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Ruling

Subject: credit card rewards

Question 1

Does the portion of your visa cash back receipts that relate to your business purchases form part of your assessable income?

Answer

Yes.

Question 2

Is the value of your reward points earned from your credit card business purchases included in your assessable income?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2008

Relevant facts

You are a sole trader.

You have a credit card in your personal name that gives 1% monthly credit on account for all payments using the card.

You use this card for most business related expenses as well as private purposes.

You also have other credit cards that provide reward points. These cards are also used for both business and private purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1936 Section 21A.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Generally speaking, a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment, business activities or income producing activities. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (FC of T v Dixon (1952) 86 CLR 540).

Where income is not regarded as ordinary income, it may be assessable as statutory income. Section 6-10 of the ITAA 1997 defines statutory income as amounts that are not ordinary income but are included by some provision of the tax law. Section 10-5 of the ITAA 1997 lists a summary of the provisions which includes section 21A of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 21A of the ITAA 1936 includes the arm's length value of non-cash business benefits in the assessable income of a taxpayer. Non-cash business benefits are defined to include property or services provided wholly or partly for or in relation directly or indirectly to a business relationship. Non-cash business benefits that cannot be converted to cash will be treated as if they were convertible to cash.

Your credit card cash back scheme and credit card reward points are regarded as consumer loyalty programs.

Consumer loyalty program is not defined in the taxation legislation. However, paragraph 3 of Taxation Ruling TR 1999/6 provides the following definition.

A consumer loyalty program is a marketing tool operated by a supplier of goods or services to encourage customers to be loyal to the supplier.

The standard features of a customer loyalty program are:

· the customer deals with the supplier in a personal capacity, that is, in a normal arm's length commercial relationship that exists between the customer and the supplier,

· membership is restricted to natural persons,

· membership of the program is usually by application, which may require an application fee and/or annual fee,

· points are received with each purchase of goods or services,

· members and non-members pay the same amount for the goods or services purchased, and

· points are redeemable for goods and services.

Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) discusses rewards received under consumer loyalty programs from banks and credit providers.

As highlighted in PS LA 2004/4 (GA), rewards received under consumer loyalty programs will be assessable where they are received as part of an income earning activity and:

· 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 includes the value of the non-cash benefit in the taxpayer's assessable income.

Example 2 in PS LA 2004/4 (GA) is relevant in your circumstances and is outlined below:

Pamela is a member of a credit card loyalty program and uses her credit card for all her business and personal expenses. The rewards flowing from the redemption of the credit card loyalty program points arise from her relationship with the credit card loyalty program provider, and may be assessable as the relationship has both a personal and business aspect.

It is arguable that Pamela has a business relationship with the financier:

· she pays fees for the service

· where business expenditure is incurred the credit card provider is extending credit to her business, so that

· the rewards she receives under the program in relation to her business expenses are arguably assessable under section 21A of the ITAA 1936.

Your situation is similar to the above example. You receive 1% credit or reward points on your credit cards in relation to both business and private purchases.

A reward is assessable where the activities associated with obtaining the reward amount to a business or commercial activity.

However where the rewards are received by an individual and they are not a result of any services provided or business activity, the rewards are not generally regarded as assessable income. As highlighted in Taxation Determination TD 1999/34, a reward received under a consumer loyalty program that results from private expenditure is not assessable.

In your case, it is considered that a portion of your credit and reward points received from using your credit cards are the product or consequence of your income producing business activities. Accordingly the cash value of the associated rewards received in relation to your business purchases are assessable income.