Edited version of your written advice

Authorisation Number: 1012785827989

Ruling

Subject: GST and loyalty program

Question 1

Are you required to apportion some of the consideration received from the sale of the goods to the supply of points to the member when third parties pay their orders directly to you?

Answer

No, you are not required to apportion some of the consideration received from the sale of the goods to the supply of points to the member when the third parties pay their orders directly to you as the third parties' payments are the entire consideration for the supplies of goods made by you to them. Further, your allocation of points to the member is not subject to the goods and services tax (GST).

Question 2

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

a) products (mainly books); or

b) cash?

Answer

a) 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.

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

Question 3

In circumstances where the members choose to take cash and an agency arrangement is determined between the parties, can you issue recipient created tax invoices (RCTIs) as per RCTI 2000/12 to the members in these circumstances or alternatively will the Commissioner make a determination to permit you to issue RCTI to the schools in these circumstances?

Answer

You do not need to issue RCTI to the members where the members choose to redeem the points for cash as no supply is made when the points are redeemed for cash.

Relevant fact

You run a loyalty points scheme in respect of members earning loyalty points for items purchased from you by third parties.

Where products are purchased from lists distributed by the members and third parties make the payment directly to you, points are accrued by the members for any purchases and are able to be redeemed for products (mainly goods) or for cash.

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 XX% of the value of the original purchase.

2. Redeemed for cash. The dollar value accruing on purchases would approximately equal to YY% of the value of the original purchase.

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 purchases at any time. There is no fee to join the loyalty scheme and the scheme only involves you and the members you deal with.

Redemption of points for products

A loyalty program is established by you and governed by an arrangement between you 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 goods to third parties.

• The price paid by a member for making eligible purchases 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 approximately XX% of that of the goods and services.

• There is a record keeping mechanism in place that allows the loyalty program operator, member or both 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 you and governed by an arrangement between you 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 goods to third parties.

• 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 approximately YY% of that of the goods and services.

• There is a record keeping mechanism in place that allows the loyalty program operator, member of both, 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

Reason for decisions

Question 1

Goods and Services Tax Ruling GSTR 2012/1 is about loyalty programs. Paragraph 7 in GSTR 2012/1 sets out the features of a loyalty program and include:

• 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 purchase.

From the facts given you are operating a loyalty scheme that provides a member with loyalty points as a consequence of third parties purchasing goods from you. Under the loyalty scheme, the third parties are not members. In this instance, your loyalty scheme does not have the feature of a loyalty program.

However, the general principles in GSTR 2012/1 can apply to your loyalty scheme.

When a third party pays consideration for the goods and the member get points allocated by you in consequence, the third party's payment is the entire consideration for the supply of goods you made to the third party. Accordingly, you are not required to apportion some of the consideration received from the sale of the goods to the supply of points to the member when the third party pays their orders directly to you.

Supply of points

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 for a taxable supply is that there is a 'supply for consideration'.

The facts indicate that your provision of points to the member is a supply.

However the points are not something that you sell and the act of purchasing the goods by the third parties does not have separate independent identity and economic value such that it could be consideration for the allocation of points. Instead, there are enforceable rights that are conferred on the member and corresponding obligations on you. Principally, the rights are for the redemption of points for rewards and the member does not provide consideration for the accrual of the points since the rewards points are considered to merely be a way of measuring progress towards a point entitlement. In this instance your allocation of point to the member in your 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 (mainly goods) 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:

a) 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

b) 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.

Question 3

As discussed in question 2, no supply is made when the member redeems the point for cash. Accordingly the issue of RCTI is not applicable.