Edited version of private ruling

Authorisation Number: 1011665491268

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Ruling

Subject: GST & Redemption of Loyalty Points

Is the acquisition made by Entity A from Entity B, a creditable acquisition pursuant to Division 11 the of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice/Answer

The acquisition made by Entity A from Entity B, is a partly creditable acquisition pursuant to Division 11 of the GST Act.

Relevant facts

Entity A operates a loyalty program whereby customers earn points for purchases. Customers can redeem points for various awards.

Entity A decides how many points are necessary to redeem for each award. Many of the rewards offered by Entity A are provided by third party suppliers, such as Entity B providing Passes for services.

Consideration for the Passes is paid by Entity A to the external supplier, which provides the reward to Entity A's customer, under the terms of the supplier's agreement with Entity A.

Entity A has outsourced the processing of redemptions for all third party suppliers. All third party supplier rewards, are accessed through a call centre or website which is operated by an external operator. When customers choose to redeem points to obtain rewards from third party suppliers, the outsourced operator manages the process.

Under Entity A's agreement with Entity B, Entity A's customer can redeem points for Entity B Passes or Gift Vouchers ("Passes") by contacting the outsourced operator. Entity B receives payment from Entity A in respect of points redeemed by customers for Passes. You confirmed that whilst the agreement talks about "Passes and Gift Vouchers" in reality only Passes are provided by Entity B and therefore, there are no supplies of vouchers that fall under Division 100 of the GST Act.

All third party suppliers involved with Entity A's loyalty program treat their supplies as being made to Entity A, and issue tax invoices to Entity A.

Contractual Arrangements

There are three key contracts under the arrangements as follows:

(a) Contract 1: Entity A and a Customer

The terms and conditions of Entity A's Loyalty program govern the operation of this contractual arrangement.

Customers accrue and redeem points pursuant to a contract between Entity A and customer. Customers can only redeem points from Entity A, not from Entity B as title to points can only be held by customers. Entity B never takes title to points and can in no way use, redeem or do anything whatsoever with the points.

Accordingly, if a customer chooses a Entity B reward, the customer redeems points with Entity A, and Entity A pays Entity B for the Passes procured from Entity B and provided to Customers.

Pursuant to agreement, Entity A at its sole discretion, can change the value of the points and can choose which redemption awards it provides customers. As such Entity A chooses whether or not rewards such as Entity B rewards will be provided to its customers. That is, if Entity A chooses not to offer particular rewards such as Passes there will be no supply made by Entity B in respect of points redemptions.

In addition, the agreement states that Entity A "has entered into arrangements with the various parties supplying Awards. If a supplier refuses to provide a Member with a particular Award or refuses to accept an Award certificate, the Member will contact Entity A to assist in the resolution of any such dispute."

(b) Contract 2: Entity A and Entity B

The operation of this contract is governed by the particular programs between Entity B and Entity A .This is the contract pursuant to which Entity A has added Entity B as a redemption Partner.

The contract involves an agreement between Entity A and Entity B for Entity B to supply Entity A Passes and to honour their redemption by customers in accordance with the terms and conditions.

The consideration payable under the contract is negotiated between Entity B and Entity A under Contract 2 and payable by Entity A to Entity B.

(c) Contract 3: Entity B and a Customer

Entity B provides services to customers on redemption of the Passes, subject to the "conditions of use" detailed on the passes.

No consideration is payable by customers to Entity B for the provision of services, nor do customers ever know how much consideration is paid by Entity A to Entity B in respect of the provision of services.

Consideration is only payable by customers to Entity B in limited circumstance listed on the Pass:

This component could be fully or partially satisfied by the Customer paying with cash, credit card etc.

The Redemption Process

When customers choose to redeem points from Entity A for Entity B Passes, the customer redeems points with Entity A (pursuant to contract 1).

Entity B fulfils its contractual obligation to Entity A (pursuant to contract 2) in return for consideration payable by Entity A to Entity B, in providing Passes to Entity A and services to the customer on their redemption of the Pass (pursuant to contract 3).

Entity A is registered for GST; carries on an enterprise in Australia and exceeds the financial acquisition threshold.

Reasons for decision

Division 11 of the GST Act deals with the entitlement to input tax credits. Section 11-20 provides for an entitlement to an input tax credit for any 'creditable acquisition' made by an entity.

Section 11-5 of the GST Act states:

You make a creditable acquisitions 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 liable to provide, *consideration for the supply; and

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

The meaning of creditable purpose is defined in section 11-15 of the GST Act. Relevant to this issue is subsections 11-15(1) & (2) of the GST Act which states:

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 a thing for a creditable purpose to the extent that:

(a) the acquisition of the thing related to making *input taxed supplies; or

(b) the thing is acquired for a private or domestic purpose.

3. …………

Terms denoted by asterisks are defined in section 195-1 of the GST Act.

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

You have advised us that the acquisition from Entity B will be partly for a creditable. Accordingly, an analysis of paragraph (a) of section 11-5 of the GST Act is not required.

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

Section 9-5 of the GST states that:

You make a taxable supply if:
(a) you make the supply for *consideration; and
(b) the supply is made in the course or furtherance of an *enterprise that you carry on; and
(c) the supply is *connected with Australia; and
(d) you are registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

*Asterisked terms are defined in the dictionary at section 195 of the GST Act.

Generally, an analysis of section 9-5 of the GST Act is applicable to a supplier rather than a recipient of a supply. As Entity A is not the supplier of the Passes the Commissioner is unable to provide a detailed analysis on whether section 9-5 of the GST Act was satisfied.

We agree with your submission that the arrangement between Entity A, its Customers and Entity B is essentially a supply involving a tripartite agreement. Accordingly, it is necessary to examine the arrangement to ascertain the recipient of the supply in concern.

The Supply

To support your arguments that the arrangement between the parties is a tripartite agreement you draw analogy with proposition 11 and 13 and the examples that elaborate these propositions in paragraphs 18 to 122 and 130-176 of Goods and Services Tax Ruling GSTR 2006/9: Supplies (GSTR 2006/9).

Outlined below are the relevant propositions and a pertinent example from GSTR 2006/9.

Proposition 11 The agreement is the logical starting point when working out the entity making the supply and the recipient of that supply.

Proposition 13 When A has an agreement with B for B to provide a supply to C, there is a supply made by B to A (contractual flow) that B provides to C (actual flow).

Grandma's flowers

118. A enters into a contract with B for B to provide goods to C. A is an individual, B is a florist, the goods are flowers, and C is A's grandmother:

121. If you take a contractual approach in analysing the arrangement in Grandma's flowers, then the only contractual relationship is between A and B. Under this contract B makes a supply of flowers to A and consideration is paid by A to B. That supply is provided by B to C.

Using the above propositions and the terminology from the example in paragraphs 118 and 121 you submit that A (Entity A) has an agreement with B (Entity B) for B (Entity B) to provide (as opposed to make) a supply to C (Customers of Entity A). Therefore, where a Customer redeems points for Passes the only supply involved is a supply made by B (Entity B) to A (Entity A) namely, the Passes for which consideration is payable by A that is relevant. Accordingly, in substance and in principle Entity B makes a supply of Passes to Entity A for which Entity A pays a sum of money as outlined in the contract between Entity A and Entity B. Entity B then provides these Passes to Entity A Customers. We agree with this analysis in principle.

Provided the conditions in paragraphs (b) - (d) of section 9-5 of the GST Act are satisfied the supply of Passes to Entity A will be a taxable supply. These Passes will not be GST free or input taxed because the conditions in Divisions 38 and 40 will not be triggered.

(c) you provide, or liable to provide, consideration for the supply

The relevant consideration for the acquisition of Entity B Passes is stipulated under the agreement between Entity A and Entity B. As Entity A is obliged to pay Entity B this amount paragraph (c) of section 11-5 of the GST Act is satisfied.

(d) you are registered or required to be registered

Entity A is registered for GST.

Based on the above reasoning the requirements of section 11-5 of the GST Act are satisfied. Consequently Entity A will make a partly creditable acquisition.

We note that the primary reason for requesting our advice was due to a decision reached in the European Court of Justice in the case of The Commissioner for Her majesty's Revenue and Customs v Loyalty Management UK Ltd and Baxi Group Limited. As you correctly submit this decision was decided under European VAT Law and, differs from Australian GST Law and the ATO's public and private rulings. Accordingly, we advise that this decision has no impact on the established and current view on loyalty programs.