ATO Interpretative Decision

ATO ID 2001/433

Income Tax

Income - redemption of credit notes for provision of free services
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does the provision of services free of charge on redemption of a credit note constitute assessable income according to ordinary concepts under section 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Income according to ordinary concepts under section 6-5(1) does not apply to redeemed credit notes that have no conversion or transferable.

Facts

The taxpayer, an individual, operates a small business which provides services to other businesses and householders. In order to generate new and repeat business, the taxpayer intends to run a promotional/advertising campaign offering the chance to win $x worth of services if they use any of the taxpayer's services within a selected period. Winners will receive a credit note with a specified dollar value which may be redeemed at their leisure.

Reasons for Decision

The issue in this case is whether the redemption of a credit note issued free of charge by the taxpayer constitutes income.

Income, or more specifically assessable income, is divided into two categories:

(i): ordinary income (being income according to ordinary concepts); and
(ii): statutory income (being amounts made assessable under specific provisions of the ITAA 1997 or the Income Tax Assessment Act 1936).

Generally, if an amount is neither ordinary nor statutory income, it is not included in assessable income.

An important feature to consider in determining whether a non-cash item received is income is whether it is convertible into money. If it is convertible into money it is more likely to be income, subject to fulfilling other tests, than if not convertible into money.

In this case the credit note or notes represent no more than an inducement to continue to engage the services of the taxpayer in question, they have no conversion or transferable value to the taxpayer on redemption. At best they may generate future income but certainly do not, on redemption, constitute a receipt of income according to ordinary concepts.

Date of decision: 21 September 2001

Legislative References:
Income Tax Assessment Act 1997
section 6-5(1)

Keywords
Income

Siebel/TDMS Reference Number: DW208720; 1-7V73JEF; 1-E8ZMSYM

Business Line: Private Groups and High Wealth Individuals

Date of publication: 6 October 2001
Date reviewed: 18 July 2018

ISSN: 1445-2782

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