• GST and product recalls

    This information is for GST-registered retailers and business customers who are affected by a product recall.

    Accounting for the GST on goods that have been recalled depends on who the goods are returned to, and if they are exchanged for money or replacement goods.

    Find out about:

    Goods returned to the retailer

    Refund for returned goods

    When a customer returns recalled goods to the retailer who sold the goods it is considered to be a cancellation of the original sale. As the retailer will have paid us GST on the sale and the customer will have claimed a GST credit, both parties will have to make adjustments.

    A retailer who refunds the customer's money will be entitled to a GST credit for the GST component of those goods that was included in a previous activity statement. Generally, the credit is reflected in their next activity statement as a decreasing adjustment. They may be required to issue an adjustment note to the customer.

    If the customer has claimed a GST credit for the GST paid in the price of the goods returned they will need to make an increasing adjustment on their next activity statement.

    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.

    As a result of a product recall, Zeta Pharmacy returned the goods to Alpha Manufacturing and received 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

    See also:

    Exchanging for new goods

    If a retailer exchanges a customer's returned goods for new goods, the original sale 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 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 customer if they request 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 customer has claimed a GST credit on the recalled goods they:

    • must repay the GST credit claimed 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 the 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.

    Example

    Nature Pty Ltd, a GST-registered business, sold 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 returned the goods to Nature Pty Ltd and received substitute goods that also had 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

    See also:

    • GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events
    • GSTR 2013/2 Goods and services tax: adjustment notes.

    Goods returned to the wholesaler

    Refund for returned goods

    In the situation where a customer returns goods to a wholesaler who did not make the sale directly to them, and the wholesaler refunds the customer's money, it is not a cancellation of a sale. The original sale of the goods has not been 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 party.

    Example

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

    Delta 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

    In the situation where a customer returns goods to a wholesaler who did not make the sale directly to them, and the wholesaler sells the customer substituted goods, the original sale has not been cancelled. The wholesaler receiving the returned goods:

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

    The customer will be entitled to a GST credit for the GST included in any additional money paid for the new goods. Generally, the customer will account for the GST credit in their next activity statement as long as they have 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
      Last modified: 23 May 2017QC 16986