Private ruling: Fringe Benefits Tax
Date of advice: 13 October 2017
Published: March 2018
Ruling period: 1 April 2016 – 31 March 2017
Date scheme commenced: 1 April 2016

Ruling: Q1: Is the Company providing a fringe benefit to its employee when the employee redeems flight reward points for flight rewards, where these points were accumulated through employer funded flights undertaken in the course of the employee’s employment with the Company? | A1: No | Q2: Does the answer to Question 1 change if the number of points accumulated as a result of business related travel exceeds 250,000 points per year? | A2: No | Q3: Is the Company providing a fringe benefit as described in subsection 136(1) of the FBTAA to its employee when the employee redeems flight rewards points for flight rewards, where these points were accumulated through the use of the employee’s personal credit cards to pay for business expenditure of the Company? | A3: No | Q4: Does the answer to Question 3 change if the number of points accumulated through the use of a personal credit card exceeds 250,000 per year? | A4: No

Relevant facts and circumstances: The employee of the Company frequently travels interstate and overseas for business. The employee has a personal credit card which is solely to pay for business expenses of the Company. The Company pays off the credit card balances each month as well as the annual credit card fees. The employee is a member of a flight rewards program. The credit card held by the employee is linked to the employee’s flight reward membership. The Company is aware the employee accumulates flight reward points on their personal credit cards. The Company does not pay for any ongoing costs associated with the flight rewards. The Company has no control or influence over how or when the employee redeems the flight rewards or what they are redeemed for. As a result of the frequent business-related travel taken, the employee accumulated in excess of 250,000 flight reward points. As a result of business expenditure funded using the employee’s personal credit card the employee accumulated in excess of 250,000 flight rewards points.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) Further issues for you to consider | The employee has a personal credit card which is used solely for business purposes. The Company extinguishes their monthly balance and pays the annual fees for each. These transactions may potentially have fringe benefit tax (FBT) consequences such as reimbursement or expense payment fringe benefits. Furthermore, the otherwise deductable rule may not apply. This is for your information.

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA defines a fringe benefit as: 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; or (e) a person (in this paragraph referred to as the arranger ) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between: (i) the employer or an associate of the employer; and (ii) the arranger or another person; or (ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer: (i) participates in or facilitates the provision or receipt of the benefit; or (ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so; in respect of the employment of the employee, … Subsection 136(1) of the FBTAA defines arrangement as: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. Practice Statement PS LA 2004/4 (GA) Taxing consumer loyalty program rewards provides guidance about whether rewards are taxable. Paragraph 2 of PSLA 2004/4 (GA) provides the general principles of consumer loyalty program rewards: … receiving rewards may be subject to tax but receiving points is not, even if the points are transferred from one loyalty program to another. 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 (per paragraph 2 PSLA 2004/4 (GA)): ● 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 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) sets out the Commissioner's view on whether or not flight rewards received from consumer loyalty programs are fringe benefits or assessable income. In particular 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. In response to the Federal Court decision in Payne v FC of T 96 ATC 4407 ( Payne ) interpretive guidance in regard to how business relationships and arrangements for FBT purposes are viewed is included at paragraph 7 of TR 1999/6 as follows: | Detailed Reasoning - Employer: 7. Flight rewards, with the following exceptions, are not subject to FBT as they result from a personal (that is, non-employment) contractual relationship. The first exception is where the person with the personal contract is also an employer and provides the flight reward received to an employee in respect of the employment. That is, under the conditions of the flight reward program, FBT only applies where the employer and employee have a family relationship and the flight reward is received in connection with the employment. The second exception is where, in respect of the employment of an employee, a flight reward is provided to an employee, or the employee's associate, under an 'arrangement' for the purposes of the FBTAA, that results from business expenditure. It should be noted the Commissioner has determined that flight rewards accrued from membership of consumer loyalty programs are distinct and separate from any benefit resulting from the payment by the employer of membership fees. | Detailed Reasoning - Employees: 8. Flight rewards received by employees from employer-paid expenditure are not assessable income. Paragraph 25 of TR 1999/6 further details the dynamic of how the relationship is determined in accordance with Payne’s decision: The Court further found the flight tickets were provided in 'consequence' of the taxpayer's employment in that the flights that earned the necessary points were undertaken in the course of her employment and paid for by her employer. The employment was, therefore, an indirect or 'contributory cause' of the receipt of the benefit. However, this was not sufficient for the benefit to be taxable under paragraph 26(e) of the ITAA 1936 (now section 15-2 of the ITAA 1997) as, per Foster J (FCR at 321; ATC at 4425; ATR at 535), 'for a benefit, etc, to be caught by the section, there needed to be a role played by the employer in the giving, etc, of the benefit'. This is lacking where the employee is the person who makes the decision to join or not join the loyalty program. In Payne's case, the taxpayer's employer had no part in the program and did not encourage, arrange or pay for the employee to participate. Furthermore, Foster J, in Payne makes it clear in regards to the flight reward that: Qantas provided the free ticket not because of Payne’s employment with KPMG, but because she had become entitled to it under Qantas’ own scheme. | Detailed Reasoning - Application to the Taxpayer’s circumstances: The Company is carrying on a business and employs the employee. The employee travels for business purposes on employer funded flights. The employee holds a flight rewards membership. In many cases, the airline travel taken by the employee, resulted in flight reward points being allocated to the membership. In accordance with paragraph 2 of PSLA 2004/4 (GA), loyalty reward points are not subject to taxation, even where the points are transferred from one program to another. The flight reward program allows the employee to convert flight rewards points to flight rewards. The employee has full control over what the loyalty points are redeemed for. The Company does not influence how or when the employee redeems the points or what is redeemed. PSLA 2004/4 (GA) states (at paragraph 2) that a reward received by an employee may be a fringe benefit where the facts demonstrate that there is an arrangement between the employee and employer which indicate a connection to employment. In this instance, the Company does not have an arrangement with flight rewards program provider to access frequent flyer benefits, nor do they pay for any costs associated with the program. It is the employee who has the arrangement with the flight rewards program provider. Therefore for these reasons it is considered that a fringe benefit has not been provided by the Company to its employee upon redemption of the flight rewards points which are a consequence of employer funded flights taken in the course of employment with the Company. | Detailed Reasoning - Question 2: Does the answer to Question 1 change if the number of points accumulated as a result of business related travel exceeds 250,000 points per year? | Detailed Reasoning - Detailed reasoning: The employee of the Company is required to travel frequently up to several times per week for business purposes. PSLA 2004/4 (GA) states at paragraph 5 that internal ATO referral to a senior technical officer is necessary where points have accumulated in excess of 250,000 points per annum. The employee in this case has done this. In this case, after discussions with a senior technical leader and the information available, it is considered that these points are not subject to fringe benefits tax. | Detailed Reasoning - Question 3: Is the Company providing a fringe benefit as described in subsection 136(1) of the FBTAA to its employee when the employee redeems flight rewards points for flight rewards, where these points were accumulated through the use of the employee’s personal credit cards to pay for business expenditure of the Company? | Detailed Reasoning - Detailed reasoning: Question 1, above provides the definition of a fringe benefit in accordance with subsection 136(1) of the FBTAA. As discussed at Question 1, the definition of arrangement is defined at subsection 136(1) of the FBTAA. Paragraph 2 of PSLA 2004/4 (GA) provides the general principles of consumer loyalty program rewards: … receiving rewards may be subject to tax but receiving points is not, even if the points are transferred from one loyalty program to another. As previously discussed at Question 1 in paragraph 25 of TR 1999/6, the application of Payne can be applied to this case. This is because the flight rewards were provided in consequence of the employee’s employment in that the flights that earned the necessary points were undertaken in the course of employment as paid for by the employer. The employment is a contributory cause of the receipt of the flight rewards points. For a benefit to be taxable there needs to be a role played by the employer in the giving of the benefit. This is lacking where the employee is the person who makes the decision to join or not join the loyalty program. In Payne’s case, which in this aspect is analogous to this case, the taxpayer’s employer had no part in the program and did not encourage, arrange or pay for the employee to participate. In this case, the employee has a personal credit card which is used exclusively for business purposes. This was obtained while they were a member of the flight rewards program. As discussed above at Question 1, in paragraph 2 of PSLA 2004/4 (GA), it is established that taxation is not appropriate to the flight rewards accumulated. In most cases the employee converts flight reward points to flight rewards. The employee has full control over how the points are redeemed and the Company does not influence how or when he does this. The Company has no part in the flight rewards program. The flight rewards are the result of the employee’s contractual relationship with flight rewards program and not under an arrangement between the employee and the Company, or between the Company and the credit card provider. The employee became entitled to flight rewards through the contractual relationship with the flight rewards program. For these reasons, an arrangement does not exist for the purposes of subsection 136(1) FBTAA. Therefore, fringe benefits tax is not appropriate to the accumulation of points and the subsequent redemption of flight rewards, which are the result of the employee paying for business expenses on a personal credit card. | Detailed Reasoning - Further information: The employee’s personal credit cards which are used solely for the purposes of business may attract fringe benefits. The Company extinguishes the employee’s monthly balances and pays the annual fees for each. The potential consequences of the Company paying the credit card balance and annual fee’s, may be identified as a reimbursement or expense payment fringe benefit. | Detailed Reasoning - Question 4: Does the answer to Question 3 change if the number of points accumulated through the use of a personal credit card exceeds 250,000 per year? | Detailed Reasoning - Detailed reasoning: The employee of the Company is required to pay for business expenses which are paid from a personal credit card. The Company fully extinguishes the credit card balance each month and pays annual fees of the credit cards. PSLA 2004/4 (GA) states at paragraph 5 that internal ATO referral to a senior technical officer is necessary where points have accumulated in excess of 250,000 points per annum. This has occurred in this instance. In this case after discussions with the senior technical leader, it is considered that these flight reward points in excess of 250,000 points are not subject to fringe benefits tax.

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