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Ruling

Subject: Income tax: Frequent flyer points

Issue 1

Question 1

Are frequent flyer points accumulated on a reward scheme by Mr X from the use of his personal credit card to pay liabilities of the head company for a consolidated group of which he is a director and shareholder, assessable to him under a provision of the Income tax Assessment Act 1936 or 1997 (ITAA 1936, ITAA 1997)?

Yes

Question 2

Are frequent flyer points accumulated on a reward scheme by Mr X when he uses his personal credit card to pay liabilities for a head company of a consolidated group of which he is a director and shareholder assessable income to him under a provision of the Income tax Assessment Acts 1936 or 1997(ITAA 1936, ITAA 1997) by reason that he is an employee of another company that is independent of the consolidated group?

No

This ruling applies for the following period

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

1 April 2013 to 31 March 2014

The scheme commenced on

1 July 2011

Relevant facts

Mr X is a director, 50% shareholder and employee of company B

Mr X uses a personal credit card to pay large bills for a consolidated group of companies headed by Company A.

Expenses paid on behalf of Company A are recorded on his credit card statements.

Payments of expenses of the company made on Mr X's personal credit card will be recorded as expenses paid on the date they are paid. A corresponding credit will be posted to Mr X's loan account in the company records to reflect the debt owed to Mr X.

When Mr X seeks payment for his credit card, the payment will be made by Company A and his loan account will be debited the amount of the payment.

It is expected that Mr X will accumulate more than 250,000 frequent flyer points from payment of Company A's liabilities.

There appears to be no set conversion rates to change frequent flyer points to monetary value.

It is intended that Mr X's frequent flyer points will be used to provide non-cash benefits for him and his family members.

Company B will not reimburse its employee Mr X for expenses he pays with his personal credit card on behalf of any other company.

Mr X's credit card has an interest free credit period of 55 days.

This arrangement provides a cash flow benefit to Company A.

Mr X's personal credit card accumulates frequent flyer reward scheme points.

Mr X is a director of Company A.

Mr X is a trustee and a beneficiary of a discretionary Trust.

The Trust owns the majority of the shares of Company A.

Mrs X owns the remaining shares in Company A.

Mrs X is also a trustee and beneficiary of the A Trust.

Mr and Mrs X own Company B equally.

Mr X does not receive salary and wages or payment as a director of Company A. No employment contract exists for him.

His income from the group arises from distributions from the family Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 21A.

Income Tax Assessment Act 1997

Section 6-5

Section 6-10

Section 10-5

Section 15-2

Reasons for decision

Issue 1

Question 1

Are frequent flyer points accumulated on a reward scheme by Mr X from the use of his personal credit card to pay liabilities of the head company for a consolidated group of which he is a director and shareholder, assessable to him under a provision of the Income Tax Assessment Act 1936 or 1997 (ITAA 1936 and ITAA 1997)?

The head company concerned is Company A.

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs addresses the tax implications of flight rewards received from consumer loyalty programs. It directs us to determine whether the fight reward has the characteristics of ordinary income.

'17. The first consideration is whether the flight reward has the characteristics of ordinary income. The 'Note in subsection 6-5(1) requires section 10-5 to be consulted as specific provisions may affect the treatment of some ordinary income. Section 10-5 has a listing for 'non-cash benefits' that directs one to 'benefits' and 'employment'. Under 'benefits' is a listing for 'business, non-cash' that directs one to section 21A of the Income Tax Assessment Act 1936 (ITAA 1936). Under 'employment' is a listing for 'allowances and benefits in relation to employment or rendering services' that directs one to section 15-2 of the ITAA 1997 (formerly paragraph 26(e) of the ITAA 1936).'

Paragraph 21 of Taxation Ruling TR 1999/6 concludes:

'….. only a business taxpayer could have a flight reward assessed as ordinary income under section 6-5 because only a business taxpayer can have a non-cash benefit treated as if it were cash and, hence, be ordinary income. Other taxpayers must be considered under section 6-10 (statutory income) which directs one to section 10-5 and in turn section 15-2.'

And paragraph 22 of TR 1999/6 notes that in determining the tax implications of rewards received from consumer loyalty programs (such as frequent flyer points) that a consideration common to both the income tax and FBT provisions is to identify whether in the provision of the reward there exists the necessary employment or business relationship. The business taxpayer may receive frequent flyer points as ordinary income under section 6-5 of the ITAA 1997 and a taxpayer who receives the benefit through an employment relationship may have the benefit included as assessable income because it is statutory income by virtue of section 6-10 of the ITAA 1997

Is the provision of frequent flyer points to Mr X when he uses his credit card to pay liabilities of Company A, assessable income as a consequence of the application of section 6-10(statutory income), section 10-5 and section 15-2 of the ITAA 1997?

Section 15-2 of the ITAA 1997 states:

Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

This is so whether the things were *provided in money or in any other form.

However, the value of the following are not included in your assessable income under this section:

(c) a *dividend or *non-share dividend;

(d) an amount that is assessable as *ordinary income under section 6-5;

Mr X is a former employee of Company A. He wants to provide the company with the benefits of an interest free period and a higher credit limit that he has available to him on a personal basis from his credit card provider. When he renders the company this service he will receive a benefit of frequent flyer points from his own financier when he pays the company's expenses.

TR 1999/6 focuses on the relevant points in section 15-2 of the ITAA:

'Employees (where FBT does not apply)

15-2(1) [of the ITAA 1997] Your assessable income includes the value to you of all ... benefits, ... *provided to you in respect of , or for or in relation directly or indirectly to, any employment of or services rendered by you ...

15-2(2) This is so whether the things were *provided in money or in any other form (emphasis added).'

The meaning of 'in respect of employment' was considered by the Full Federal Court in J & G Knowles & Associates v. Federal Commissioner of Taxation [2000] FCA 196; (2000) 96 FCR 402; 2000 ATC 4151; (2000) 45 ATR 1101 (Knowles Case). In that case a trustee company that built and operated retirement villages provided interest-free loans to its directors via their family trusts. The Full Federal Court said that there must be a sufficient and material connection or relationship between the loans and the employment for a fringe benefit to exist, but remitted the matter back to the Administrative Appeals Tribunal (AAT) to determine that question of fact. In AAT Case [2000] AATA 846, Re J&G Knowles & Associates Pty Ltd v. FCT the AAT decided that although the directors did not own the business in law, the loans were provided to them in their capacity as effective owners of the business, and not in respect of their employment.

Mr X received director's fees in the form of superannuation guarantee contributions two years ago as a former employee. He is also a director of Company A and a trustee of the family trust which owns a majority of the shares in the company. He advised that he will use his credit card to pay Company A's expenses in his capacity as a director of Company A.

The benefit of the frequent flyer points is obtained when he uses his personal credit card to pay Company A's expenses. Company A will record the loan in its books of account and credit the account when it pays the credit card account on behalf of Mr X. Company A has not incurred costs related to the credit card. The fees are paid on an annual basis by Mr X himself. It is not a situation where Company A provides a loan to an employee but one where Mr X is effectively providing a short term loan to the company. This type of transaction is more likely to be made by the owner of a business rather than an employee. An employee is unlikely to have the funds to sustain an employers' debt in the hope of a future reimbursement. However even when loan repayments are made by an employer to an employee it is unlikely that a benefit of frequent flyer points in connection with the loan would be a benefit as defined in subsection 136(1) but rather a benefit derived from the discharge of a pre-existing right. Slade Bloodstock Pty Ltd v FCT [2007] FCAFC 173; 2007 ATC 5276. His employment relationship with Company A was some years ago. He is not proposing to render the company the service of a better interest free period and credit limit on the basis of a decision made whilst employed by the company some years ago.

It is considered that the use of the credit card to accumulate frequent flyer points cannot be sufficiently and materially connected, per the Knowles Case, to those activities in the context of an employment relationship. It is, therefore, concluded that the frequent flyer points accumulated from the use of his personal credit card to pay Company A's business expenses was obtained in respect of the ownership of the company via the family trust rather than in respect of any employment relationship either directly or indirectly. Therefore the accumulated frequent flyer points will not be assessable income to Mr X as a consequence of the application of 6-10, section 10-5 and section 15-2 of the ITAA 1997.

However paragraph 21 of TR 1999/6 states:

21. It is concluded only a business taxpayer could have a flight reward assessed as ordinary income under section 6-5 because only a business taxpayer can have a non-cash benefit treated as if it were cash and, hence, be ordinary income. Other taxpayers must be considered under section 6-10 (statutory income) which directs one to section 10-5 and in turn section 15-2.

Are the frequent flyer points that Mr X accumulates from the use of his personal credit card to pay the business expenses of Company A, a non-cash business benefit described in section 21A of the ITAA 1936 and ordinary income pursuant to section 6-5 of the ITAA 1997?

Section 6-5 of the ITAA 1997 includes in a taxpayers assessable income, income according to ordinary concepts. A necessary characteristic of income according to ordinary concepts is that it must be money or something capable of being turned into money. This is the so-called principle of convertibility, established in Tenant v Smith (1892) 3TC 158 (Tenant) and confirmed in an Australian context in FC of T v Cooke & Sherden 80 ATC 4140 (Cooke & Sherden).

In order to ensure that certain benefits received by taxpayers did not escape taxation solely by reason that the relevant benefits were not convertible to cash, section 21A was introduced into the ITAA 1936 following the decision in Cooke & Sherden. The benefits to which section 21A is directed are non-cash business benefits as defined in the section.

Subsection 21A (1) of the ITAA 1936 states that:

For the purposes of this Act (the 1936 Act), in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash.

Practice Statement Law Administration (General Administration)PS LA 2004/4 (GA) Income tax and fringe benefits tax - rewards received under consumer loyalty programs provides the Commissioner's view on rewards received under consumer loyalty programs because of a business relationship. It does not concern itself with the decision in Payne v FC of T (1996) 66 FCR 299, 96 ATC 4407, (1996) 32 ATR 516 (' Payne's Case').In this case the Court held that the rewards received by Mrs Payne as an employee did not constitute income according to ordinary concepts and the benefit given was as a result of a personal contract between the taxpayer and the consumer loyalty provider even though the benefit arose as a consequence of her employment. The flight rewards received by Mrs Payne did not form part of her assessable income. The Court did not consider the application of section 21A of the ITAA 1936 that deals with non-cash business benefits.

Paragraphs 17 and 18 of Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) state:

17. Rewards received under consumer loyalty programs will be taxable in circumstances where the facts demonstrate that the reward is 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 operates to include the reasonable value of the non-cash business benefit in the taxpayer's assessable income.

18. Similarly, where the activities associated with the obtaining of a reward amount to a business or commercial activity and the reward is a non-cash business benefit in terms of section 21A of the ITAA 1936 the reward will be assessable.

Mr X is the recipient of the reward when he uses his personal credit card and the reward provider is the credit card provider. He has a business relationship with his credit card provider as he pays a fee for the use of the personal credit card. The frequent flyer points he accumulates will be redeemed for non-cash benefits which he and his immediate family will use. There appears to be no set conversion rates to change frequent flyer points to a monetary value. However once the frequent flyer points are redeemed for a non-cash benefit a monetary value can be ascribed. The third criteria listed at paragraph 17 above, is determined by the application of section 21A of the ITAA 1936 to the facts.

TR 1999/6 at paragraph 22 explains how the provision of the rewards will be as a result of a business relationship when it defines a non-cash business benefit as:

Business taxpayers

21A(5) [of the ITAA 1936] In this section: ...

'non-cash business benefit' means property or services provided ...

(a)  wholly or partly in respect of a business relationship ; or

(b)  wholly or partly for or in relation directly or indirectly to a business relationship (emphasis added).

Paragraph 21A(5)(a) includes an arrangement for or in relation to the lending of money in the definition of 'services'. Mr X receives the frequent flyer points as a reward for the use of his personal credit card as a consequence of an arrangement he has with his credit card provider.

'Business' is defined at section 6 of the ITAA 1936 as having the meaning provided in section 995-1 of the ITAA 1997 which 'includes any profession, trade, employment, vocation or calling but does not include occupation as an employee. Mr X is a former employee of Company A. However, we have already concluded, based on the Knowles Case, that the use of his personal credit card to accumulate frequent flyer points cannot be sufficiently and materially connected in the context of an employment relationship.

Mr X is a director of Company A and a trustee of the family trust which owns the majority of the shares in the company. He derives most of his income as a beneficiary of the family Trust. Mr X clearly has a significant amount of control over the business in his capacity as director, indirect shareholder, trustee and beneficiary of the A Trust. As a director of Company A, he advised that he will use his personal credit card to pay Company A's expenses for the purpose of extending the benefit of his 55 day interest free period and a higher credit card limit than that available to the company on its own credit card. Payments of expenses of the company made on Mr X's personal credit card will be recorded as expenses paid on the date they are paid. A corresponding credit will be posted to Mr X's loan account in the company records to reflect the debt owed to Mr X.

When Mr X seeks payment for his credit card, the payment will be made by Company A and his loan account will be debited the amount of the payment. Mr X is effectively providing a short term interest-free loan to Company A when he pays the company's liabilities. We have concluded that this type of transaction is made by Mr X is his capacity as an owner of a business, for the benefit of the business and for business purposes. This is reflected by the treatment of the transaction in the company's books of account as a loan by the director to Company A. The activities associated with obtaining the consumer rewards ie the payment of business expenses on his personal credit card have a business character. The frequent flyer points he accumulates when he uses his personal credit card to pay Company A's business expenses will be a non-cash benefit provided wholly in respect of his business relationship with Company A. Section 21A of the ITAA 1936 operates to include the reasonable value of the non-cash business benefit in the taxpayer's assessable income.

Subsection 21A(2) states that the benefit is brought to account at its arm's length value, reduced by any contributions made by the recipient, Mr X. Subsection 21A(3) provides a restriction on the value of the benefit should Mr X be entitled to a once only deduction had he paid the expenditure for the frequent flyer points. The amount of income relating to the benefit would be reduced accordingly.

PS LA 2004/4 (GA) provides guidance on the taxing point of the rewards.

Rewards or Points - the taxing point

23. In TR 1999/6, the tax implications of flight rewards received from consumer loyalty programs was considered. It is the receipt of a reward which is the taxing point and the value of that reward may be subject to tax. The receipt of points would not be a taxing point in accordance with the views expressed in TR1999/6.

24. Further where points received under a consumer loyalty program are substituted for points in another consumer loyalty program, that is, the points are transferred between programs, the transfer is not considered to be the receipt of a reward.

Mr X will be required to include in his ordinary income the value of the rewards he receives at the time he redeems the accumulated frequent flyer points obtained when he uses his personal credit card for business purposes.

The frequent flyer points are a non-cash business benefit for Mr X as described in section 21A of the ITAA 1936 and accordingly is ordinary income and assessable pursuant to section 6-5 of the ITAA 1997.

Question 2

Are frequent flyer points accumulated on a reward scheme by Mr X when he uses his personal credit card to pay liabilities for a head company of a consolidated group of which he is a director and shareholder, assessable income to him under a provision of the Income Tax Assessment Acts 1936 or 1997(ITAA 1936, ITAA 1997) by reason that he is an employee of another company that is independent of the consolidated group?

Mr X is a current employee of Company B. He will pay the liabilities of another company with his personal credit card and accumulate frequent flyer points from the credit card provider.

TR 1999/6 and PSLA 2004/4(GA) require the business and employment relationships giving rise to the benefit of frequent flyer points received under a consumer loyalty program to be examined to determine the tax treatment of those frequent flyer points. Specifically, paragraph 21 of TR 1999/6 states:

21. It is concluded only a business taxpayer could have a flight reward assessed as ordinary income under section 6-5 because only a business taxpayer can have a non-cash benefit treated as if it were cash and, hence, be ordinary income. Other taxpayers must be considered under section 6-10 (statutory income) which directs one to section 10-5 and in turn section 15-2.

And paragraph 18 of PSLA 2004/4(GA) expands on the flight rewards earned by a business taxpayer through business or commercial activity.

18. Similarly, where the activities associated with the obtaining of a reward amount to a business or commercial activity and the reward is a non-cash business benefit in terms of section 21A of the ITAA 1936 the reward will be assessable.

The benefit of the frequent flyer points is provided by his credit card provider as part of its consumer loyalty program. The credit card provider is a third party providing the benefit under a personal arrangement with Mr X for which he pays a fee. The credit card provider is not providing Mr X with frequent flyer points because of a relationship with Company B, his current employer. It is providing the frequent flyer points and subsequent rewards under its business relationship with Mr X.

Mr X will use his credit card to pay the liabilities of Company A. Company B will not reimburse its employee, Mr X for expenses he pays with his personal credit card on behalf of any other company. Mr X will not be reimbursed by Company B for any of the business expenses he pays on behalf of Company A. None of these transactions will be recorded in Company B's books of account. Company A will pay Mr X's credit card statement, 55 days after he has paid Company A's expenses with his personal credit card. There is no financial arrangement between the two companies, Company B and Company A with respect to Mr X's use of his personal credit card to pay expenses for Company A.

There is a business relationship between the head company, Company A and Mr X because he will pay the business expenses of the head company using his personal credit card in his capacity as a director/owner of the company. Mr X is also a director of Company B. As a director of both companies, Company B will be aware of the arrangement between Company A and Mr X when he uses his personal credit card to pay Company A's business expenses. However Company B is not involved in any of the transactions that will give rise to the frequent flyer points. It therefore has not established a direct or indirect business relationship with either Company A or Mr X in relation to Mr X's use of his personal credit card to pay Company A's liabilities. Similarly there is no evidence, either directly or indirectly, of a business relationship between Company B and Mr X's business relationship with his credit card provider which gives rise to the benefit of frequent flyer points. The frequent flyer points will not be a non-cash business benefit (section 21A of the ITAA 1936) received by Mr X because of a business relationship with Company B. As such the frequent flyer points will not be assessable income of Mr X pursuant to section 6-5 of the ITAA 1997 because of a business relationship he has with Company B.

Company B will not reimburse its employee Mr X for expenses he pays with his personal credit card on behalf of any other company. There is no nexus between his employment relationship with Company B and the use of his personal credit card to pay Company A's business expenses. He will not be accumulating frequent flyer points in respect of his employment relationship with Company B. Therefore section 6-10 (statutory income) which directs one to section 10-5 and in turn section 15-2 of the ITAA 1997 will not apply of include the value of the benefit in his assessable income.

As Mr X is not accumulating frequent flyer points through the use of his personal credit card as a result of a business or his employment relationship with Company B, the frequent flyer points are not assessable income to him under a provision of the ITAA 1936 and/or ITAA 1997 by reason that he is an employee of Company B that is independent of the consolidated group.