Is a contra a good idea? You’re in business and you need some product or service and you know another business that can do that for you & you know that they also need what you do – hey why not contra it and both of you are happy. Easy right? Wrong – well yes it is easy but make sure you do it right.
The IRD classify income as:
- what you receive from the sale of goods and services
- any ‘cash’ jobs you do, and
- the value of any transactions you barter
Now Barter and “contras” are really one and the same and so they are technically income. What’s the issue you may say as the value may be about the same? Well it still needs to be accounted for, just issue each other an invoice and offset the invoices against each other in your accounting program. If one party is not GST registered then the other party will have to pay the GST as there is no input tax credit for them to claim. For example if a GST registered sign-writer does $500 work for a no GST registered marketing person and get $500 of marketing in return, the sign-writer has to charge GST 15% on the contra and pay it to the IRD in their GST return.
Why does it need to be accounted for, well a product or service is being “sold” for another product or service, this sale/income needs to be recorded even though actual money hasn’t changed hands, unless you return their value in your books the IRD may view this as tax evasion.
There’s nothing wrong with contras and in fact they can come in handy at times when cash flow is short but you need something then and there, you must just make sure it is handled correctly and above board.
Well they’ll never know right? Wrong. The IRD have figures for most industries, benchmarks, and they can apply these to many businesses to see discrepancies from stock to sales amongst other things. They could also see sales for the month don’t match good/services required for those sales if they are auditing. You might think you’re clever enough to cover your tracks but if they catch one company doing it they’ll drill down and maybe catch your company in this net as a result. They may even look further and consider reassessing for previous years, then there is not only the penalty for doing so but any interest will also apply.
So contras seem like a good idea at the time but is it really worth the risk in the long run, remember you are not the first person to have thought of this, the IRD has seen it all before and have systems & processes in place to check for it. If in doubt talk to the IRD or your accountant, playing Russian Roulette with the IRD is not clever.