Edited version of your written advice

Authorisation Number: 1012748541548

Ruling

Subject: GST and loyalty program

Question 1

Are you required to apportion the consideration for the supply (accrual) of the points to the member when products are purchased from you?

Answer

No. When a member pays consideration for goods or services and gets points allocated to them, the member's payment is consideration for the supply of the goods or services they acquire. You do not need to apportion the amount paid by the member between the goods or services and the points. The accrual (allocation) of the points is not subject to GST.

Question 2

Is the provision of a reward to a member (upon redemption of the points), a supply for consideration when the points are redeemed for:

(a) products; or

(b) cash?

Answer

(c) No. The redemption of points by a member for products is not consideration for a supply of a reward to the member. The supply of the reward can only be a taxable supply by the operator to the member where some additional consideration is provided.

(d) No. The redemption of points by a member for cash is not a supply for consideration.

Relevant facts and circumstances

An Australian company (AusCo) runs a loyalty points scheme in respect of members who purchase products from them. The members may earn points in one of two ways:

1. By purchasing products directly from AusCo or;

2. By taking part in a club whereby AusCo develops product lists that it supplies to members for sale to clients. The lists are distributed by the members to the clients who select the products required and pay the member for them, who then in turn pay AusCo.

The members are able to nominate the 'points' redeemed in one of two streams:

1. Redeemed for products. The dollar value accruing on purchases would approximately equate to X% of the value of the original purchases.

2. Redeemed for cash. The dollar value accruing on purchases would approximately equate to Y% of the value of the original purchases.

Members must nominate the selected stream for redemption in advance and there is no ability to change streams for points that are already earned. Members may elect to change streams for future purchase. There is no fee to join the loyalty scheme and only involves AusCo and the members they deal with.

Redemption of points for products

A loyalty program is established by AusCo and governed by an arrangement between AusCo and each member whereby the arrangement has the following features:

• The loyalty program operator provides a member with loyalty points as a consequence of the member purchasing eligible goods or services or using a credit card to make such a purpose. The member also receives loyalty points on sales of products to clients.

• The price paid by a member for making eligible purchase is the same as for a non-member (that is, they don't pay anything for the loyalty points).

• The loyalty points cannot be transferred for money.

• The loyalty points cannot be redeemed for money.

• To the extent that points may notionally have a value for program members, the value of points earned in making eligible purchases is low compared to the price of goods or services themselves. The value would be equal to approx. X% of the value of the original purchases.

• There is a record keeping mechanism in place that allows the loyalty program operator and member to track how many points have accrued and,

• The points may be redeemed at some time for a reward, being goods or services or a right to receive goods and services. The actual reward depends on the number of points accrued and redeemed by the member. Accordingly, the greater the points redeemed, the more valuable reward to the member is likely to be.

Redemption of points for cash

A loyalty program is established by AusCo and governed by an arrangement between AusCo and each member whereby the arrangement has the following features:

• The loyalty program operator provides a member with loyalty points as a consequence of the member purchasing eligible goods or services or using a credit card to make such a purpose.

• The price paid by a member for making an eligible purchase is the same as for a non-member (that is, they don't pay anything for the loyalty points).

• The loyalty points cannot be transferred for money.

• The loyalty points can be redeemed for money.

• To the extent that points may notionally have a value for program members, the value of points earned in making eligible purchases is low compared to the price of goods or services themselves. The value would be equal to approx. Y% of the value of the original purchases.

• There is a record keeping mechanism in place that allows the loyalty program operator and member to track how many points have accrued and,

• The points may be redeemed at some time for cash. The actual reward depends on the number of points accrued and redeemed by the member. Accordingly, the greater the points redeemed, the more cash to the member.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999, section 9-17

Reasons for decisions

Question 1

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). One of the requirements of a taxable supply is that there is 'a supply for consideration'.

Goods and Services Tax Ruling GSTR 2012/1 covers loyalty programs. The general principles in GSTR 2012/1 will be applied in your case.

When a member makes an acquisition of eligible goods or services from AusCo (the loyalty program operator), the member is allocated points. A question arises as to whether any GST consequences arise from the allocation of points to members. In this context, it is necessary to consider whether there is a 'supply' of points.

The term 'supply' is defined broadly in section 9-10 of the GST Act, including the extended meaning given to it by subsection 9-10(2) of the GST Act. Under paragraph 9-10(2)(e) of the GST Act the creation or grant of a right is a supply, and under paragraph 9-10(2)(g) of the GST Act the entry into an obligation to do anything is a supply.

The facts indicate that there is an agreement between the loyalty program operator and the member under which points are allocated, and these points can be redeemed for rewards on offer. There are enforceable rights that are conferred on the member and corresponding obligations on the loyalty program operator. Principally, the rights are for the redemption of points for rewards. Accordingly, the provision of points to members is a supply.

The next step is to determine whether the supply of points is a supply to members for 'consideration'.

For the accrual of points by members, we consider that the consideration paid by the member should be treated entirely as consideration for the goods or services they acquire rather than apportioned between the goods or services and the points. Therefore, there is no amount paid by the member that is treated as consideration for the supply of points, even though the points may have some value to the member upon allocation (as representing a right to a future reward).

Accordingly, as the member does not provide consideration for the supply of the rights, the accrual (allocation) of the points to the member in the loyalty program is not subject to GST.

Question 2

Under the loyalty program, once the member has accumulated sufficient points, they can redeem those points for a reward. That is, the points can be redeemed for products or cash.

Redemption of points for products

Where a member redeems the points for products (the reward), a supply is made to them. Whether the supply of the reward to the member is a taxable supply made to them depends on whether there is any 'consideration' for the supply.

If the member does not pay any amount to obtain the reward (that is, they redeem sufficient points to obtain the reward), they do not provide any monetary consideration for the supply of the reward.

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 act of redemption does not have any inherent value or independent identity such that they are compensation for the supply of the rewards.

Moreover, subsection 9-17(1) of the GST Act 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

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

When the member redeems points in exchange for a reward, they are exercising their right to the supply of the reward. In accordance with paragraph 9-17(1)(a) of the GST Act, the consideration for the supply of the thing (the reward) is limited to any additional consideration provided either for the supply or in connection with the exercise of the right. Where the member redeems their points for the reward without providing consideration (that is, it is not a points plus pay situation), the supply of the reward is not a supply to the member for consideration.

Accordingly, the supply of the reward to the member is not a taxable supply unless additional consideration is provided (for example, an amount paid by the member) and the other elements of section 9-5 of the GST Act are met (including that the supply is not GST-free or input-taxed).

Redemption of points for cash

Where a member redeems the points for cash (the reward), we need to consider if a 'supply' is made to them.

The term 'supply' is broadly defined in subsection 9-10(1) of the GST Act as 'any form of supply whatsoever'. 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.

Accordingly, in this circumstance the redemption of the points by the member for cash is not a supply. As there is no supply being made, the requirement that there is a supply for consideration is not satisfied.