The ATO issued PCG 2016/18 to provide guidance to entities that enter into barter transactions. We recently received some GST Q&A’s from a member which raises some interesting technical and practical questions.
PCG 2016/18 ‘GST and countertrade transactions’ (issued in November 2016) outlines a practical compliance approach for certain countertrade transactions (i.e., barter transactions) that are GST neutral.
If parties are transacting with countertrade or barter transactions, it is worth reviewing and being familiar with this PCG. To provide some context, we have included below the first few paragraphs from the PCG:
1. This Guideline is concerned with ‘countertrade’ transactions. In this context, ‘countertrade’ refers to the direct exchange of things by one entity for things provided by another entity, and does not include transactions where any of the consideration is monetary.
2. Each entity to a countertrade transaction makes a supply and an acquisition. GST registered entities that enter into countertrade transactions are required under the GST law to record and report those transactions in the same manner as other supplies and acquisitions.
3. For GST purposes, in most circumstances the things exchanged by parties acting at arm’s length are taken to have the same GST-inclusive market value. The amount of the GST payable and the GST credit entitlement on such a countertrade transaction would be equal to 1/11th of that GST-inclusive market value. In practice, this means that an entity engaging in these countertrade transactions will pay an amount of GST that equals the amount of its GST credit entitlement.
4. The Commissioner is aware of the practical problems of market valuation in the context of these transactions, as well as the difficulties of accommodating countertrade in the natural accounting systems of entities that do not usually engage in such transactions. Compliance and administration costs in these circumstances may be unnecessarily burdensome for transactions that have no net revenue effect. For this reason, this Guideline outlines a practical compliance approach for certain countertrade transactions that are GST neutral.
5. This Guideline only applies in relation to GST and is not applicable for any other purpose or in relation to any other tax obligations and entitlements.
The key fundamentals here are that where both parties are GST-registered, acting at arm’s length, would be entitled to claim a full GST credit for the acquisition they make, and the GST-inclusive value of each transaction is identical, the GST position would be neutral to each party (assuming they each issued a tax invoice to the other party, to support the claiming of the GST credit).
The member prefaced their questions with a comment that their understanding was that if they have a countertrade transaction as contemplated in PCG 2016/18, and where conditions of that PCG are met, they are no longer required to exchange invoices. However, they raised a number of questions for clarification.
Does this mean we are able to ignore the transaction as far as GST BAS reporting goes? Or are we still expected to at least raise a sale and purchase journal and still record the GST paid and GST collected on the BAS?
The guidance provided in the PCG allows the transactions not to be reported in the BAS under cover that the Commissioner will not devote resources to verifying compliance with GST reporting obligations.
However, the PCG still requires you to have records that show:
(i) when the countertrade transaction was entered into and occurred;
(ii) what was exchanged (what was supplied and acquired);
(iii) the identity and ABN of the other entity; and
(iv) the GST-inclusive market value that you and the other party agreed on (if applicable).
You may, of course, continue to record the transactions in your BAS if you choose. There may be other reporting obligations that require you to show these type of transactions in your accounting records which may mean it is just as simple to treat as per normal transactions despite the concession offered by the PCG.
[Note: At the time the PCG was issued we sought some clarification from the ATO about why the wording was not more explicit and we were advised the ATO is limited in saying transactions should not be reported, but could state they would not devote compliance resources if the conditions outlined in the PCG were met. See the link to an article we issued at that time.]
Can we also confirm whether doing journals to report the sales and purchases, and including these on the BAS, is okay – given that we would be claiming GST without a tax invoice to support it? That’s different to ignoring the whole thing. I’m wondering if the only two options are (1) to do nothing (i.e., no reporting in the BAS at all), or (2) to actually exchange proper tax invoices (or a tax invoice and an RCTI)?
If the conditions in the PCG are met, we would recommend not reporting the transactions on the BAS as this appears to be what the PCG contemplates. If you wanted to report the transactions in the BAS, we tend to agree that claiming an input tax credit (without a Tax Invoice) may be flagged as problematic.
We also note that the PCG does not expressly mention Tax Invoices at all. However, provided the terms of the PCG are met, and the GST position remains neutral for the relevant transactions, the ATO should not be devoting its resources in relation to these type of transactions (and presumably as part of this would also not be seeking to review Tax Invoices for such transactions).
We note the two options mentioned, and they both sound acceptable. There may also be a third option – reporting the transactions but not showing them as a GST inclusive supply nor a GST-inclusive acquisition. Note that we have not formally considered whether this would be acceptable, but it does appears to fall within the scope of the PCG. That is, again, provided the conditions in the PCG are met the ATO should not be devoting resources to review such transactions.
For a one-off transaction, we would assume the agreement between the parties would specify the GST-inclusive price.
What if it is not a one-off transaction but this type of countertrade/barter is ongoing, and the value of the supply is based on some formula? Would the formula or method of calculation stipulated in an agreement be enough to work out the value of the future transactions? Or do you think if it is not a clear dollar amount including GST stated in the agreement we would have to go down the path of exchanging invoices?
Provided the agreement allows each party to determine the value of the transaction and, and it is clear that value is subject to GST, this should be acceptable and within the scope of the PCG. This would be the case whether the transaction is one-off or there are ongoing transactions.
However, where there are ongoing countertrade transactions, we do note that paragraph 7 of the PCG contains a proviso that the countertrade transactions account for no more than approximately 10% of the entity’s total number of supplies.
PCGs provide taxpayer entities with guidance on how the ATO/Commissioner will apply the law (and/or its resources) when reviewing particular transactions. They are therefore helpful to such taxpayers. However, care must be taken to ensure the relevant conditions set out are met. There is also often not a lot of guidance provided by way of, say, FAQs, however from time to time the ATO reviews and updates its rulings (including PCGs) and may provide additional guidance on the ATO website. It is therefore always good practice to review these periodically.
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