Private ruling: Assessability of credit card reward points
Date of advice: 14 September 2017
Published: January 2018
Ruling period: 01 July 2014 – 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the gift cards redeemed from the reward points acquired under a credit card loyalty program included in the assessable income of the taxpayer? | A1: No | Q2: Are the funds received from the sale of gift cards acquired through the redemption of credit card rewards points included in the assessable income of the taxpayer? | A2: No | Q3: Are the transactional costs incurred resulting from gift voucher sales acquired through the redemption of credit card rewards points deductible to the taxpayer in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No | Q4: Are the gifts cards received by Company A Directors a fringe benefit per subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A4: No

Relevant facts and circumstances: X and Y are Directors of Company A. Company A operates an online business. Orders can be made online, through its websites or via a call centre. Delivery is Australia wide. Payment to suppliers is settled by a personal credit card owned by X and Y which is used for business purposes only. The credit card has a rewards program. Rewards points are allocated to the credit card. The rewards points are then redeemed by the cardholders for gift cards from various retailers. The gift cards are then on sold for cash less certain fees by one of the cardholders.

Relevant legislative provisions: Income tax Assessment Act 1997 section 6-5 | Income tax Assessment Act 1997 section 6-10 | Income tax Assessment Act 1997 section 6-15 | Income tax Assessment Act 1997 section 8-1 | Fringe Benefit Tax Administration Act 1986 subsection 136(1) Question 1 | Are the gift cards redeemed from the reward points acquired under a credit card loyalty program included in the assessable income of the taxpayer? | Summary | The gift cards acquired through the redemption of rewards points are not included in the assessable income of the taxpayer under section 6-5 of the ITAA 1997. | Detailed reasoning | Assessable income includes ordinary income and statutory income as stated in subsection 6-1(1) of the ITAA 1997. Subsection 6-5(1) of the ITAA 1997 states your assessable income includes income according to ordinary concepts which is called ordinary income. As a resident for tax purposes, subsection 6-5(2) explains that assessable income includes the ordinary income which is derived, directly or indirectly, from sources inside or outside Australia, during the income year. | Section 6-10 of the ITAA 1997 goes on to describe statutory income as amounts that are not ordinary income but are included in assessable income by another provision. | Practice Statement PS LA 2004/4 (GA) Taxing consumer loyalty program rewards provides guidance about whether rewards are taxable. Taxation does not arise where a program issues loyalty points as the result of meeting certain conditions. However, where loyalty points are redeemed for a reward, which has occurred as part of an income earning activity, taxation may be appropriate. This is the case when the following factors are evident: | ● there is a business relationship between the recipient of the reward and the reward provider, and | ● the benefit is convertible directly or indirectly to money’s worth, or | ● the taxpayer is carrying on a business, and section 21A of the ITAA 1936 operates to include the reasonable value of the non-cash business benefit in the taxpayer’s assessable income. | Taxation Determination TD 1999/34 (TD 1999/34) is specific to consumer loyalty programs and states that rewards received under consumer loyalty programs which are as a result of private expenditure will not be subject to tax. | 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) defines a consumer loyalty program as a marketing tool being operated by (and including) credit card providers. The objective of these schemes is to encourage their customer’s loyalty. | Application to the taxpayer’s circumstances | Although the taxpayer is carrying on a business of online sales, it is the payment of expenses using a private credit card by the cardholders which has enabled the redemption of points for gift cards. The existence of a business relationship between the Company A and the credit card provider is not evident. The taxpayer has not redeemed these points in exchange for gift cards. | Therefore, for these reasons, the value of the gift cards acquired through the redemption of points accumulated under the credit card loyalty program are not assessable income to the taxpayer? | Question 2 | Are the funds received from the sale of gift cards acquired through the redemption of credit card rewards points included in the assessable income of the taxpayer? | Summary | The funds received from the sale of gift cards acquired through the redemption of credit card rewards points are not assessable to Company A as they did not participate in their sale. | Detailed Reasoning | Section 6-1 of the ITAA 1997 states that assessable income includes the ordinary and statutory income which is derived, directly or indirectly, from sources inside or outside Australia, during the income year. | Section 6-5 of the ITAA 1997 discusses income according to ordinary concepts: | 6-5(1) | Your assessable income includes income according to ordinary concepts, which | is called ordinary income . | 6-5(2) | If you are an Australian resident, your assessable income includes the * ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. | 6-5(3) | If you are a foreign resident, your assessable income includes: | (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and | (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. | 6-5(4) | In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. | Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. It is not necessary for all of these characteristics to be present for an amount to be considered ordinary income. | Furthermore, whether a receipt is ordinary income depends upon its quality in the hands of the recipient as noted in case: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514. | It is also stated that in order for an amount to be income according to ordinary concepts, it must be money or something capable of being turned into money. In FC of T v Cooke & Sherden 80 ATC 4140 it was affirmed that the application of convertibility was valid. Furthermore it was determined that the income had to be money or something which could be converted into money. | Section 6-10 of the ITAA 1997 goes on to describe statutory income as amounts that are not ordinary income but are included in assessable income by another provision, which is also included in assessable income. | Application to the taxpayer’s circumstances: | Company A was not involved in the sale of the gift cards. | As they were not involved in the sale of the gift cards, there is no amount attributable to the sale of gift cards to be included in Company A’s assessable income? | Question 3 | Are the transactional costs incurred resulting from gift voucher sales acquired through the redemption of credit card rewards points deductible to the taxpayer in accordance with section 8-1 of the ITAA 1997? | Summary | The transaction costs incurred from the sale of gift cards are not deductible to Company A. | Detailed reasoning | Section 8-1 of the ITAA 1997 generally allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. | In this case, Company A did not gain or produce assessable income from the sale of the gift card sales. It follows therefore, that any transactional costs from the gift voucher sales are not deductible under section 8-1 of the ITAA 1997. | Question 4 | Are the gifts cards received by X and Y fringe benefits per subsection 136(1) of the FBTAA? | Summary | FBT does not arise in respect to the gift cards redeemed by X and Y through the use of a credit card. | Detailed reasoning | A fringe benefit is defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as a benefit provided to an employee in respect of employment, but not in the form of salary or wages. A benefit provided in respect of employment includes a benefit provided to somebody by reason of that person’s employment. fringe benefit , in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: | (a) provided at any time during the year of tax; or | (b) provided in respect of the year of tax; | being a benefit provided to the employee or to an associate of the employee by: | (c) the employer; or | (d) an associate of the employer; … | The definition of the term ‘benefit’ in subsection 136(1) of the FBTAA includes rights, privileges or services: | benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under: | (a) an arrangement for or in relation to: | (i) the performance of work (including work of a professional nature), whether with or without the provision of property; | (ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or | (iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; | (b) a contract of insurance; or | (c) an arrangement for or in relation to the lending of money. | Where an employer pays a third party on behalf of an employee in relation to expenses in respect of the employee’s employment then a fringe benefit has been provided. | Employee | An ‘employee’ is defined in subsection 136(1) of the FBTAA is defined as a ‘current employee’, a ‘future employee’ or a ‘former employee’. A ‘current employee’ is further defined as someone entitled to receive ‘salary or wages’. ‘Salary or wages’, as defined in subsection 136(1) of the FBTAA, includes payments of remuneration to a director from which an amount must be withheld under section 12-40 of Schedule 1 to the Taxation Administration Act 1953 . Section 137 of the FBTAA extends the definition of ‘salary or wages’ to include benefits that would constitute salary or wages if they were instead provided by way of a cash payment. | Paragraph 4 of Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax: shareholder employees of family private companies and directors of corporate trustees provides the following example: | a director of a company who does not receive any cash remuneration but who does receive non-cash benefits by way of remuneration is treated as an employee for FBT purposes. | However, if a non-cash benefit is received by a director solely by reason of his or her shareholding rather than by way of remuneration, the receipt of that benefit would not result in the director being treated as an employee for fringe benefits tax purposes. | In respect of employment of employee | In considering whether a benefit is provided to an employee ‘in respect of’ their employment, subsection 136(1) defines ‘in respect of’, in relation to the employment of an employee, to include: | by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. | The term ‘employment’ involves the holding of an office, pursuant to subsection 136(1) of the FBTAA, which would include holding the office of director of a company. | MT 2019 deals specifically with the circumstances where a family private company provides benefits to a shareholder of the company who is also a current employee of the company. At paragraph 9 it is stated: | In relation to benefits that are not expressly linked to the carrying out of the employee's duties, it is necessary to examine all the facts and circumstances of the case to establish whether the benefit is fairly to be regarded as having been granted to the shareholder/employee in his or her capacity as an employee or as a shareholder. Factors such as the nature of the benefit, any cash remuneration paid, the nature and extent of any trading activities of the company, the extent of any services rendered by the shareholder/employee and the extent of his or her shareholding may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the capacity of shareholder. | PS LA 2004/4 (GA) provides further clarification on FBT for consumer loyalty program rewards; | A reward received by an employee under a consumer loyalty program may be a fringe benefit for the purposes of the FBTAA where the facts demonstrate that there is an arrangement between the employee and employer so that the provision of the reward has a sufficient and material connection to employment. | Generally, flight rewards or other rewards received under similar consumer loyalty programs are not subject to FBT as they result from a personal, non-employment contractual relationship between the employee and the program provider. | Essentially, if the employer was a party to the agreement or arrangement between the loyalty program and the employee and there is sufficient connection with the employee’s employment, the benefits arising under the program may be taxable as a fringe benefit. | The direct or indirect connection to the employment and the benefit received is the key element in the definition of a fringe benefit under subsection 136(1) of the FBTAA. | Application to Company A’s circumstances | The facts do not demonstrate that there is a sufficient and material connection between the receipt of the gift cards and the employment. | Therefore, the gift cards acquired through the redemption of points earned under a credit card loyalty program are not fringe benefits for the purposes of subsection 136(1) of the FBTAA.