Edited version of your private ruling

Authorisation Number: 1012426600339

Ruling

Subject: GST and entitlement to input tax credits

Question

Are you entitled to an input tax credit in respect of purchases made by the GST group member R, as part of the customer loyalty program?

Answer

Yes, you are entitled to an input tax credit for the purchases made by R, as part of the customer loyalty program, to the extent that the supplies made to R are taxable supplies.

Relevant facts and circumstances

· You are an entity. You carry on an enterprise and you are registered for the goods and services tax (GST).

· You are the representative member of a GST group.

· Your related entity R is a member of the same GST group.

· R and related entities operate a loyalty program.

· Members of the loyalty program are retail suppliers.

· To become a member of the loyalty program, members are required to complete an application form and enter into an agreement with R. As part of this agreement, the member agrees to adhere to the rewards rules of membership and the terms and conditions of the program.

· R engages an independent third party entity X, to manage its loyalty program.

· Key features of the loyalty program are set out below.

· The member earns loyalty points as a consequence of purchasing eligible goods and services.

· The price paid by the member for making eligible purchases is the same as the price paid by a non-member. No extra monetary or non-monetary consideration is paid for the loyalty points.

· A member may choose to redeem loyalty points for any reward item the member wants.

· After selecting the item, the member must request a purchase price confirmation for the item from the retailer.

· The member is required to notify the retailer that the item is being claimed under the loyalty program and the payment for the reward items will be made by R by way of Electronic Funds Transfer (EFT) or by R's credit card.

· The member faxes the completed point's redemption form to X, along with the purchase price confirmation.

· If the member does not have the required loyalty points in their account, the member will not receive the selected reward item.

· If there are sufficient points in the member's account, X contacts the retailer to confirm that the retailer will supply the item to R by providing it to the member and accept payment from R via either R's corporate credit card or direct debit from R's account.

· R enters into a contractual arrangement with the retailers at this point. For the purposes of Goods and Services Tax Ruling GSTR 2012/1, the retailer becomes a redemption partner at this point.

· Due to the desire to maintain the flexible nature of R's loyalty program it would not be practical for R to enter into a written agreement with all the potential redemption partners.

· There are no instances where members would pay for their products initially and then seek reimbursement from R at a later stage.

· The redemption partner supplies R with the reward item only after R accepting that it will purchase the item identified in the supplier's quote and accepting liability for payment of that item.

· On completion of the transaction, a tax invoice is faxed to X. The tax invoice and relevant redemption form are kept on the file under the relevant member's account.

· At the end of each month, X collates all the details of the points redeemed by members and sends a file, including copies of all retailer documents received in relation to credit card payments under the loyalty program to R for approval.

· Reward points cannot be transferred or redeemed for cash.

· The redeemed rewards are not exchangeable for other rewards and are not refundable, replaceable, or transferable for cash or credit under any circumstances.

· R has retained all the relevant documentation as part of the loyalty program.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1).

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2).

A New Tax System (Goods and Services Tax) Act 1999 section 11-20.

A New Tax System (Goods and Services Tax) Act 1999 Division 48.

A New Tax System (Goods and Services Tax) Act 1999 section 48-45.

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that entities that are registered for GST are entitled to claim input tax credits for creditable acquisitions that they make.

Division 48 of the GST Act makes the representative member of a GST group entitled to an input tax credit, even though it is another entity that makes the creditable acquisition.

Pursuant to section 48-45 of the GST Act, if an entity that is a member of a GST group makes a creditable acquisition, the representative member is entitled to the input tax credit, and the entity making the acquisition is not entitled to the input tax credit on the acquisition, unless the entity is the representative member.

Section 11-5 of the GST Act states:

You make a creditable acquisition if

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide *consideration for the supply; and

(d) you are *registered or *required to be registered.

*The asterisked terms are defined at section 195-1 of the GST Act.

An entity makes a creditable acquisition if it makes an acquisition solely or partly for a creditable purpose and the other requirements of section 11-5 of the GST Act is met.

Section 11-15 of the GST Act defines the meaning of 'creditable purpose' as follows:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

It is therefore necessary firstly to identify the entity that made the acquisition, secondly, the enterprise that is being carried on and thirdly to determine whether there is a connection between the acquisition and the enterprise being carried on.

Goods and Services Tax Ruling GSTR 2012/1 concerns the GST implications of certain loyalty programs. Paragraphs 25 to 27 of GSTR 2012/1 state:

25. When a redemption partner provides goods or services to the member upon redemption of points (or upon redemption of points plus additional consideration) under a contractual arrangement between the redemption partner and the loyalty program operator, the redemption partner also makes a supply to the loyalty program operator. A payment from the loyalty program operator to the redemption partner, in return, is consideration for this supply.

26. The supply is properly characterised as a supply of the underlying rewards (for example goods or services) provided to members. Whether the supply is taxable, GST free or input taxed needs to be determined accordingly...

27. Where the elements of section 11-5 are met, the loyalty program operator makes a creditable acquisition from the redemption partner and is entitled to an input tax credit in accordance with Division 11.

You submit that a contractual agreement between R and the redemption partner exists, under which R is supplied with the goods and is to pay the redemption partner for the goods, prior to the time at which the goods are made available by the redemption partner to a member.

As the redemption partner is made aware in advance of any commitment to fulfil the request to supply goods under the loyalty program and that payment is to be made directly from R, you are of the view that at the time of the transaction, the redemption partner is entering into an arrangement to supply the goods to R and furthermore, the payment for the reward will be from R.

We consider that prior to and up to the time when the member submits the points redemption form, with the price confirmation, to X, there is no contractual agreement entered into with the retailer for any supply to be made by the retailer to either the member or to R.

At that point it is not known to the member how many points would be required to be redeemed to receive the reward item that the member has identified or chosen.

Although the member is able to check the number of points accrued on their account, the member does not know how many points are required to redeem for the reward item until the calculation is performed by X upon receipt of the completed redemption form and the price confirmation for the item chosen by the member.

The member may not have accrued enough points to get that reward, in which case, there is neither an obligation for the retailer to supply anything nor for either the member or R to purchase anything from that retailer.

If there are sufficient points in the member's account, X contacts the retailer to confirm that the retailer will supply the item to R by providing it to the member and will accept payment from R via either its corporate credit card or direct debit from R's account.

This can be distinguished from a situation where the member enters into an agreement with the retailer for the supply of a good or service, obtains a price confirmation for the item to be purchased and requests R to pay for the item by authorising the use of R's credit card or direct debit from R's bank accounts.

The facsimile sent by X on behalf of R to the redemption partner contains the details of the purchase price confirmation issued by the redemption partner, details of the member and loyalty program, the payment details and authorisation.

You submit that the legal and contractual obligations are formed at the point in time prior to the provision of the goods when the redemption partner accepts the terms proposed in the facsimile sent by X.

Having regard to the structure of the arrangement and the processes that are followed by R, X, the redemption partner and the member, for the redemption of points and the provision of a reward, we agree with your submission and consider that the requirement that there is a contractual arrangement between R as loyalty operator and the redemption partner is satisfied.

The offer and acceptance of the terms of the facsimile by the parties as well as the subsequent acts of processing the payment and providing the items to the member form the basis of a contractual arrangement whereby R enters into a binding obligation to pay the redemption partner for the reward item provided to the member.

It follows on that the redemption partner makes a supply to R when the redemption partner provides the reward item to the member upon redemption of points. The payment from R to the redemption partner in return is consideration for this supply. The supply made to R is a supply of the underlying reward which is provided to the member.

Therefore, R is the entity that has made the acquisition of the relevant reward item from the redemption partner.

Subsection 11-15(1) of the GST Act requires that the entity acquires a thing in carrying on its enterprise. The acquisition must be made in the course of the activities that constitute the entity's enterprise. An acquisition is made 'in carrying on your enterprise' if it is made for the purposes of that enterprise, but not if it is made for some other purpose.

Under the loyalty program, the member is entitled to rewards upon redemption of accrued points. The things that are acquired by R to be used as rewards provided to the members are acquired by R in carrying on R's business as loyalty program operator and not for making input taxed supplies or for private purposes. Therefore, the acquisitions made by R are for a creditable purpose.

R is liable to provide consideration for the acquisitions made from the redemption partners and is registered for GST.

As such, where the supply of the goods and services by the redemption partners to R is a taxable supply, R is making a creditable acquisition.

In this case, R is a member of the GST group where you are the representative member. Therefore, you are the entity entitled to the input tax credits for these creditable acquisitions under section 48-45 of the GST Act.

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