Edited version of your written advice

Authorisation Number: 1051281889926

Date of advice: 14 September 2017

Ruling

Subject: Assessabillity of credit card reward points and gift cards

Question 1

Are the gift cards acquired under a credit card loyalty program included in the assessable income of the taxpayer?

Answer

No

Question 2

Are the funds received from the sale of gift cards acquired through the redemption of credit card rewards points included in the assessable income of the taxpayer?

Answer

Yes

Question 3

Are the transactional costs incurred resulting from gift card sales acquired through the redemption of credit card rewards points deductible to the taxpayer in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

01 July 2014 – 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

X is a Director of Company A

Company A operates an online business.

Company A was unable to acquire a credit card due to its lack of prior trading history.

X was issued a credit card which was used for business purposes.

The credit card has a rewards program.

Points were accumulated under loyalty rewards program.

The points were subsequently redeemed for gift cards by X.

X sold the gift cards to an unrelated third party. There are no other customers.

X sells the gift cards at a discount.

The remaining gift cards are retained and used by X.

The funds received from the sale of gift cards have been used to pay for personal living costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Are the gift cards acquired under a credit card loyalty program included in the assessable income of the taxpayer?

Summary

The gift cards acquired through the redemption of rewards points are not included in the assessable income of the taxpayer under section 6-5 of the ITAA 1997.

Detailed reasoning

Assessable income includes ordinary income and statutory income as stated in subsection 6-1(1) of the ITAA 1997. Subsection 6-5(1) of the ITAA 1997 states your assessable income includes income according to ordinary concepts which is called ordinary income. As a resident for tax purposes, subsection 6-5(2) explains that assessable income includes the ordinary income which is derived, directly or indirectly, from sources inside or outside Australia, during the income year.

Section 6-10 of the ITAA 1997 goes on to describe statutory income as amounts that are not ordinary income but are included in assessable income by another provision.

Practice Statement PS LA 2004/4 (GA) Taxing consumer loyalty program rewards provides guidance about whether rewards are taxable. Taxation does not arise where a program issues loyalty points as the result of meeting certain conditions. However, 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:

● 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 Determination TD 1999/34 (TD 1999/34) is specific to consumer loyalty programs and states that rewards received under consumer loyalty programs which are as a result of private expenditure will not be subject to tax.

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) 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.

Application to the taxpayer’s circumstances

In this case, the taxpayer has earned points from expenditure on a personal credit card. The points are then redeemed for gift cards.

The value of the gift cards acquired through the redemption of points under the credit card loyalty program are not included in the assessable income of X.

Question 2

Are the funds received from the sale of gift cards acquired through the redemption of credit card rewards points included in the assessable income of the taxpayer?

Summary

The funds received from the sale of gift cards acquired through the redemption of credit card rewards points are assessable to X as they are considered ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-1 of the ITAA 1997 states that assessable income includes the ordinary and statutory income which is derived, directly or indirectly, from sources inside or outside Australia, during the income year.

Section 6-5 of the ITAA 1997 discusses income according to ordinary concepts:
6-5(1)   Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2)

If you are an Australian resident, your assessable income includes the ^*ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

6-5(3)

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

6-5(4)

In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Amounts that are periodical, regular or recurrent, relied upon by the recipient for their regular expenditure and paid to them for that purpose are likely to be ordinary income as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. It is not necessary for all of these characteristics to be present for an amount to be considered ordinary income.

Furthermore, whether a receipt is ordinary income depends upon its quality in the hands of the recipient as noted in case: Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514.

It is also stated that in order for an amount to be income according to ordinary concepts, it must be money or something capable of being turned into money. In FC of T v Cooke & Sherden 80 ATC 4140 it was affirmed that the application of convertibility was valid. Furthermore it was determined that the income had to be money or something which could be converted into money.

Section 6-10 of the ITAA 1997 goes on to describe statutory income as amounts that are not ordinary income but are included in assessable income by another provision, which is also included in assessable income.

Part 3-1 and 3-3 of the ITAA 1997 detail CGT provisions. CGT is an example of statutory income for the purposes of the ITAA 1997. Relevantly section 118-20 is an anti-overlap provision which works to reduce any capital gain which is already included in assessable income.

Application to the taxpayer’s circumstances:

Ordinary income

X sold gift cards obtained from the redemption of points accumulated on a credit card to an unrelated party. There is periodicity, recurrence and regularity in relation to the receipts received from the sale of gift cards evidenced by the volume of transactions which occurred over the course of the income year. The proceeds from the sale of the gift cards have been used to fund living expenses and therefore have an element of being relied upon.

Therefore, the entire proceeds received from the sale of the gift cards in the income year are included in X’s assessable income under section 6-5 of the ITAA 1997.

Statutory income

The CGT provisions may apply to the disposal of gift cards. However, section 118-20 of the ITAA 1997 would operate to reduce the amount of any capital gain to the extent an amount is otherwise assessable.

As we have concluded that the entire proceeds received from the sale of the gift cards are ordinary income and included in assessable income under section 6-5 of the ITAA 1997, no amount would be included in X’s assessable income under the CGT provisions.

Question 3

Are the transactional costs incurred resulting from gift voucher sales acquired through the redemption of credit card rewards points deductible to the taxpayer in accordance with section 8-1 of the ITAA 1997?

Answer

Yes

Summary

The transaction costs incurred from the sale of gift cards are deductible to X.

Detailed reasoning

Section 8-1 of the ITAA 1997 generally allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

In this case, X has produced assessable income from gift card sales. Therefore the transactional costs incurred from the gift card sales are deductible to X as they are incurred in producing assessable income.

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