By Winnie Lok, Solicitor
30 July 2021
Everyone’s favourite topic is tax, right? Maybe not, but the exchange of contra as part of (or all of) the consideration paid in services agreements is becoming increasingly prominent in business-to-business transactions, especially in the marketing and advertising industries when brands are increasingly dealing with influencers and ambassadors, on lower value deals than traditional brand ambassadors may have in years gone by. It is very common to see, for instance, an influencer engagement on the basis of the provision of a brand’s products only. It is a common misconception that, due to countertrade transactions not being a monetary transaction, that there is no taxable supply or any tax liability applicable that the parties need to address, and thus that the transaction (and related taxation) does not need to be recorded or reported in the same manner as monetary transactions. However, this is not the case, and this misconception could land many businesses in hot water with the Australian Taxation Office (“ATO”) if the appropriate steps are not taken.
What is a countertrade transaction?
A countertrade transaction (also known as barter transaction, in-kind agreement, or contra deal) refers to the exchange of goods or services between parties where all or part of the payment is non-monetary. For instance, a motor vehicle brand ambassador such as a professional athlete may provide a set number of social media posts and attend a number of sponsor functions, and in return receive a loan vehicle from the manufacturer for a 12 month period. Alternatively, an influencer may provide certain social media posts for a food company and receive a year’s supply of that brand’s products. As you can imagine or may be aware from your own experience, some of these exchanges can be very low value, but some can represent quite significant value.
How are countertrade transactions treated for GST purposes?
As all businesses are painfully aware, business activity statements must be filed regularly with the ATO covering off on the business’ GST and other tax payments, in light of the business’ activity during the relevant period.
For traditional cash-based transactions, accounting for the GST and the relevant taxable supply is a relatively simple process.
However, what happens when a portion of a business’ activity involves the exchange of non-cash (i.e. countertrade) value? Prior to 2016, countertrade transactions were to be treated in the same manner as any monetary transaction for tax purposes, even if the effect of the exchange was GST neutral. The value of a countertrade transaction is generally calculated on the market value of the supplies exchanged. The ATO recognised that there are practical problems in determining the market value of countertrade transactions specifically for GST purposes, and that there are considerable difficulties involved in the accounting of such transactions. For this reason, the ATO issued the Practical Compliance Guideline 2016/18 (“PCG 2016/18”) to provide guidance on GST treatment of countertrade transactions and reduce the regulatory burden on taxpayers in such transactions.
As of 18 November 2016, the ATO’s position on GST treatment of countertrade transactions has been that the Tax Commissioner will not apply resources to verify an entity’s compliance with GST reporting obligations for a countertrade transaction if the following circumstances apply:
- the transaction does not arise from a barter scheme conducted by a barter or trade exchange – this would be unlikely to be an issue for most businesses in the advertising or marketing industries;
- both parties are registered for GST – this may or may not be a problem, depending on the sophistication of the parties involved;
- both parties are acting at arm’s length and there is no monetary consideration involved;
- both parties are making a fully creditable acquisition of the supply it receives;
- the supplies by both parties are wholly taxable and the countertrade transaction makes up less than 10% of each party’s total supplies;
- both parties agree that the GST-inclusive market values of the countertrade supplies being exchanged are equal;
- there are records to show that the exchange occurred, what was exchanged, the identity and ABN of the parties and any GST-inclusive market value agreed upon (if applicable).
If all the above circumstances apply to your countertrade transaction, then there is no requirement to strictly comply with GST reporting obligations by establishing a market value for the supplies exchanged, swapping tax invoices, and recording the exchange in your Business Activity Statement. However, you must ensure that there is record of the transaction in accordance with the PCG 2016/18 which is why having an agreement in place is essential.
On the other hand, if any of the above circumstances do not apply, then the PCG 2016/18 will not apply, and the parties will need to comply with their GST reporting obligations as required.
Finally, it is important to note that the above will only apply if countertrade transactions make up less than 10% of all of a business’ taxable supplies. In other words, this protection will only apply if countertrade transactions are a minor part of your business.
For most businesses, our experience is that the main consideration to come out of the application of PCG 2016/18 is that each party to a countertrade transaction must be registered for GST. This is not always the case when dealing with brand ambassadors and influencers, so this is an issue worth discussing with your suppliers and your tax accountants/financial advisors.
Tax is not everyone’ s cup of tea, and the issues here are complex. This publication does not constitute tax or financial advice, and by its nature is a brief discussion on the points of interest only. We always recommend taking detailed tax advice from your tax advisor before adopting any shift in your approach to tax.