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Ruling

Subject: GST and issue of gift cards under loyalty scheme

Question 1

Is the sale of gift cards by A to B via C as agent a taxable supply?

Answer

No.

Question 2

Are gift cards supplied by A to B (via C as agent) vouchers covered by Division 100 of the GST Act?

Answer

No.

Question 3

Is a taxable supply made by either C or B when it issues gift cards to Members as an Award in exchange for points?

Answer

No.

Question 4

Are the gift cards issued by C or B to Members Division 100 vouchers for GST purposes?

Answer

No.

Question 5

Is the supply of merchandise by participating sellers on redemption of a gift card issued as an Award under the Loyalty Programme (LP) a taxable or GST-free supply in accordance with subsection 9-15(3)(a)(ii) of the GST Act?

Answer

No.

Relevant facts and circumstances

LP is a loyalty program that operates to reward customers for their patronage and to encourage consumer loyalty. It operates by allowing program members to accrue 'points' when making purchases at participating businesses.

B is registered for GST purposes and is a member of the D GST group. C, also a member of the D GST group, is appointed to manage the LP. In managing the LP, C acts in its capacity as an agent of B in respect of many transactions that occur in the operation of the program. The Shareholders of C are the constituents of B.

The structure of the LP is that Members earn loyalty points at the participating sellers and the participants pay money into the LP Trust. The money is held in the LP Trust for the beneficiaries of the trust, being the Members (in respect of awards) and C (in respect of administration costs). The LP Trust then makes distributions to Members in the form of awards by paying amounts to C to acquire awards as agent for the LP. C provides the awards it acquires on behalf of the LP to the Members in satisfaction of their entitlements to the capital of the LP Trust.

D is a member of the D GST group and operates a specific operation. D is a participant in the LP. In addition to D, there are other sellers participating in the LP, all are a part of the D GST group. Members can earn points by acquiring goods and services using credit products from those financial institutions participants in the LP. Members may also redeem points for awards from those financial institutions. Other participants in the LP include various service providers.

Customers of D and other participating sellers apply to become members of the LP in accordance with the Membership Terms and Conditions by completing a membership application form and are accepted into the LP as Members by C as manager on behalf of B. When a Member purchases eligible goods or services from a participating seller or service provider or uses an eligible credit product from a participating financial institution, the participant will notify C of the purchase or use and the membership account maintained within the LP Trust in respect of the Member will be credited with points.

The number of points that are credited typically depends upon the value of the purchase (although it may vary according to other factors, for example, special offers of bonus points at certain times). The crediting of a point by C to a Member's membership account does not give the Member any rights to an Award, a portion of an Award or any cash or property. The Terms and Conditions of membership provide that points have no cash or monetary value. Participating sellers make contributions to the LP Trust upon points being issued in respect of acquisitions made from them or use of credit products by Members.

After the accumulation of sufficient points, Members will become entitled to receive an Award from the LP in exchange for the points they have accumulated. A range of Awards are made available by the LP for the members to choose from. One type of an Award that may be obtained in exchange for points by Members is a gift card that entitles a Member to redeem for merchandise up to the value specified on the gift card at a seller that participates in the gift card arrangement. The gift card is the only Award that is relevant for the purposes of the private ruling request.

A Member can request C to issue a gift card to a Member once the Member has accumulated sufficient points in their membership account. Contractually, A issues and sells gift cards to C, which acquires these gift cards as agent for B. C's payment for the gift cards is funded by a distribution out of the LP Trust. The gift cards are therefore legally purchased by B (through C as agent) and given to Members as an Award, which satisfies the Members' entitlement to the capital of the LP Trust. Therefore, where Members redeem points for a gift card, the sale, acquisition and redemption of the gift card award all take place within the D GST group.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 48-40

A New Tax System (Goods and Services Tax) Act 1999 section 100-5

A New Tax System (Goods and Services Tax) Act 1999 section 100-25

Reasons for decision

Question 1

Summary

As this supply is made by one GST group member to another, it is not a taxable supply.

Detailed reasoning

Chapter 4 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) contains special rules which, in particular cases, have the effect of modifying the basic rules of the GST Act.

Section 9-5 of the GST Act is a basic rule that sets out the requirements of a taxable supply. Division 48 of the GST Act is a special rule in Chapter 4, in particular paragraph 48-40(2)(a) of the GST Act ensures that some otherwise taxable supplies made between members of GST groups are not taxable supplies:

(2) However:

(a) a supply that an entity makes to another *member of the same *GST group is treated as if it were not a *taxable supply, unless:

(i) it is a taxable supply because of Division 84 (which is about offshore supplies other than goods or real property); or

(ii) the entity is a participant in a *GST joint venture and acquired the thing supplied from the *joint venture operator for the joint venture; and

The supply by way of sale of gift cards by A to its fellow GST group member, B via its agent C is treated as if it were not a taxable supply. This supply is not excluded from this treatment by either subparagraph (i) or (ii) above; it is not a taxable supply because of Division 84 of the GST Act, nor is the supplier, A a participant in a GST joint venture.

Question 2

Summary

The supply of gift cards by A to B through its agent is not covered by Division 100 of the GST Act.

Detailed reasoning

Under normal circumstances, the supply of a voucher for consideration would be a taxable supply under section 9-5 of the GST Act and the redemption of the voucher for goods and services would constitute a taxable supply only for any further component of consideration payable at that time. However, if the voucher satisfies the definition in section 100-25 of the GST Act and the supply conditions of section 100-5 are subsequently met, the initial issue of the voucher will not be a taxable supply; the taxing point arises later when the voucher is redeemed.

Without questioning whether the gift cards have the characteristics of a voucher set out in section 100-25 of the GST Act (and qualifying as a face value voucher or FVV), we will first examine the nature of their supply and whether this supply meets the requirements of section 100-5 of the GST Act.

The Commissioner's interpretation of GST's effects on vouchers and Division 100 of the GST Act is contained in the Goods and Services Tax Ruling GSTR 2003/5 'Goods and Services Tax: Vouchers'. Paragraph 56 of GSTR 2003/5 notes that one of the additional requirements of section 100-5 of the GST Act is that the supply of the FVV must be otherwise a taxable supply. Paragraph 57 of GSTR 2003/5 states:

57. Subsection 100-5(1) provides that, in certain circumstances, the supply of a voucher is not a taxable supply. If these circumstances are not present, the supply would be a taxable supply if the requirements of section 9-5 are satisfied.¹⁰ Therefore, section 100-5 only applies when the supply of the voucher would be taxable under the basic rules in Chapter 2 of the GST Act.

As discussed in question 1 above, the supply of the gift cards by A to B is not a taxable supply under section 9-5 of the GST Act due to the operation of Division 48 of the GST Act. Therefore this supply cannot be covered by Division 100 of the GST Act.

Question 3

Summary

Neither C nor B make a taxable supply when issuing gift cards to Members as an Award in exchange for points.

Detailed reasoning

Whether supplies of rewards in the form of gift cards to Members is a taxable supply depends on whether there is any consideration for the supplies. If the Members do not provide additional consideration for the gift cards (that is they redeem sufficient points to obtain the cards), the Members do not provide any monetary consideration for the supply of the reward.

We consider that the redemption of points is not consideration for the supply of rewards to the Members. The redemption of points is merely the exercise of a contractual right and not the provision of consideration. The points do not have any inherent value or independent identity such that they are compensation for the supply of the rewards. Moreover, paragraph 9-15(3)(a) of the GST Act provides that:

(3) However:

(a) if a right or option to acquire a thing is granted, then:

(i) the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or

(ii) if there is no such additional consideration-there is no consideration for the supply; and

…..

When a Member redeems points in exchange for a gift card, he/she is exercising their right to the supply of the reward. In accordance with sub-paragraph 9-15(3)(a)(i), the consideration for the supply of the thing (the card) is limited to any additional consideration provided either for the supply or in connection with the exercise of the right. Where the Member redeems points for the gift card without providing additional consideration, the supply of the reward is not a supply to the member for consideration.

Accordingly, the supply of the reward to the Member is only a taxable supply where additional consideration is provided and the other elements of section 9-5 of the GST Act are met.

Question 4

Summary

Gift cards issued by C or B to Members are not Division 100 vouchers for GST purposes.

Detailed reasoning

As discussed in the response to question 2 above, for a voucher meet the requirements of Division 100 of the GST Act, its supply 'must be otherwise a taxable supply'. Gift cards issued by C or B are not issued in return for consideration. Therefore the supply cannot notionally meet all requirements of section 9-5 of the GST Act and as a result are not supplies of Division 100 vouchers.

Question 5

Summary

The supply of merchandise by participating retailers on redemption of a gift card issued as an Award under the LP is not a taxable or GST-free supply in accordance with subsection 9-15(3)(a)(ii) of the GST Act.

Detailed reasoning

The supplies made by participating retailers to Members upon redemption of gift cards issued as Awards will be taxable supplies where the requirements of section 9-5 of the GST Act are satisfied. Of particular importance is the requirement set out in paragraph 9-5(a) of the GST Act that to make a taxable supply, the supply must be made for consideration.

Consideration is defined in section 9-15 of the GST Act. As discussed in the response to question 3 above, subsection 9-15(3) notes that:

· if a right or option to acquire a thing is granted, then:

o the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option; or

o if there is no such additional consideration-there is no consideration for the supply.

Gift cards evidence a right or option to acquire merchandise. When a gift card is redeemed for its face value, the resultant supply is not made in return for consideration. Therefore the supply made to the Member is not subject to GST unless further consideration beyond the face value of the gift card is required.