Private ruling: Goods and services tax (GST) and sale of loyalty points
Date of advice: 1 July 2016
Published: July 2016

Ruling: Q1: Is the sale of loyalty points to members under the points top up scheme subject to GST in accordance with the GST rate that applies to the loyalty reward redemptions? | A1: The sale of loyalty points to members under the points top up scheme is subject to GST on a fair and reasonable GST rate which may be the same that applies to loyalty reward redemptions if the latter is based on a fair and reasonable GST rate.

Relevant facts and circumstances: You are a company registered for GST. You operate a loyalty program where members collect redeemable points for a range of rewards. You plan to introduce a point top up arrangement for members so they can increase their points balance in order to qualify for larger rewards. The entitled rewards are not known when the points are purchased. Information on the program: Points Top Up functionality ● Points top up to be available online only ● Customer elects to top up their points balance in bundles of points ● Customer can choose to redeem their points for any award at any time – they are not nominating to redeem for a specific item ● Cap of X points per membership available for top up each year ● Rate of purchase to be set, likely variable depending on how many points purchased How Top-up points works ● Points may be purchased in blocks of X ● Minimum and maximum points per purchase ● Points may only be purchased with a specific Award in mind ● Members may not purchase more than X% of the points needed for the Award ● Points must be purchased by the member on their own behalf ● Each member may only purchase points once every X months.

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 9-10 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(e) | A New Tax System (Goods and Services Tax) Act 1999 section 9-17 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-17(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(2)(b)

Reasons for decision: Summary: Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity makes a taxable supply if: ● it makes a supply for consideration; ● the supply is made in the course or furtherance of an enterprise that it carries on; ● the supply is * connected with the indirect tax zone; and ● the entity is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Supply is broadly defined under section 9-10 of the GST Act and the allocation of points is a supply of rights within the meaning of paragraph 9-10(2)(e) of the GST Act. Consideration for supplies of rights is specifically catered for in section 9-17 of the GST Act. Subsection 9-17(1) of the GST Act states: (1) If a right or option to acquire a thing is granted, then: (a) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or (b) if there is no such additional consideration there is no consideration for the supply. Therefore, consideration for a proportion of rights is made when the member pays the amount for the top-up points because the granting of the rights is due to the redemption of points and the purchase of the balance of points is for consideration. This is different to the scenarios where: a) points accrued are redeemed for goods or services - the redemption is not consideration; b) payments are made in addition to the redemption of points for goods and services – the payment is part consideration for the goods or services. Where a supply is GST-free or input taxed then that supply is not taxable. This also applies to a supply of rights. Section 9-30 of the GST Act provides for supplies that are GST-free or input taxed: GST-free (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a). Input taxed (2) A supply is input taxed if: (a) it is input taxed under Division 40 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a). Note: If a supply is input taxed, there is no entitlement to an input tax credit for the things that are acquired or imported to make the supply (see sections 11-15 and 15-10). Supplies that would be both GST-free and input taxed (3) To the extent that a supply would, apart from this subsection, be both *GST-free and *input taxed: (a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed; or (b) the supply is input taxed and not GST-free, if that provision requires the supplier to have so chosen. Note: Subdivisions 40-E (School tuckshops and canteens) and 40-F (Fund-raising events conducted by charities etc.) require such a choice.) Paragraph 79 of Goods and Services Tax Ruling GSTR 2012/1 Goods and services tax: loyalty programs ( GSTR 2012/1) explains the test under paragraphs 9-30(1)(b) and 9-30(2)(b) is whether the points represent a right to receive a supply that would be GST free or would be input taxed. This requires a prediction, when the points are allocated, of the extent to which they would be redeemed for GST free or input taxed supplies. Paragraph 81 of GSTR 2012/1 states that: The operator needs to work out the extent to which the points would be redeemed on some fair and reasonable basis. It may be reasonable for the loyalty program operator to determine how the rights (points) would be redeemed by reference to the history of how rewards had been redeemed in the program - although any changes in the nature of the program and the rewards offered to members should be considered. In this case, the entitled rewards are not known when the points are purchased. You have calculated the GST rate that applies to the flybuys loyalty reward redemptions. If this is a reasonable and fair rate, the same rate would be suitable to apply to the portions of points purchased.