Private ruling: Goods and services tax (GST) and loyalty programs
Date of advice: 12 February 2019
Published: May 2019
Date scheme commenced: The date of issue of the private ruling.

Ruling: Q1: Does the loyalty program operator make a taxable supply to the Member when a Member redeems their loyalty points for loyalty dollars or money off at POS? | A1: No. | Q2: 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? | A2: Yes. | Q3: Does the Participating Retailer make a taxable supply to the loyalty program operator for the Redemption Payment? | A3: Yes. | Q4: If the answer to question 3 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? | A4: Yes.

Relevant facts and circumstances: The questions raised in this ruling are to address the situation where a former member of a GST group, continues to participate within the Loyalty Program (LP) as a member of a new GST group. The operation of the Loyalty Program Customers who sign up to become Members of the LP agree to Membership Terms and Conditions by completing a membership application form. After becoming a Member, customers are able to earn points on eligible purchases from Participating Retailers and other business partners on every dollar they spend and via special promotions offered. The points earned are credited to the individual member’s account. 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 Company for the points earned by Members on eligible purchases at the Participating Retailer or business partner. Loyalty Company 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 LP including the possibility to acquire 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 relate to these types of rewards offered through the LP. The LP essentially has all the features set out at paragraph 7 of the Goods and Services Tax Ruling Goods and Services Tax: loyalty programs (GSTR 20012/1). Money off rewards This ruling concerns the GST treatment of the transactions occurring in relation to two similar ways that Members can use their points to receive discounts, or ‘money off’ as the marketing materials put it, on their purchases at Participating Retailers - the POS discount arrangements and the L$ arrangements. (a) Point of Sales (POS) Discounts At stores, Members can swipe their Loyalty card at POS and request to redeem their Loyalty points. If they have sufficient Loyalty points, they can reduce their payment (purchase price) by redeeming Loyalty points. These eligible Members who have swiped their Loyalty card at the till to accrue points will be prompted when their purchase exceeds $X and they have sufficient points available to redeem for a reward. Eligible Members are then asked if they wish to take $X off their shop or save their points for later use. The eligible Member is required to make a selection via the touchscreen at the till or by confirming with the cashier. It is not possible for a Member to pay for a shop wholly with a POS discount, as the POS discount is only available where the Member is purchasing more than $X of shopping. (b) Loyalty dollars (L$) Members can also choose to redeem their points for L$. Members can convert points to L$. L$ can currently be used to pay for purchases at Participating Retailers. To obtain the L$ Members must log into their account and redeem their chosen number of points for a certain value of L$. The L$ are then credited on the Member’s Loyalty card. To redeem their L$, the Member will need to swipe their card at the till and enter the amount of L$ that they want to use in that transaction. The Loyalty card is protected by a PIN, which the customer must enter in order to access and spend the L$. L$ can be repeatedly claimed and accessed by the Loyalty card. L$ cannot be used for online purchases. Redemption Payments to Participating Retailers The Participating Retailers have entered into Participation Agreements with Loyalty Company under which they agree to accept the ‘money off’ rewards – either POS or L$ - and only charge the Member the discounted price. Loyalty Company agrees that where points are redeemed by Members for a ‘money off’ reward at a Participating Retailer, then Loyalty Company will pay that Participating Retailer an amount which represents a discount to the value of the reward (hereafter, a Redemption Payment). The exact amount of the Redemption Payment from Loyalty Company for any Participating Retailer will depend upon the agreement negotiated between the Participating Retailer and Loyalty Company, including any GST-gross up clause.

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 | A New Tax System (Goods and Services Tax) Act 1999 Section 100-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 100-25

Reasons for decision: Summary: Question 1 As per the facts provided, the Loyalty Program has all the features of a loyalty program as set out in paragraph 7 of GSTR 2012/1. Before a member can redeem points for a reward, the following will have occurred: ● the member would have accrued points by acquiring eligible goods or services from Participating Retailers or other business partners – but the consideration paid for the eligible goods or services is not apportioned to the points (paragraphs 16 and 54 of GSTR 2012/1); ● the Participating Retailer or other partner will have paid the Loyalty Program Operator a ‘points fee’ for the points allocated to Members – which would be subject to GST (to the extent not input taxed or GST-free) if the Participating Retailer or other partner are not in the same GST Group as the Loyalty Program Operator (refer paragraphs 17-20 and 75-83 of GSTR 2012/1). Where a Member of the Loyalty Program chooses to redeem their loyalty points for Loyalty Dollar or a ‘Money off’ at POS reward, then there is a supply being made by the Loyalty Program Operator of the reward - a discount that can be used at the Participating Retailers. This position is consistent with paragraphs 24, 98 and 99 of GSTR 2012/1 , which deal with whether there is a supply being made to the Member of a Loyalty Program when a member redeems their points. However, in accordance with the requirements of the GST Act and also explained in that ruling, in order for the supply to the Member to be a taxable supply there must be consideration for the supply (and the other requirements of Section 9-5 of the GST Act must be met). Where a Member redeems their loyalty points for Loyalty Dollar or a POS discount reward, they do not provide any consideration to the Loyalty Program Operator. As the Commissioner states in GSTR 2012/1 at paragraph 101 (in part): The redemption of points is not consideration for the supply of rewards to the Member. The redemption of points is merely the exercise of a contractual right and not the provision of consideration. Accordingly, it is considered that there is no taxable supply by the Loyalty Program Operator to the Members when they redeem their loyalty points for Loyalty Dollar or a ‘Money off’ at POS reward. Question 2 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 (ie. 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 Loyalty Dollars on their loyalty card or swiping their loyalty card for $L 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 X 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. Question 3 The Participating Retailer and the 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 Loyalty Program. One such supply is the Participating Retailers agreement to accept ‘money off’ rewards – Loyalty Dollars for Participating Retailers and also discounts at POS – and only charge Members the discounted price. In consideration of having done so, The 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 as 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: | Detailed Reasoning - 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 the Loyalty Program Operator in accordance with their Participation Agreement. For completeness, whilst the Loyalty Program Operator’s payment to the Participating Retailer is in the context of a supply to the Member, we do not consider this a ‘third party consideration’ because: ● there is a commercial agreement in place – the Participation Agreement – between the 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’; ● 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) case and paragraphs 221A-221G of GSTR 2006/9. Question 4 It is considered that the character of the supply by the Participating Retailer to the 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 Commissioner of Taxation v Secretary to the Department of Transport (Vic) . 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.