alpha Manufacturing will have to:

    • claim back the $200 GST it has already paid by making a decreasing adjustment to the net GST they are liable to pay
    • provide an adjustment note to Zeta Pharmacy.

    Zeta Pharmacy will have to repay the $200 GST credit they claimed by making an increasing adjustment to the net GST amount they are liable to pay.

    End of example

    Exchanging for new goods

    If a consumer returns goods to a retailer who exchanges them for new goods, the previous sale of the recalled goods is cancelled and a new sale is made. This means the retailer:

    • can claim back the GST they have already paid on the original sale of the recalled goods, (this is done by making a decreasing adjustment to the net GST amount they are liable to pay on their next activity statement)
    • must provide an adjustment note to the consumer if the consumer requests one, or if they issued a tax invoice for the previous sale
    • must account for the GST on the sale of the new goods on their next activity statement
    • must provide a tax invoice for the new goods if the GST inclusive amount is more than $82.50.

    If the consumer is registered, or required to be registered, for GST, they:

    • must repay the GST credit claimed after purchasing the recalled goods, which is done by making an increasing adjustment to the net GST amount they are liable to pay on their next activity statement
    • can claim a GST credit for GST included in the price of the new goods. If the GST inclusive amount of the new goods is more than $82.50, they must hold a valid tax invoice for the purchase before they can claim the GST credit.

    (Refer GST definitions: purchases.)

    Example

    Nature Pty Ltd, a GST registered business, sells goods to Abundant Pty Ltd, also a GST registered business, for $2,200. Nature Pty Ltd issued a tax invoice for this transaction.

    As a result of a recall, Abundant Pty Ltd returns goods to Nature Pty Ltd and receives substitute goods that also have a market value of $2,200 (including GST).

    Nature Pty Ltd must now:

    • provide an adjustment note to Abundant Pty Ltd for the recalled goods
    • provide a tax invoice for the sale of the new goods
    • claim back the $200 they previously paid on the sale of the recalled goods by making a decreasing adjustment on their next activity statement
    • include $200 for the sale of the new goods on their next activity statement.

    Abundant Pty Ltd must now:

    • repay the $200 GST credit they previously claimed by making an increasing adjustment on their next activity statement
    • claim a $200 GST credit on their next activity statement for the GST included in the price of the new goods.
    End of example

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    Recalled goods returned to the wholesaler

    Refunding returned goods

    If a consumer returns goods to a wholesaler, who refunds the money paid for those goods, it is not a cancellation of a sale. This is because the wholesaler did not make a sale directly to the consumer. The original sale of the goods is not cancelled and there is no change in the GST obligations for the original sale of the goods. In this case, no adjustment needs to be made by either the wholesaler, or the consumer returning the goods to the wholesaler.

    Example

    Gamma Ltd, a GST registered business, sells goods to Delta Wholesaling Pty Ltd, also a GST registered business, for $1,100 (including GST).

    Delta Wholesaling Pty Ltd sells the goods to Theta Health Foods, also a GST registered business, for $2,200 including GST.

    As a result of a recall, Theta Health Foods returns the goods directly to the wholesaler, Gamma Ltd, and receives a payment from Gamma Ltd. This means:

    • Gamma Ltd takes no action and will not be able to claim back any amount from us for either their original sale or for the payment they have made for the returned goods
    • Theta Health Foods takes no action and will continue to be entitled to a GST credit for their original purchase
    • Delta Wholesaling Pty Ltd takes no action.
    End of example

    Exchanging for new goods

    Where goods are returned to a wholesaler and substituted goods are sold, the original sale is not cancelled. For the wholesaler receiving the returned goods, this means:

    • they will account for the GST on any additional money paid for the new sale in their next activity statement
    • they may need to provide a tax invoice for the new sale of goods.

    For the business returning the goods, this means it will be entitled to a GST credit for the GST included in any additional money paid for the new sale of goods. Generally, it will account for the GST credit in their next activity statement as long as it has a tax invoice for the goods.

    Example

    Beta Pty Ltd, a GST registered business, sells goods to Pi Goods Ltd, also a GST registered business, for $1,100.

    Pi Goods Ltd then sells goods to Mu Supermarket, also a GST registered business, for $2,200.

    As a result of a recall, Mu Supermarket returns goods to Beta Pty Ltd. Beta Pty Ltd sells substitute goods to Mu Supermarket and charges it an additional $220. The value of the returned goods is nil and the GST component on the additional payment is $20. This means:

    • the $20 of GST must be included by Beta Pty Ltd in its next activity statement
    • Mu Supermarket is entitled to a GST credit of $20 and will claim it on its next activity statement
    • Pi Goods Ltd takes no action.
    End of example

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      Last modified: 27 Jun 2016QC 16986