Contra deals: What You Need To Know

Author: Ian Aldridge, Progressive Legal

Many small business owners don’t realise that contra deals or barter transactions still need to be treated like any other sale including issuing invoices.

Did you know that barter transactions (or contra deals), where you perform services or provide goods in exchange for goods or services of similar value, are treated the same and are assessable and deductible for income tax purposes to the same extent as other cash or credit transactions?

This means that if you’re doing a contra deal “off the books” trying to save on tax you could find yourself in a bit of a pickle with the ATO.

When you make a trade exchange, whether or not you are part of a registered bartering network, it is a taxable sale and there will be a tax liability including GST.

As a general rule, when valuing the payment arising from contra deals or countertrade transactions, the tax office will accept a fair market value as adequately reflecting the money value or arm’s length value. In most cases, this means the cash price which the business would normally have charged a stranger for the services or for the sale of the goods or property.

Is a tax invoice required for a contra deal?

A tax invoice is required for a contra deal. If you are dealing with a friend or other business in your network to exchange goods and services, you must:

1. Keep records of each exchange transaction;
2. Issue a tax invoice in accordance with relevant GST law, for an amount equivalent to fair market value for the goods and services provided; and
3. Account for the invoice in your business’s income tax for the year as well as the business activity statement for the period.

Of course, you will also be able to claim on your income tax the amount paid on the other party’s invoice to your business, (if that is a deductible expense) as well as claim an input tax credit for the GST on that invoice.

The GST registration threshold and contra deals

It’s crucial not to get caught out with the GST threshold in contra deals. This is an especially important consideration if you are not yet registered for GST and are under the impression that your business does not reach the revenue threshold.

Make sure you include the fair market value of exchanged goods and services that you are providing, or will be providing, when determining when you are required to register for GST.

Failing to collect GST when you are obliged to do so can result in you being liable to pay the GST you should have collected.

What are the risks of contra deals?

With limited resources, contra deals can be very tempting for start-up entrepreneurs and small business owners, but they don’t come without risks. Especially when just starting out and money is really tight, it’s really tempting to do a deal with another business to essentially exchange or barter services – a contra deal. But there are a lot of dangers and pitfalls in contra deals. Here’s why:

Invariably in each transaction there will be a trap. One person or even sometimes both parties will feel like they are getting the “short end of the stick”. Therefore, animosity ensues. It’s a fact that, in a contra deal, neither party will truly know how much work or value the other is giving and we all value highly what we do and don’t really understand what goes on in the background of another person’s business.

The only way of truly knowing is by invoicing each other for the work that you do. Then no one should feel like they are getting taken advantage of.

Prioritisation and potential pitfalls

The other potentially unforeseen consequence is that if you have other work that you can charge for, that will take priority over the barter work or contra deals and eventually what you have is both sides’ work being put to the bottom of the pile – so essentially no one wins in the transaction. You each become a lesser priority and eventually you both receive poor service. And it becomes a bit of a “grudge” transaction.

What if the work goes wrong? Then what? You guessed it, it’s as dangerous as entering into a contract on a handshake, with the boundaries not clear on either side. It can be very messy and you’re asking for trouble.

The final point is that if you’re naturally a giving person, you’ll find that people will often approach you for barter services and contra deals when they know they will be getting a better deal out of the transaction and you can be left doing far more work and feeling worse off for it.

Legal and tax considerations

In the right situation, with clear terms and expectations, contra deals can be a great thing for small business owners to leverage outside resources and skill sets. But, they should be treated with a high degree of caution and only with the relevant discussions about the allocation of work, value exchange, delivery, etc., being discussed upfront.

From a legal/tax perspective, though, if you’re registered for GST, you must invoice as technically, the other party needs to be paying GST on the goods and services and so do you. You both need to be collecting GST and paying each other’s GST to the government. If a dispute arises or a complaint is made, you could very well get in trouble with the ATO. And no one wants that.