Invoicing: what it is, how it works and requirements
In this guide, we’ll explore the different types of invoices and how the invoicing process works.
We’ll also explain why invoices are important for your business and show you what information is mandatory. Plus, there’s a section at the end for all your invoicing FAQs.
Download your free invoice template here.
What is an invoice?
An invoice is a time-stamped commercial document that records a transaction between a seller and a buyer.
The invoice informs the buyer how much they owe and states payment terms for the transaction.
The vendor may send an invoice to a client before or after they deliver the product or service.
Types of invoices
In Australia, there are 2 distinct types of invoices depending on whether you’re registered for goods and services tax (GST).
If your business is:
registered for GST – you must provide tax invoices
not registered for GST – you must use regular invoices (and not include the words “tax invoice”).
There are also several other types of invoices, so let’s take a look at each one.
1. Regular invoice
If you’re not registered for GST, you must provide regular invoices. Your invoices won’t include a tax component, so they should not include the words “tax invoice”.
If your customer asks for a tax invoice, show on your invoice that there is no GST. You can do this by including the statement “price does not include GST” or displaying the GST as nil or zero.
2. Tax invoice
If you’re registered for GST, you must provide tax invoices. Tax invoices include the GST amount for each item, along with some extra details. You need to provide a tax invoice if any of these apply:
the purchase is taxable
the purchase is more than $82.50 (including GST)
your customer asks for a tax invoice.
3. Pro forma invoice
A pro forma invoice is one of the most common types of invoice. They’re used to show items and prices before a sale is made. Sometimes they’re referred to as a preliminary bill of sale, an estimate, or a quote.
A pro forma invoice acts as a commitment to provide a service to completion, and the value indicated is subject to change depending on market changes.
4. Recipient-created tax invoices
In exceptional cases, the buyer can provide the seller with the tax invoice. These are called recipient-created tax invoices (RCTIs) and can be used if the vendor sells a farming product, and the buyer determines its value.
For example, sugar cane mills decide how much to pay the seller based on the sugar content. Once the mill knows the value of the sugar cane, it provides the seller with an RCTI.
5. Credit note
Credit notes reverse charges from previous invoices. Typically, they're issued when goods are returned or when a customer is overcharged.
6. Past due invoice
Some businesses resend invoices with an overdue stamp if they have not been paid. A customer must be reminded of the pending bill before resorting to taking legal action. In some cases, past due invoices may attract some interest charges as a penalty.
7. Interim invoice
If a vendor requires progress payments during a lengthy piece of work, they might send an interim invoice. Typically, they are issued every month and reflect the work done during that period.
8. Recurring invoice
If a supplier charges a customer the same amount every time, they can send a recurring invoice. These are particularly useful for monthly/quarterly subscriptions or leases.
9. Final invoice
A final invoice is the last in a series of interim invoices and confirms the completion of the work and that no other invoices will follow.
The contractor must notify the client that the project is complete and payment is expected.
10. Commercial invoice
Prices on a pro forma invoice can change at any time, but a commercial invoice is legally binding. After issuing one of these, you can't change the price until the invoice has expired.
Commercial invoices are typically used to calculate the customs on imports before a deal is finalised.
Why are invoices important for businesses?
Invoices are a notice of an obligation to pay and a record of purchase.
They allow your customers to pay you for the goods or services you've provided and maintain accurate accounting records of expenses.
Not only are proper invoices necessary for recordkeeping, but they also help protect your business's cashflow and meet your tax obligations.
Invoices are also tax documents, so if they don’t comply with ATO requirements, you may get into trouble.
Done correctly, invoices help you:
set clear payment terms
establish a right to payment
get paid on time
reduce billing questions
reduce tracking issues
provide evidence for tax audits.
How the invoicing process works
The invoicing process begins when you take on a job or receive an order and only finishes when the payment arrives.
As we’ve seen, there are various types of invoices, but in general, the invoicing process looks something like this:
Agree to do a job or receive an order
Complete the work or supply the goods
Send an invoice
Check if the customer has paid the invoice:
If yes:
Match the payment to the invoice
Record the invoice as paid
Send a receipt
If no:
Chase the payment
If the invoice remains unpaid:
Record a bad debt
At year-end, report invoices and payments in your tax return.
What information is required on a business invoice?
It’s essential to know what information is required on a business invoice so that it is valid and helps your customers to pay you promptly.
Remember, there are 2 distinct types of invoices depending on whether you’re registered for goods and services tax (GST) or not.
Regular invoices
A regular (non-tax) invoice should include:
your business name (at the top)
your Australian Business Number (ABN) or Australian Company Number (CAN) near the business name
the word “Invoice” stated prominently at the top
an invoice number alongside the word “Invoice”
the invoice date at the right-hand side
the statement “GST has not been charged” placed prominently at the bottom
terms of payment details, including the invoice due date and how to pay the invoice, such as your business bank account or BPAY information.
Tax invoices
A tax invoice should include:
your business name (at the top)
your Australian Business Number (ABN) or Australian Company Number (CAN) near the business name
the term “Tax invoice” (not just “Invoice”) at the top
an invoice number alongside the word “Tax invoice”
the invoice date at the right-hand side
a list of each item sold and/or service provided, including the quantity and price
either the:
GST inclusive price with a statement to the effect that “all prices include GST”
GST-exclusive price for the goods and services showing the total for the goods and services and the GST total as a separate line item
terms of payment details, including the invoice due date and how to pay the invoice, such as your business bank account or BPAY information.
NOTE: For goods and services costing $1,000 or more in total (including GST), you also need to include the buyer’s identity or ABN.
If you send an incorrect or incomplete invoice, it’s rendered invalid. In which case, you’ll need to replace it with a complete and correct invoice.
Invoicing FAQs
What is the purpose of invoicing?
Businesses use invoices to track what customers owe in total and monitor overall cash flow.
Correct invoices can help companies receive payment in full and on time. Plus, they serve as records of sale and provide a way to track:
the sales date of the goods or services
the amount charged for the goods or services
any outstanding balances the client owes.
Invoices provide a complete audit trail that protects your company in the event of the tax authority questioning your tax returns.
When should invoices be issued?
You should issue an invoice as soon as possible after you’ve completed the work. If you don't send invoices promptly, you may face delayed payments and significant cash flow problems.
How long should you give someone to pay an invoice?
You should define payment terms during the sales process. A typical amount of time given to pay invoices is 30 days, sometimes called Net 30. Other options include payment in advance, immediately, 7 days, 60 days, or 90 days. But you can choose payment terms that make sense for your business, your customer, and the transaction.
Are invoices legal documents?
No, invoices are not legally binding documents. They do not contain proof that a business and its customer have agreed on the terms of payment outlined in the invoice or that the business has delivered the goods or services.
To reduce the likelihood of a disputed invoice, you can create a contract that outlines the scope and details of the goods and services to be delivered. Signed contracts can serve as legal documents, help reduce misunderstandings about transactions, and speed up payment processes.
What happens when a customer refuses to pay an invoice?
First, you need to understand why the customer is refusing to pay an invoice.
Sometimes customers may disagree with specific elements of the invoice. For example, they may query whether you delivered the items listed. Some disputes can be resolved through discussion, but you may need to escalate to taking legal action to collect payments if you and your customer can’t reach an agreement about the disputed elements of the invoice.
On the other hand, customers may not have an issue with the invoice as such – they simply haven’t paid it according to the agreed payment terms. In this situation, contact your customer and remind them to pay the invoice as soon as possible. If they still refuse to pay, you may have to take legal action.
Can I amend and resend an invoice?
As a rule, it is legal to amend and resend an invoice that is missing information or includes an error. However, if this happens, you should never delete the invoice. It is vital for auditing reasons that you hold onto records, even if they are incomplete or incorrect.
Create and send invoices today
Invoices are an intrinsic part of any business, whether you’re registered for goods and services tax (GST) or not. Done correctly, they reduce customer queries, provide evidence for tax audits, and, most importantly, help you get paid on time.
MYOB solutions let you create and send compliant invoices from any device, so you get paid faster.
Download your free invoice template here.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.