Edited version of private advice

Authorisation Number: 1051994171600

Date of advice: 15 June 2022

Ruling

Subject: GST and loyalty programs

Question 1

Is the consideration for the goods or services supplied by a Participating Retailer to a Member using a 'money off' reward limited to the discounted price?

Answer

Yes.

Question 2

Does the Participating Retailer make a taxable supply to the Loyalty Program Operator for the Redemption Payment?

Answer

Yes.

Question 3

If the answer to question 2 is yes, is the character of the supply by the Participating Retailer to the Loyalty Program Operator the same as the character of the supply to the Member?

Answer

Yes.

This ruling applies for the following period:

The scheme commences on:

The date of issue of the private ruling

Relevant facts and circumstances

The operation of the Loyalty Program

The Loyalty Program meets the criteria set out in paragraph 7 of the Goods and Services Tax Ruling GSTR 2012/1 Goods and Services Tax: loyalty programs (GSTR 2012/1).

Customers who sign up to become Members of the Loyalty Program agree to Membership Terms and Conditions by completing a membership application form.

After becoming a Member, customers earn points on eligible purchases from Participating Retailers (retailers where the Member may earn points and use Loyalty Dollars (L$) and other business partners (retailers where the Member may earn points but not use L$) on every dollar they spend and via special promotions offered. The points earned are credited to the individual Member's account.

For the purposes of this ruling both the Participating Retailer and the Loyalty Program Operator are registered for the goods and services tax (GST). You have joined as a Participating Retailer to the Loyalty Program.

The points earned by Members and credited to their account do not have any monetary value and do not give the right to any rewards until such time as the points are redeemed.

Participating Retailers and other business partners are required to pay Loyalty Program Operator for the points earned by Members on eligible purchases at the Participating Retailer or business partner. Loyalty Program Operator uses these funds to purchase the rewards to be provided to Members redeeming their points.

Members then use their points to redeem rewards. There are many different types of rewards available to Members of the Loyalty Program including the possibility of acquiring goods or services from various providers using only points or, in some instances, using points and money to pay for the goods or services. Members can also elect to redeem their points for gift cards or to make donations to charity. This private ruling does not request a position on the GST treatment of these type of rewards.

This private ruling concerns the GST treatment of transactions where Members use their points to obtain L$ and then receive discounts, or 'money off', on their purchases at Participating Retailers using the L$ at point of sale.

Loyalty Dollars (L$)

Members can choose to redeem their points for L$. Members can convert points to L$ in multiples.

L$ can currently be used to pay for purchases at many Participating Retailers. Where a Member wishes to use L$ at Participating Retailers, the Member must log into their account and redeem their chosen number of points for a certain value of L$. The L$ are then credited to the Member's Loyalty card.

To redeem their L$ the Member swipes their card at point of sale and enters the amount of L$ that they want to use in the transaction. The Loyalty card is protected by a PIN which the customer must enter in order to access and redeem the L$.

Each Participating retailer may elect to specify excluded products i.e., products that are not eligible for the 'money off' benefit.

As an example, a customer with $10 of L$ has scanned $22 of shopping at the register and then elects to pay for the shopping with $12 cash and redeeming $10 of L$. The Participating Retailer must accept the L$ and only Charge the Member the discounted price.

Redemption payments to Participating Retailers

Under the terms of the Participation Agreement between Loyalty Program Operator and the Participating Retailer the Participating Retailer must accept L$ and only charge the Member the discounted price.

In turn, Loyalty Program Operator agrees that where points are redeemed by Members for a 'money off' reward at the Participating Retailer, Loyalty Program Operator will pay that Participating Retailer an amount (a Redemption Payment) to compensate the Participating Retailer for redeeming the L$.

The exact amount of the Redemption Payment from Loyalty Program Operator to the relevant Participating retailer will depend upon the rate negotiated between the Participating Retailer and Loyalty Program Operator.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

Reasons for decision

Detailed reasoning

Paragraph 7 of GSTR 20012/1 provides:

This Ruling applies to arrangements whereby a loyalty program is established by the loyalty program operator, and governed by an arrangement between the loyalty program operator and each member, that have all of the following features:

•                     the loyalty program operator provides a member with loyalty points as a consequence of the member purchasing eligible goods or services or using a credit card to make such a purchase;

•                     the price paid by a member for making eligible purchases is the same as for a non member (that is they do not pay anything extra for the loyalty points);

•                     the loyalty points cannot be transferred for money;

•                     the loyalty points cannot be redeemed for money;

•                     to the extent that points may notionally have a value for program members, the value of points earned in making eligible purchases is low compared to the price of the goods or services themselves (that is the value would be less than 10% of that of the goods or services);

•                     there is a record keeping mechanism in place that allows the loyalty program operator, member or both, to track how many loyalty points have accrued; and

•                     the points may be redeemed at some time for a reward, being goods or services or a right to receive goods or services. The actual reward depends on the number of points accrued and redeemed by the member. Accordingly, the greater the number of points redeemed, the more valuable the reward to the member is likely to be.

Question 1

Is the consideration for the goods or services supplied by a Participating Retailer to a Member using a 'money off' reward limited to the discounted price?

For GST purposes, this question is only an issue where the Participating Retailer making the sale to the Member is making, at least to some extent, a taxable supply (i.e., not a GST-free or input taxed supply). Where that is the case, it is necessary to determine whether the 'consideration' for the taxable supply is limited to the cash amount paid - the discounted price - or also includes the value of the 'money off' reward.

Where the Member is using its Loyalty points to obtain 'money off' - whether by using L$ loaded on their Loyalty card or swiping their Loyalty card for $10 off at POS - the reward they are getting is a discount for the goods or services being purchased.

In such circumstances, we consider that the consideration that the Participating Retailer receives from the Member is limited to the cash payment that is received from the Member. There is no other payment or valuable right received by the Participating Retailer.

This circumstance is the same as, or similar to, a customer using a discount voucher, a 4 cents-a-litre off coupon or a 'points plus pay' promotion. The act of using such a discount is not itself consideration under section 9-15 of the GST Act.

Question 2

Does the Participating Retailer make a taxable supply to Loyalty Program Operator for the Redemption Payment?

The Participating Retailer and Loyalty Program Operator are parties to the Participation Agreement under which they have agreed to make a number of supplies to each other as part of the FBP.

One such supply is the Participating Retailers' agreement to accept 'money off' rewards by only charging Members the discounted price. In consideration of having done so, Loyalty Program Operator will pay the Participating Retailer a Redemption Payment.

As a result of the contractual agreement and the actions of the parties, there is both a supply and consideration in the Participating Retailer accepting the 'money off' reward.

Such supply will be a taxable supply as the requirements of a taxable supply in section 9-5 of the GST Act are met.

This analysis is in line with the Commissioner's view set out in paragraphs 104 to 107 of GSTR 2012/1, which states:

Does a redemption partner make a supply to the Loyalty Program Operator when it provides rewards to program members?

104. In some loyalty programs there is an agreement between the operator and a redemption partner, under which rewards are provided by the redemption partner to members on redemption of points. Under such an agreement, the operator pays the redemption partner for the provision of those goods or services (whether or not there is any separate amount payable by the member under a points plus pay arrangement).

105. In these circumstances an acquisition is made by the operator pursuant to a contract between the parties and the payment by the loyalty program operator is consideration for the provision of the reward.

106. Where the member pays consideration for the reward under a points plus pay arrangement, there may be two taxable supplies, one to the member and one to the loyalty program operator. In some loyalty programs both these supplies are made by the redemption partner.

107. The conclusion that the one set of actions by the redemption partner may give rise to two taxable supplies - one to the operator and one to the member - is consistent with the decision in Commissioner of Taxation v. Secretary to the Department of Transport (Vic), where it was held that taxi drivers made a supply not just to their passengers, but also to the Department which paid part of the fare.

The above analysis applies to the 'money off' rewards, as the Participating Retailer accepting the 'money off' discount is making a supply to Loyalty Program Operator in accordance with their Participation Agreement.

For completeness, whilst Loyalty Program Operator's payment to the Participating Retailer is in the context of a supply to the Member, we do not consider this 'third party consideration' because:

•                     there is a commercial agreement in place - the Participation Agreement - between Loyalty Program Operator and the Participating Retailers that creates binding obligations - refer paragraph 25 of GSTR 2012/1 and also paragraphs 119, 221 and 222 of GSTR 2006/9 'Goods and services tax: supplies' (GSTR 2006/9)

•                     the one set of acts - supplying the goods or services and accepting the 'money off reward' can give rise to two supplies - refer paragraphs 217-218 of GSTR 2006/9;

•                     the Participation Agreement has binding obligations, so is even more conclusive than the 'pre-existing framework' factors of the Commissioner of Taxation v. Secretary to the Department of Transport (Vic)[2010] FCAFC 84 (the Department of Transport) case and paragraphs 221A-221G of GSTR 2006/9.

Question 3

If the answer to question 2 is yes, is the character of the supply by the Participating Retailer to Loyalty Program Operator the same as the character of the supply to the Member?

It is considered that the character of the supply by the Participating Retailer to Loyalty Program Operator is the same as the character of the supply to the Member.

This view is based on the principle provided in paragraphs 106 to 108 of GSTR 2012/1 where it discusses the GST implications of redemption of rewards by a member under points plus pay arrangements.

In this case, the 'Money off' rewards are very similar to the 'points plus pay' arrangements. Relevantly in paragraph 108 of GSTR 2012/1, it says:

The character of what is provided to the member may assist with the characterisation of the thing supplied under the contract between the loyalty program operator and the redemption partner (see Proposition 13 in GSTR 2006/9). This may be relevant in determining, for example, whether the supply by the redemption partner to the loyalty program operator is taxable, GST-free or input taxed. For example, where the reward is food provided to the member (that does not fall within the exclusions in sections 38-3), the supply by the redemption partner to the operator is GST-free.

The characterisation that the supply to the loyalty program operator is the same as the supply to the member is consistent with the decision in the Department of Transport case. In that case, the single action of transporting an eligible taxi passenger was taken to be a supply to both the passenger (who paid a discounted fare) and the Department (who paid an amount equal to the remaining fare). Both supplies had the same character of transport services.

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