‘Too good to be true’ barter credit schemes possibly fraud, tax office warns

“If it seems too good to be true, it probably is,” said the ATO’s deputy commissioner for behaviours of concern, Erin Dale. “‘Be wary of people promoting this scheme, or any scheme that promises to significantly reduce or avoid paying tax. Some may even be financial advisers or tax agents.”

Under the scheme, the taxpayer obtains “barter credits” (or “trade dollars”) by entering into a non-recourse or limited-recourse loan agreement with a barter exchange. For a fee to the exchange, the taxpayer exchanges real money for the credits, which are worth much more on paper than the amount paid. The creditscan then be “donated” to an organisation with DGR status and be eligible for a major tax deduction.

In a hypothetical example offered by the tax office, a payment of $3000 might buy a taxpayer a non-recourse loan to fund the purchase of barter credits for a nominal face value of $30,000, with a loan term of 25 years and no repayments required for the principal or the interest.

The taxpayer then donates the $30,000 in barter credits to a DGR-status organisation and receives a donation receipt, which can be offset as a deduction against tax owed on the taxpayer’s annual tax return.

The kicker is that the DGR organisation cannot use the barter credits, or certainly not for the amount they are said to be worth – which raises the question of why any DGR charity would go anywhere near such a gift.

It’s no surprise that the ATO has “concerns” about this chain of events.

“While it’s not unlawful for DGRs to accept barter credits as donations, participating in arrangements where deductions for barter credits are artificially inflated could be fraud and may result in an investigation by the ATO,” deputy commissioner Dale said.

Barter exchanges – where members trade goods and services without cash – are not new, the ATO said, adding, “Barter exchanges have been in operations for many years and are separate from crypto currency. Legitimate barter transactions where members genuinely trade goods and services at fair value are not within the scope of the Alert.”

Dale said it was possible taxpayers had been lured into the scheme without realising it was potentially fraudulent. She emphasised the benefits of speaking up if that was the case.

“If you think you're involved in an unlawful tax scheme, we can help you,” Dale said. “If you proactively approach us, you may be eligible for a reduction in penalties.”

If not, look out. Dale warned that anyone else involved may have to prepay any tax owed and face heavy penalties, interest and potential legal action.

Under promoter penalty laws, the ATO could impose heavy civil penalties on anyone promoting unlawful tax schemes, she said.

It wasn’t only fraudulent tax deductions that were at issue, she added, saying that as well as taking money away from the community through unpaid taxes, the scheme also threatened to undermine public trust in not-for-profits with DGR status. DGR organisations receiving barter credits might not be aware they were involved in a tax scheme, she said.

The ATO said anyone who wanted to explore the detail of where taxpayers and their advisors involved in barter credit schemes may come unstuck would find it under section 30-15 of the Income Tax Assessment Act 1997.

Taxpayers may be incorrectly relying on paragraph 15 of Taxation Ruling IT 2668, “Income tax: barter and countertrade transactions”, to treat the value of one donated barter credit as equivalent to one Australian dollar, the ATO official alert stated, adding that IT 2668 does not support this valuation basis in arrangements of the kind described.

“We are concerned that these arrangements are being facilitated by barter exchanges and being marketed and promoted as supposedly legitimate tax arrangements to taxpayers as a means of reducing their tax payable or increasing refunds,” said the ATO.

“We are actively reviewing these arrangements and are engaging with relevant taxpayers, barter exchanges and DGRs to ensure that all parties have correctly met their income tax obligations. In the course of these reviews, we will also consider any related goods and services tax obligations.

“Taxpayers and advisers who facilitate or promote these types of arrangements will be subject to increased scrutiny.

“We are liaising with the Australian Charities and Not-for-profits Commission in respect of participating DGRs, and the Australian Securities and Investments Commission in respect of participating barter exchanges.”

Think you might be caught in this scheme?

The ATO said taxpayers concerned they have found themselves caught up in such a scheme should:
- Phone the ATO on 1800 060 062
- Ask the ATO for its view through a private ruling
- Seek independent advice as to the legal and tax consequences of your arrangement
- Make a voluntary disclosure to reduce penalties that may apply.

If you have been offered a scheme that you suspect is unlawful, the ATO said, you should reject it and report it to the ATO. To make a confidential report, phone 1800 060 062 or complete a tip-off form.

The official taxpayer alert from the ATO is here.