ATO ID 2001/433: Income - redemption of credit notes for provision of free services
Date of decision: 21 September 2001
Business line: Private Groups and High Wealth Individuals

Issue
Does the provision of services free of charge on redemption of a credit note constitute assessable income according to ordinary concepts under section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Income according to ordinary concepts under section 6-5(1) does not apply to redeemed credit notes that have no conversion or transferable.

Facts
The taxpayer, an individual, operates a small business which provides services to other businesses and householders. In order to generate new and repeat business, the taxpayer intends to run a promotional/advertising campaign offering the chance to win $x worth of services if they use any of the taxpayer's services within a selected period. Winners will receive a credit note with a specified dollar value which may be redeemed at their leisure.

Reasons for decision
Summary: The issue in this case is whether the redemption of a credit note issued free of charge by the taxpayer constitutes income. Income, or more specifically assessable income, is divided into two categories: Generally, if an amount is neither ordinary nor statutory income, it is not included in assessable income. An important feature to consider in determining whether a non-cash item received is income is whether it is convertible into money. If it is convertible into money it is more likely to be income, subject to fulfilling other tests, than if not convertible into money. In this case the credit note or notes represent no more than an inducement to continue to engage the services of the taxpayer in question, they have no conversion or transferable value to the taxpayer on redemption. At best they may generate future income but certainly do not, on redemption, constitute a receipt of income according to ordinary concepts.

Legislative references: Income Tax Assessment Act 1997 section 6-5(1)
Subject references: Income