Edited version of private ruling

Authorisation Number: 1011924183289

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Ruling

Subject: Fringe benefits tax; employee rewards program

Question 1

To the extent that the minor benefits exemption under section 58P of the Fringe Benefits Tax Assessment Act 1986 will not apply, will fringe benefits, as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, arise when employees of Company X are awarded points as an incentive under the employee recognition (ER) program?

Answer

Yes

Question 2

If the answer to Question 1 is yes, will the fringe benefits be property fringe benefits under Division 11 of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 3

If the answer to Question 2 is yes, will the property fringe benefits be in-house property fringe benefits as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 4

If the answer to Question 3 is no, will the taxable value of the external property fringe benefits be determined in accordance with paragraph 43(c) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 5

Will fringe benefits, as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, arise in relation to points accrued by employees from private expenditure where employees also receive points as a result of their employment relationship as an incentive under the ER program?

Answer

No

This ruling applies for the following fringe benefits tax years:

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015

Year ending 31 March 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company X runs a rewards program which is open to the public.

Members of the rewards program earn points when they purchase certain goods or services from company X and Company partners affiliated with the rewards program.

The points earned can be redeemed for goods or services that are offered through the rewards program.

Company X has a formal employee recognition (ER) program which is used as a performance incentive measure to recognise staff for good work.

As an extension of the ER program Company X is proposing to establish a scheme whereby employees are awarded rewards program points to reward good work performance.

These points would be subject to the normal rewards program terms and conditions and as such could expire or could be redeemed for goods or services.

Under the proposal, employees may accumulate points awarded via the ER program in addition to points earned privately through the purchase of goods and services from Company X and their partners affiliated with the rewards program.

At the time of redemption it would not be possible to distinguish between points awarded via the ER program and points earned from private purchases.

For an employee to receive points under the proposed incentive scheme they must be a member of the rewards program.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 40,

Fringe Benefits Tax Assessment Act 1986 section 43,

Fringe Benefits Tax Assessment Act 1986 subsection 136(1) and

Fringe Benefits Tax Assessment Act 1986 section 154.

Reasons for decision

Question 1 and Question 2

The definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) applies to a 'benefit' that is provided to an employee in respect of their employment. The benefit may be provided by the employer, an associate of the employer or under an arrangement with a third party.

A 'benefit' that is an exempt benefit is excluded from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

It can be determined whether an employee is provided with a benefit by reference to the definition of 'benefit' in subsection 136(1) of the FBTAA and by identifying whether one of the types of benefits referred to in Part III of the FBTAA is provided.

The definition of 'benefit' in subsection 136(1) of the FBTAA is very broad and includes any right, privilege, service or facility.

Under section 40 in Part III of the FBTAA, if an employee is provided with property, the provision of the property is taken to constitute a benefit provided to the employee at the time it is provided.

Where a person does anything that results in the creation of property in another person, section 154 of the FBTAA deems the property to be provided when it comes into existence.

Under the relevant definitions in subsection 136(1) of the FBTAA 'property' can be 'tangible property' or 'intangible property'. 'Tangible property' means goods (including gas and electricity, unless provided through a reticulation system) and animals. 'Intangible property' means real property, a chose in action and any other property that is not 'tangible property'.

When loyalty points are awarded to employees of the employer under the employee rewards program they will be 'benefits' and 'intangible property' as defined in subsection 136(1) of the FBTAA. This is because they are not goods or any other form of tangible property as defined in the FBTAA and they will confer the employees with the right to obtain goods or services under the loyalty program.

The loyalty points will be the provision of property benefits at the time they are awarded to employees under section 40 of the FBTAA.

An essential element of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA is that the benefit must be provided in respect of the employment of the employee. The phrase 'in respect of', in relation to the employment of an employee, is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'.

In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation 2000 ATC 4151; (2000) 44 ATR 22; [2000] FCA 196; (2000) 96 FCR 402 the Federal Court considered the meaning of 'in respect of employment' in the fringe benefits tax legislation. The Court noted that what has to be established in determining if a benefit is 'in respect of employment' is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment.

Employees of the employer will be awarded loyalty points under the employee rewards (ER) program as a reward for good work performance in carrying out their employment duties. Employees will be awarded those points because of their employment. There is a direct and material relationship between the employment and the provision of the points such that the points will be provided in respect of employment.

To the extent that loyalty points that will be provided to employees under the employee rewards program are not exempt minor benefits under section 58P of the FBTAA, they will be 'fringe benefits' as defined in subsection 136(1) of the FBTAA.

Question 3

For a property benefit to be an 'in-house property fringe benefit' as defined in subsection 136(1) of the FBTAA the relevant property must be tangible property.

As explained in the reasons for decision in relation to Questions 1 and 2, the loyalty points that will be provided to employees under the ER program will be intangible property and, therefore, will not be in-house property fringe benefits.

Question 4

A property fringe benefit that is not an 'in-house property fringe benefit' is an 'external property fringe benefit' as defined under subsection 136(1) of the FBTAA.

The taxable value of an 'external property fringe benefit' is determined under one of the three valuation rules in section 43 of the FBTAA.

Paragraph 43(a) of the FBTAA applies where the employer (or an associate) provides the benefit and the benefit consists of property purchased by the employer under an arm's length transaction at or about the time the employer provides the benefit. The taxable value is the cost price to the employer reduced by any employee contribution.

Paragraph 43(b) of the FBTAA applies where the employer (or an associate) does not provide the benefit but the employer (or an associate) incurs expenditure to the provider under an arm's length transaction for the property benefit. The taxable value is the amount of that expenditure reduced by any employee contribution.

Where neither of the above rules apply, the taxable value is determined in accordance with paragraph 43(c) of the FBTAA. The taxable value is the 'notional value' of the property at the time the benefit is provided reduced by any employee contribution.

As the loyalty points will be provided by the employee under the ER program and they will not be purchased, the taxable value of the external property fringe benefits that arise will be the 'notional value' in accordance with the valuation rule in paragraph 43(c) of the FBTAA.

Question 5

The taxation treatment of benefits received by members of consumer loyalty programs is discussed in Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) and Taxation Ruling TR 1999/6.

Although TR 1999/6 considers the taxation implications of flight rewards, paragraph 6 of PS LA 2004/4 (GA) states that the principles set out in TR 1999/6 and Taxation Determination TD 1999/34 are to be applied in determining whether a reward received under a consumer loyalty program is a fringe benefit or assessable income.

When an employee is a member of a consumer loyalty program, such as the employer's loyalty program, the member will normally receive reward points with each purchase of goods or services that they make from suppliers participating in the program. The purchases are made in a personal capacity in accordance with a normal arm's length commercial relationship. The member can then redeem those points for rewards in the form of goods or services from participating suppliers.

This means there are effectively two benefits that a member of a consumer loyalty program could receive, i.e. the points and the reward.

In paragraph 23 of PS LA 2004/4 (GA) it is confirmed that no tax liability arises at the time that reward points are received. A tax liability could only arise at the time when rewards are received on the redemption of points.

At the time when the employees receive points as members of the employer's loyalty program, i.e. by purchasing goods or services from participating suppliers, no fringe benefits arise under the FBTAA in relation to the those points.

As explained in the reasons for decision in relation to Questions 1 and 2, loyalty points given to employees under the ER program will be fringe benefits under subsection 136(1) of the FBTAA because they will be provided in respect of their employment. The employees will not receive those points under the normal conditions of the loyalty program by purchasing goods or services.

Although employees may be given points under the ER program in respect of their employment, this will not change the fact that loyalty points that are received by making private purchases are not in respect of employment. Points received for private purchases will continue to result from their personal contractual relationship in relation to the loyalty program.

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