Edited version of your private ruling

Authorisation Number: 1012584527586

Ruling

Subject: Cash redeemable reward points

Questions and Answers:

1. Will your payment to your customers for redeemed reward points be deductible?

Yes.

2. Will your payment to your customers for redeemed reward points be deductible at the point of time when your customers apply for their redemptions?

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a start-up company that provides a customer reward points programme, redeemable in cash, as soon as the customer earns the points.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.

To qualify for deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been 'incurred'. The word 'incurred' is discussed in Taxation Ruling TR 97/7: 'Income tax: subsection 51(1) - meaning of 'incurred' - timing of deductions', which states:

As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape… a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing...it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

The Commissioner's view in Taxation Determination TD 2003/20 provides a deduction is not allowable to a reward provider under section 8-1 of the ITAA 1997 when points are credited to a member under a 'consumer loyalty program'. It states:

At the time the points are credited to the member there is no presently existing liability to actually provide a reward. When the points are credited to the member, the reward provider has not completely subjected itself to the future liability so as to have incurred a deductible expense under section 8-1 of the ITAA 1997. Any future liability is subject to contingencies as an actual entitlement to a reward may not arise until a certain number of points are accrued. Even at that time there is no certainty that a reward will be redeemed or what reward will be redeemed. It is not therefore a presently existing liability...Even where a member has sufficient points to redeem a reward, a liability in respect of the points will not arise until such time as the reward is actually redeemed and supplied. [Emphasis added]

In your case, your payment to customers for reward points will be a deductible expense because such outgoings will be incurred in earning your assessable income.

Although your customer reward points may be immediately redeemed for cash by your customers (rather than redeemable for goods and services), the principle in TD 2003/20 will remain to apply. This is because there is no certainty that a reward will be redeemed since the onus rests upon the customer to redeem the reward. In other words, you will not be completely subjected to a money debt you cannot escape until the customer acts to redeem the reward.

It follows you will incur an existing liability of a pecuniary character at the time when the reward points are redeemed by the customer (rather than at the time when the reward points are credited to your customer or at the time you make payment to the customer).