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Ruling

Subject: GST and loyalty program awards

Question 1

Are there any goods and services tax (GST) implications when a credit card authority gives you a % credit on account every month on the credit card?

Answer

No, there are no GST implications when the credit card authority gives you a % credit on account every month on the credit card.

Question 2

Are there any GST implications when you receive and/or redeem reward points under a credit card reward scheme for a reward?

Answer

No, there are no GST implications when you receive and/or redeem reward points under a credit card reward scheme for a reward.

Relevant facts and circumstances

You are a sole trader.

You are registered for GST.

You use various credit cards for personal and business related expenses.

You currently have a credit card with a credit card authority in your personal name which gives a % credit on account for all payments you make with the card.

You also use other credit cards which give you reward points under a reward scheme when you use the credit cards to make purchases. You are a member of the loyalty program and pay a membership fee to receive the points. You can redeem these points for a reward. The actual reward depends on the number of points accrued and redeemed by you. You do not make any extra payment for the supply of the reward.

You also confirmed the following:

· the price you pay to make purchases using the credit card is the same as that paid by a person who does not accrue reward points

· the points cannot be transferred for money

· the points cannot be redeemed for money but you may be able to get a credit amount

· the value of the points earned when making purchases is low compared to the price of the goods or services themselves, and

· there is a record-keeping mechanism to track the points accrued.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(4)

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decisions

Question 1

Detailed reasoning

Under subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), GST is payable on taxable supplies and taxable importations.

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

Under section 9-5 of the GST Act, you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered or required to be registered for GST.

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

In this case, when you use your credit card to pay for your expenses, the credit card authority gives you a % credit on your account. The question that arises is whether there are any GST implications when you receive the % credit. In this context, it is necessary to consider whether you make any supply to the credit card authority for the credit. It is also necessary to consider whether, in giving you the % credit, the credit card authority is making any supply to you for which you are entitled to an input tax credit.

The term 'supply' is broadly defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. Subsection 9-10(2) of the GST Act expands on the meaning of supply and provides that supplies include, amongst other things:

· a supply of goods

· a supply of services, and

· the creation, grant, transfer, assignment or surrender of any right.

However, subsection 9-10(4) of the GST Act provides that the definition of supply excludes a supply of money unless the money is provided as consideration for a supply that is a supply of money (as in a foreign exchange transaction). This means that generally the payment of money for the supply of something else is not a supply.

Therefore, a supply essentially is something that passes from one entity to another. The supply may be one of particular goods, services or something else that is reflected in an agreement by one party to do something for another.

This view is contained in Goods and Services Tax Ruling GSTR 2006/9 which sets out a number of propositions for characterising and analysing supplies. Of relevance is paragraph 123 of GSTR 2006/9 which states:

123. The Commissioner explained in Part 2 of this Ruling at paragraphs 102 to 103 how an agreement that does not bind the parties in some way is not sufficient to establish a supply by one party to the other unless there is something else, such as goods, services, or some other thing, passing between the parties.

In this case, from the information provided, you are not making any supply to the credit card authority for the % credit that you receive on account. You receive the credit payment because you use the credit card for your expenses. That payment is considered to be an inducement by the credit card authority for you to use the credit card for your expenses. You do not pay anything extra for the credit that you receive.

In relation to input tax credits, section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Under section 11-5 of the GST Act, you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

To be entitled to claim input tax credits all of the above requirements must be satisfied. One of the requirements is that the supply of the thing to you is a taxable supply.

As stated above, the requirements of section 9-5 of the GST Act must be satisfied for there to be a taxable supply.

In this case, the credit card authority gives you a % credit on your monthly purchases. We have determined that the payment is an inducement for you to use the credit card for your expenses. As the definition of supply excludes the supply of money unless it is money that is provided as consideration such as in a foreign exchange transaction, the % credit, in itself, is not a supply to you. There is an underlying supply that the credit card authority makes which is the right to credit. This supply is a financial supply that is input taxed under Division 40 of the GST Act. No GST is payable on input taxed supplies.

As such, the credit card authority is not making any supply when it makes the % credit to you. It makes the payment to encourage or induce you to use the credit card for your expenses. As there is no supply being made, the requirement in section 11-5 of the GST Act that the supply of the thing to you is a taxable supply is not satisfied and you are not entitled to an input tax credit.

Consequently, there are no GST implications for you when the credit card authority gives you a % credit on account every month on the credit card.

Question 2

Detailed reasoning

The ATO has issued Draft Goods and Services Tax Ruling GSTR 2011/D3 on loyalty programs for public comment. Please note that this draft ruling represents the Commissioner's preliminary view about the way in which a relevant tax provision applies to a particular scheme. If the final ruling, when issued, differs from the draft, the final ruling will prevail. If you have relied on the draft ruling, you may be protected from interest and penalties. However, even if you do not have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it.

Receipt/Accrual of reward points

GSTR 2011/D3 provides the following explanation on the accrual of reward points:

When a member (in this case, it will be you) of a loyalty program makes an acquisition of eligible goods or services from a loyalty program operator or program partner, the member is allocated points.

In the context of whether there are any GST implications, it is necessary to consider whether there is a 'supply' of points.

As explained in question 1 above, the term 'supply' is broadly defined in section 9-10 of the GST Act and subsection 9-10(2) of the GST Act expands on the meaning. Under the terms of the member agreement for the reward points, the loyalty program operator is required to allocate the points to members when they acquire eligible goods or services. The points themselves do not have any inherent monetary value. They can be redeemed for a reward.

A supply includes the grant of rights. The question of whether the points are something that is supplied turns on whether they represent binding 'rights' that a member of the program has or merely gives rise to expectations.

Where there is an agreement under which points are allocated to a member by the loyalty program operator and the points can be redeemed for rewards, there are enforceable rights that are conferred on the member and corresponding obligations on the part of the operator. The rights are for the redemption of points for rewards and they are binding.

However, it is also necessary to determine whether the supply of points is a supply to the member for consideration where points are allocated to the member when they acquire eligible goods or services. Although the allocation of points is a supply of rights, the member does not pay anything extra to obtain these points. As such, there is not a supply of rights to the member for consideration and the first requirement in section 9-5 of the GST Act is not satisfied.

Paragraph 16 of GSTR 2011/D3 states:

The allocation of points to a member of a loyalty program when the member purchases goods or services is not in itself a supply to the member for consideration. The price the member pays is consideration for the goods or services the member acquires.

You have stated that you use credit cards to pay for your expenses. You are a member of a loyalty program and pay a membership fee to receive reward points when you use the credit cards. The allocation of reward points to you under the reward scheme entitles you to redeem the points for a reward. You do not make any extra payment for the supply of the reward.

Consequently, there are no GST implications when you receive/accrue reward points.

Redemption of reward points

GSTR 2011/D3 provides the following explanation on the redemption of reward points:

Under loyalty program arrangements, once the member has accumulated sufficient points, they can redeem those points for a reward such as goods, services or vouchers. Typically, when a member decides to redeem a particular reward, they will notify the loyalty program operator or the nominated entity of their desire to redeem the points for the reward and the loyalty program operator arranges for the reward to be provided to the member.

Where a member obtains a reward, a supply is made to them. Whether the supply of the reward is a taxable supply to the member depends on whether there is any consideration for the supply. If the member does not provide any additional consideration for the reward (that is, they redeem sufficient points to obtain the reward), the member does not provide any monetary consideration for the supply of the reward.

Paragraph 24 of GSTR 2011/D3 states:

The redemption of points by a member is not consideration for the supply of a reward to the member. Accordingly, the supply of the reward can only be a taxable supply to the member where additional consideration is provided.

Paragraph 98 of GSTR 2011/D3 further explains:

We consider that the redemption of points is not consideration for the supply of rewards to the member. 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 rewards. Moreover, paragraph 9-15(3)(a) provides that:

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

· 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

· there is no such additional consideration - there is no consideration for the supply.

As such, when a member redeems points in exchange for a reward, they are exercising their right to the supply of the reward. Where the member does not provide additional consideration for the redemption of the points, 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 (as stated in question 1 above) are satisfied.

In your case, you have stated that you do not provide any extra payment for the supply of the reward. As such, section 9-5 of the GST Act will not be satisfied. Consequently, there are no GST implications when you redeem your reward points for a reward.

Further information

In Media Release 2000/14 - No GST on loyalty, the Commissioner of Taxation announced that the accrual and conversion or redemption of points by members into goods or services will not be subject to GST.

However, membership fees to loyalty programs will attract GST.