Edited version of private advice

Authorisation Number: 1051591947482

Date of advice: 8 October 2019

Ruling

Subject: Income Tax Implications - Credit Card Reward Points

Question 1

Would reward scheme points earned (but not yet redeemed for goods and services) by the Taxpayer through the use of her personal credit cards to purchase gift cards that are used in the business operated by a trust be assessable to her under either section 21A of the Income Tax Assessment Act 1936 (ITAA 1936) or under section 6-5 or section 6-10 or section 10-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Would reward scheme points earned by the Taxpayer - from the use of her personal credit cards to purchase gift cards that are used in the business operated by a trust - that are redeemed for goods and services be assessable to her under either section 21A of the Income Tax Assessment Act 1936 (ITAA 1936) or under section 6-5 or section 6-10 or section 10-5 or section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period(s)

1 July 2017 to 30 June 2021.

The scheme commences on

1 July 2017

Relevant facts and circumstances

In 20XX, the trustee for a Trust ('the Employer') commenced a business of purchasing various kinds of gift cards and reselling these gift cards to customers.

The Taxpayer is the sole Director of the Trustee Company.

The Taxpayer, as well as their parents, are beneficiaries of the Trust.

The Taxpayer's Personal Credit Cards

The Taxpayer uses two personal credit cards to purchase gift cards on behalf of the Employer in respect of the Employer's business.

With the exception of some minor personal expenses, the Taxpayer uses their two personal credit cards primarily for the business expenses of the Employer, which includes the purchase of various gift cards.

The Taxpayer is the main card holder for the two credit cards, with supplementary cards held by each of the Taxpayer's parents. The Taxpayer's parents individually use the Taxpayer's (supplementary) credit cards to also purchase gift cards on behalf of the Employer.

The Taxpayer pays the annual credit card fees on her two personal credit cards.

The Employer's Business Process

The Employer's high-level business process is as follows:

1.     Customers place an order online for the purchase of a certain number of gift cards from the Employer's business.

2.     Customers pay for their order in advance. Funds for the order are deposited into a bank account in the name of the Employer.

3.     Once the funds for each customer's order is deposited into the Employer's bank account, the Taxpayer will then use her personal credit cards to purchase (also online, on behalf of the Employer) the gift cards ordered by the Employer's customers.

·        To ensure there are sufficient funds prior to purchasing gift cards, the Taxpayer will generally not purchase the gift cards (on behalf of the Employer, using their two personal credit cards) until after clients have confirmed their orders and paid the relevant monies in full into the Employer's bank account.

·        The Taxpayer and their parents purchase gift cards online through a program that the Taxpayer has membership of (in the name of the Employer). As part of this program, the Taxpayer and their parents (on behalf of the Employer) can purchase gift cards at a discount and then on-sell them (also online).

·        For example, for the purchase of a retail store's gift cards, the contract for the purchase of these gift cards is between the retail store and the Employer.

·        There is only a very small margin/profit made on the sale of each gift card.

·        Once the Taxpayer uses their personal credit cards to purchase (online) the gift cards ordered by the Employer's customers, the amount of the purchase is recorded on the Employer's books as a 'Director Loan'.

4.     Using the funds in the Employer's bank account, the Employer regularly pays the Taxpayer back for the gift cards that were purchased using the Taxpayer's personal credit cards (and for any other business expenses incurred).

·        Once the Employer reimburses the Taxpayer for the cost of the gift cards that were purchased using their personal credit cards (and for any other business expenses incurred), the amount recorded on the Employer's books as a 'Director Loan' is reduced accordingly.

The Employer's business has XXX customers. Each customer is an unrelated party.

Director/Employee Remuneration

Since the inception of the Employer's business until XXX 20YY, the Taxpayer did not receive any Director's fees or salary/wages. During that time, the Taxpayer was only remunerated through the Taxpayer's occasional redemption of reward points (that had been accumulated on their personal credit cards through the purchase of gift cards for the Employer's business) for their personal use.

However, from XXX 20YY, the Taxpayer was also remunerated through the receipt of Director's fees.

Apart from the Taxpayer and the Taxpayer's parents, the Employer only has one other employee (who is not related to the Taxpayer). This employee is employed on a casual basis for one day per week and receives an hourly wage.

The Taxpayer's parents have not received any remuneration for purchasing gifts cards for the Employer's business. As the Taxpayer's parents are beneficiaries of the Trust, they expect a trust distribution from the Trust at the end of each financial year.

Accumulation and Redemption of Credit Card Reward Points

The Taxpayer has earned the following number of reward points on their two credit cards during the 20XX and 20YY financial years. These reward points were accumulated as a result of purchasing gift cards on behalf of the Employer for the Employer to on-sell as part of its business.

Of the total reward points accumulated on the Taxpayer's personal credit cards, a component of these points was redeemed by the Taxpayer for her personal use.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 21A

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-2

Reasons for decision

Summary

Credit card reward scheme points earned (but not yet redeemed for goods and services) by the Taxpayer through the use of her personal credit cards to purchase gift cards that are used in the business operated by a trust are not assessable to her under either section 21A of the ITAA 1936 or under sections 6-5, 6-10, 10-5 or 15-2 of the ITAA 1997.

However, the rewards or benefits obtained by the Taxpayer upon redemption of her credit card reward scheme points are benefits provided to the Taxpayer in respect of their employment or services rendered by them. Accordingly, the value of the redeemed rewards will be assessable income pursuant to section 15-2 of the ITAA 1997.

Detailed reasoning

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs (TR 1999/6) addresses the tax implications of flight rewards received from consumer loyalty programs.

The receipt of credit card reward points is regarded as a consumer loyalty program.

A 'consumer loyalty program' is not defined in the taxation legislation. However, paragraph 3 of TR 1999/6 provides the following definition:

A consumer loyalty program is a marketing tool operated by a supplier of goods or services to encourage customers to be loyal to the supplier.

The standard features of a consumer loyalty program are:

·        the customer deals with the supplier in a personal capacity, that is, in a normal arm's length commercial relationship that exists between the customer and the supplier

·        membership is restricted to natural persons

·        membership of the program is usually by application, which may require an application fee and/or annual fee

·        points are received with each purchase of goods or services

·        members and non-members pay the same amount for the goods or services purchased, and

·        points are redeemable for goods and services.

Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) Taxing consumer loyalty program rewards (PS LA 2004/4 (GA)) discusses whether rewards received under consumer loyalty programs from banks and credit providers are taxable. Relevantly, paragraph 2 of PS LA 2004/4 (GA) provides that:

... receiving rewards may be subject to tax but receiving points is not, even if the points are transferred from one loyalty program to another.

Paragraph 17 of PS LA 2004/4 (GA) provides that, to determine whether the fight reward has the characteristics of ordinary income:

The first consideration is whether the flight reward has the characteristics of ordinary income. The Note in subsection 6-5(1) requires section 10-5 to be consulted as specific provisions may affect the treatment of some ordinary income. Section 10-5 has a listing for 'non-cash benefits' that directs one to 'benefits' and 'employment'. Under 'benefits' is a listing for 'business, non-cash' that directs one to section 21A of the Income Tax Assessment Act 1936 (ITAA 1936). Under 'employment' is a listing for 'allowances and benefits in relation to employment or rendering services' that directs one to section 15-2 of the [Income Tax Assessment Act 1997] ITAA 1997 (formerly paragraph 26(e) of the ITAA 1936).

Paragraph 21 of Taxation Ruling TR 1999/6 concludes:

..... only a business taxpayer could have a flight reward assessed as ordinary income under section 6-5 [of the Income Tax Assessment Act 1997 (ITAA 1997)] because only a business taxpayer can have a non-cash benefit treated as if it were cash and, hence, be ordinary income. Other taxpayers must be considered under section 6-10 (statutory income) which directs one to section 10-5 and in turn section 15-2 [of the ITAA 1997].

Paragraph 22 of TR 1999/6 further notes that in determining the tax implications of rewards received from consumer loyalty programs (such as credit card reward points) that a consideration common to both the income tax and fringe benefits tax provisions is to identify whether in the provision of the reward there exists the necessary employment or business relationship. The business taxpayer may receive frequent flyer points as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and a taxpayer who receives the benefit through an employment relationship may have the benefit included as assessable income because it is statutory income by virtue of section 6-10 of the ITAA 1997.
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Benefits provided in respect of employment or services

Section 15-2 of the ITAA 1997 states:

15-2(1)

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

15-2(2)

This is so whether the things were *provided in money or in any other form.

15-2(3)

However, the value of the following are not included in your assessable income under this section:

(a) a *superannuation lump sum or an *employment termination payment;

(b) an *unused annual leave payment or an *unused long service leave payment;

(c) a *dividend or *non-share dividend;

(d) an amount that is assessable as *ordinary income under section 6-5;

(e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share schemes) applies.

The Taxpayer will receive a benefit of credit card reward points when they use their personal credit cards to purchase gift cards that are used in the Employer's business.

Paragraph 22 of TR 1999/6 focuses on the relevant points in section 15-2 of the ITAA 1997:

Employees (where FBT does not apply)

15-2(1) [of the ITAA 1997] Your assessable income includes the value to you of all... benefits,... *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you...

15-2(2) This is so whether the things were *provided in money or in any other form (emphasis added).

In Payne v. FC of T (1996) 66 FCR 299; 96 ATC 4407; (1996) 32 ATR 516 (Payne's case), Mrs Payne joined the consumer loyalty program without her employer's knowledge. Mrs Payne was unable to cash in the flight reward (airline tickets) or transfer it to anyone else, but she was able to have the flight reward made out in the name of family members. The reward points Mrs Payne accrued from employer-paid travel (and some privately-paid travel) were used to acquire airline tickets in the name of her parents who travelled from England to visit her. The Federal Court held Mrs Payne was not assessable in respect of the flight reward as she received the flight reward as a result of the personal contract she established with the airline on payment of the membership fee.

In view of Payne's case, the term 'given or granted' (and its equivalent in section 15-2 of the ITAA 1997, 'provided'), requires the employer and employee to have an understanding that the employee will receive an entitlement to flight rewards from employer-paid expenditure. The fact that an employer may have a policy that allows employees to use points acquired from employer-paid expenditure for private purposes is not, of itself, enough to demonstrate that an employee will receive flight rewards as it is up to the employee to determine if they will receive flight rewards by becoming a member. Similarly, just because an employer has paid the membership fee for a consumer loyalty program, does not mean the employee will ever receive flight rewards unless the employer has agreed that sufficient employer-paid expenditure will occur to result in flight rewards.

Since the inception of the Employer's business until XXX 20XX, the Taxpayer did not receive any Director's fees or salary/wages. During that time, the Taxpayer was only remunerated through the receipt of credit card reward points (that had been accumulated on their personal credit cards through the purchase of gift cards that are used in the Employer's business), which were available for the Taxpayer to redeem for their private use (for example, for flight rewards and/or other goods and services).

From XXX 20XX, the Taxpayer was also remunerated through the receipt of Director's fees.

Conclusion

This case can clearly be distinguished from Payne's case. It is clear from the facts that the Employer and the Taxpayer had a clear understanding and agreement of the use of the Taxpayer's credit cards and the redemption of the points that accumulated as a result of that use. Up until XXX 20XX, the Taxpayer received no other remuneration for her services.

In accordance with paragraph 2 of PS LA 2004/4 (GA), the receipt of reward points (that have not yet been redeemed for goods or services) will not create a taxing point for the Taxpayer.

However, the value of any rewards obtained by the Taxpayer upon redemption of their credit card reward scheme points are benefits provided to the Taxpayer in respect of their employment or services rendered by them and will be assessable income to the Taxpayer as a consequence of the application of sections 6-10, 10-5 and 15-2 of the ITAA 1997.

It is worth noting, however, that PS LA 2004/4 (GA) states at paragraph 5 that a referral to a Senior Technical Leader in the Australian Taxation Office (ATO) for review is necessary if the reward (that is, the benefit obtained from redemption of credit card reward points) is considered to be assessable income (or a fringe benefit) because:

·          The arrangement is so contrived and artificial that it has no commercial purpose other than to allow the recipient to receive the rewards.

·          The nature of the arrangements suggests that the rewards are a substitute for income which would otherwise be earned.

·          The points accumulated exceed 250,000 points per annum.

Administrative action is only considered warranted if at least one of the above criteria exist.

As per the Facts, the Taxpayer has accumulated a total of XXX reward points on their personal card cards in the 20XX income tax year, and a total of YYY reward points on their personal credit cards in the 20YY income tax year. This satisfies the last condition in paragraph 5 of PS LA 2004/4 (GA) and, as such, this matter has been referred to a Senior Technical Leader for review.

Based on discussions with a Senior Technical Leader, and based on the information available, it is considered that no further administrative action is required provided the Taxpayer includes in their assessable income - for their income tax returns for the relevant income tax years - the value of any rewards (goods and services) that she receives upon redeeming the credit card reward scheme points they have accumulated from using their personal credit cards to purchase gift cards for use in the Employer's business (and for any other business expenses incurred).

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