Private ruling: GST and loyalty program
Date of advice: 20 April 2018
Published: July 2018

Ruling: Q1: Is the First Supply a taxable supply? If so, can the program partner issue recipient created tax invoices (RCTIs) in the current case? | A1: Yes, unless the terms and conditions of the Participation Agreement differ from the Entity’s description of the loyalty program, the First Supply is a taxable supply and the Program Partner may issue RCTIs provided the requirements set out in the Goods and Services Tax: Recipient Created Tax Invoice Determination (No. 09) 2016 on Loyalty Program Participation are met. | Q2: Is the Second Supply a taxable supply? | A2: No. | Q3: Is the Third Supply a taxable supply? | A3: No. | Q4: Is the Fourth Supply a taxable supply? | A4: Yes. | Q5: If the Fourth Supply is a taxable supply, can the Entity issue recipient created tax invoices (RCTIs) as the recipient of the taxable supply? If yes, would the Commissioner accept the Generated Document as a RCTI? | A5: No.

Relevant facts and circumstances: The Entity (the Program Operator) is a GST registered entity that operates in Australia. The Entity has designed a multi-party loyalty program. This loyalty program will involve the Entity entering into Participation Agreements with Program Partners which involve the payment of a small commission (the First Supply) by the Program Partner to the Entity each time a member of the loyalty program purchases goods or services from that Program Partner (Eligible Purchases). The commission paid to the Entity is set at a percentage (circa 10%) of the value of the Eligible Purchase. The Entity will enter into agreements with Program Members (Membership Agreements) under which the Entity will provide each member with a loyalty program account and transfer money into their account for each Eligible Purchase. The price paid by members for making Eligible Purchases is the same as for non-members purchasing the same goods or services. The Entity as the Program Operator will allocate the commission paid to it by Program Partners under the Participation Agreements as follows: 1. Circa 10%-20% to the Entity itself; 2. Circa 70-80% to the relevant member’s account (the Second Supply); 3. Circa 10% to a charitable organisation of members choice (the Third Supply); and 4. Circa 10% may be paid to local sports clubs and/or other businesses (Promotional Partners) as an incentive to promote the loyalty program (the Fourth Supply). Members of the loyalty program will be able to use the money in their accounts to fund purchases of other goods or services (or a right to receive goods or services) from Program Partners only. The charitable organisations under the Third Supply are all Australian endorsed charities and other non-profit bodies. The payments to these organisations are straight 100% donations from a members account to their preferred organisations. The Fourth Supply is the supply of promotional services by the GST registered Promotional Partners to the Entity in accordance with the agreements signed between the Entity and these Promotional Partners. Under these agreements, the Promotional Partners will promote the rewards card and assist with the signing up of new members. The Promotional Partners are GST registered local sports clubs and/or other GST registered businesses and organisations. The Promotional Partners will receive consideration for their promotional services. The Entity has designed an online portal where Program Members will be able to log in and view the balance of and any transactions relating to their loyalty program accounts. This online portal also allows the Entity and Program Partners to generate a downloadable document listing all the payments from Program Partners to the Entity for any period of time, including the amounts of GST collected and payable (if any) (the Generated Document). This document will have the heading ‘Recipient Created Tax Invoice’. Program Partners will then be able to fill in the document with their entity name and business details. The Entity has provided an example to demonstrate how the loyalty program works. Example The Entity enters into a Participation Agreement with Program Partner A and a Membership Agreement with Member B. Member B makes an Eligible Purchase of $110 from Program Partner A. Program Partner A pays $11 commission to the Entity (the First Supply). The Entity makes the following transactions following the receipt of the commission: 1. it pays $1 (1/11 th of the commissioner received) as GST to the ATO; 2. it keeps $1 to the Entity’s own accounts; 3. it transfers $7 to Member B’s loyalty program account (the Second Supply); 4. it may transfer $1 to Charity C (the Third Supply); and 5. it may pay an amount to Promotional Partners (the Fourth Supply). The Entity does not have any of the agreements mentioned above yet.

Relevant legislative provisions: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | Paragraph 9-10(4)(a) of the GST Act Subsection 9-17(2) of the GST Act | Section 29-70 of the GST Act

Reasons for decision: Detailed Reasoning - The supply between the Program Operator and the Program Partner: By allowing a Program Partner to participate in the program, the operator can generate profits by receiving the fees paid by the Program Partner pursuant to the Participation Agreement, as well as increase its market share by attracting new customers. Based on the Entity’s description of the loyalty program, under the proposed Participation Agreement between the Entity and the Program Partner: ● the Entity is paid a commission by the Program Partner each time a member of the loyalty program makes an Eligible Purchase; ● the Entity undertakes to allocate a proportion of the commission received to members of the program (in response to their Eligible Purchases from the program partner); ● the amount is allocated directly to the member’s account and can be used to acquire goods or services.. Consistent with Proposition 12 of Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies GSTR 2006/9, in the current case, the existence of the Participation Agreement identifies a supply as having been made by the Program Operator to the Program Partner. Moreover, any payment by the Program Partner to the operator pursuant to this agreement is consideration for that supply. The GST implications of such supply depend on how it is characterised. In the context of the loyalty program arrangement, for GST purposes, in characterising the supply between the Program Operator and the Program Partner, it is necessary to have regard not only to the terms of the Participation Agreement, but also any interrelated documents that are relevant to the operation of the loyalty program, including the loyalty program Membership Agreement. In the current case, none of the agreements are available. Therefore, the characterisation of the supply can only be based on the Entity’s description of how the loyalty program works. In cases where the Participation Agreement and other interrelated documents contradict the current description of the loyalty program, the GST implications are only applicable to the extent of the Entity’s description of the loyalty program. Based on the Entity’s description, pursuant to the Participation Agreement, the Program Partner pays the Entity a commission each time a member makes an eligible purchase. We consider this commission is consideration for a supply made by the Entity as the Program Operator to the Program Partner. Such supply can be characterised as a supply of participation services whereby the Program Partner can participate to enjoy the benefits of the loyalty program that is set up and maintained by the Entity. The allocation of a proportion of the commission paid to the purchasing member’s account is one of the terms and conditions of the Participation Agreement. As the Program Operator, the Entity also undertakes other things as part of the Participation Agreement and the Membership Agreement to ensure the program is operated as per these agreements. The supply of the participation services is a taxable supply because the requirements in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. | Detailed Reasoning - The issue of RCTIs: The Commissioner has made a Determination under subsection 29-70(3) of the GST Act to allow the class of tax invoices that may be issued by a recipient of a taxable supply for participation in loyalty programs. According to the Determination Goods and Services Tax: Recipient Created Tax Invoice Determination (No. 09) 2016 on Loyalty Program Participation , a retail association or group that is the recipient of a taxable supply of a loyalty program participation may issue a tax invoice called a recipient created tax invoice (RCTI) for the taxable supply if the retail association or group: (a) establishes the value of the taxable supply after the supply is made; and (b) satisfies the following requirements: ● is registered for GST; ● sets out the ABN of the supplier on the RCTI; ● issues the original or a copy of the RCTI to the supplier within 28 days of making, or determining, the value of a taxable supply and must retain the original or the copy; ● the recipient must issue the original or a copy of an adjustment note to the supplier within 28 days of any adjustment and must retain the original or the copy; ● must reasonably comply with its obligations under the taxation laws; and ● have either a written agreement with the supplier that meets the requirements of Clause 8, or a written agreement embedded in the RCTI that meets the requirements of Clause 9 of the Determination. Clause 8 of the Determination reads: 8. The written agreement the recipient has with the supplier must: (a) specify the supplies to which it relates; (b) be current and effective when RCTI is issued; and (c) have the following conditions; (i) the recipient can issue RCTIs in respect of the supplies; (ii) the supplier will not issue tax invoices in respect of the supplies; (iii) the supplier acknowledges that it is registered for GST when it enters into the agreement and that it will notify the recipient if it ceases to be registered; and (iv) the recipient acknowledges that it is registered for GST when it enters into the agreement and that it will notify the supplier if it ceases to be registered for GST. Clause 9 of the Determination provides: 9. The embedded agreement in the RCTI that the recipient has with the supplier must contain the following statement: The recipient and the supplier declare that this agreement applies to supplies to which this tax invoice relates. The recipient can issue tax invoices in respect of these supplies. The supplier will not issue tax invoices in respect of these supplies. The supplier acknowledges that it is registered for GST and that it will notify the recipient if it ceases to be registered. The recipient acknowledges that it is registered for GST and that it will notify the supplier if it ceases to be registered for GST. Acceptance of this RCTI constitutes acceptance of the terms of this written agreement. Both parties to this supply agree that they are parties to a RCTI agreement. The supplier must notify the recipient within 21 days of receiving this document if the supplier does not wish to accept the proposed agreement. Provided the requirements set out in the Determination are met, a Program Partner who is the recipient of the taxable supply may issue RCTIs without the need to ask for the Commissioner’s approval. | Detailed Reasoning - Question 2: The Second Supply is a unilateral transfer of money by the Entity to a program member; therefore, is not a supply for GST purposes. This is because: a) a supply of money is expressly excluded from the meaning of supply for GST purposes pursuant to paragraph 9-10(4)(a) of the GST Act; and b) the program member is not making any supply to the taxpayer in return for the transfer of the money. | Detailed Reasoning - Question 3: As the transfer of money by the Entity to the non-profit bodies are donations by the members, neither the Entity nor the members are making any supply based on the operation of paragraph 9-10(4)(a) of the GST Act. In addition, the donations made to non-profit bodies are not consideration for a supply pursuant to subsection 9-17(2) of the GST Act. | Detailed Reasoning - Question 4: The commission the Entity pays to the GST registered Promotional Partners is consideration for a taxable supply because these Promotional Partners are making a taxable supply to the Entity and are receiving the commissions as consideration for these supplies. | Detailed Reasoning - Question 5: Subsection 29-70(3) of the GST Act defines an RCTI as a ‘tax invoice belonging to a class of tax invoices that the Commissioner has determined in writing may be issued by the recipient of a taxable supply.’ An entity can issue RCTIs if the Commissioner has determined in writing that the nature of the industry in which the entity operates warrants their use. Goods and Services Tax Ruling GSTR 2000/10 (GSTR 2000/10) outlines the circumstances in which a recipient is entitled to issue RCTIs. There are limitations placed on who can issue RCTIs and the circumstances in which they may be issued. The Commissioner has determined under subsection 29-70(3) of the GST Act that three classes of tax invoices may be issued by a recipient of a taxable supply. These classes are described in paragraphs 10-11 of GSTR 2000/10 and include: 1. tax invoices for taxable supplies of agricultural products 2. tax invoices for taxable supplies made to government related entities; and 3. tax invoices for taxable supplies made to registered recipients that have a turnover of at least $20 million, or are members of a group that has such an entity as a member. Tax invoices that come within any of these three classes can be issued by recipients without notifying or applying to the Commissioner. As the taxable supplies in the current case do not fall within these broad categories, the Entity cannot issue RCTIs unless the Commissioner makes a determination in respect of another class of tax invoices that covers these supplies. Under paragraph 12 of GSTR 2000/10, other registered recipients of taxable supplies that are not covered by the three broad classes of tax invoices can request that the Commissioner make a determination to allow them to issue RCTIs. Such requests are considered on the basis of the particular circumstances of the industry, including the nature of the taxable supplies, the suppliers and the recipients. In the present case, because the loyalty program is in its design stage and the specific information surrounding the arrangements between the Entity and the Promotional Partners are not available, there are insufficient facts for the Commissioner to make a determination under subsection 29-70(3) of the GST Act as the particular circumstances of the industry, including the nature of the taxable supplies, the suppliers and the recipients are unknown.