20 Feb Contra deals – what you need to know
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.
A tax invoice IS required for a contra deals.
If you are dealing with a friend or other business in your network to exchange goods and services, you must:
- Keep records of each exchange transaction;
- 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
- Account for the invoice in your business’s income tax for the year as well as the business activity statement for the period.
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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.
Don’t get caught out with the GST registration threshold with 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.
Contact us today if you require any assistance with preparing or reviewing your Non Disclosure Agreement.
(c) Progressive Legal Pty Ltd – All legal rights reserved (2020)
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Ian Aldridge is the Founder and Principal Lawyer Director at Progressive Legal. He has over 15 years experience in advising businesses in Australia and the UK. After practising in commercial litigation for 12 years in major Australian and International Law Firms, he decided to set up a NewLaw law firm in Australia and assist growing Australian businesses. Since then, he has advised over 2,500 small businesses over the past 6 years alone in relation to Intellectual Property Law, Commercial, Dispute Resolution, Workplace and Privacy Law. He has strived to build a law firm that takes a different approach to providing legal services. A truly client-focused law firm, Ian has built Progressive Legal that strives to deliver on predictable costs, excellent communication and care for his clients. As a legal pioneer, Ian has truly changed the way legal services are being provided in Australia, by building Legal Shield™, a legal subscription to obtain tailored legal documents and advice in a front-loaded retainer package, a world-first. He has a double degree in Law (Hons) and Economics (with a marketing major). He was admitted to the Supreme Court of NSW in 2005.
