Edited version of your written advice

Authorisation Number: 1012867328209

Date of advice: 21 September 2015

Ruling

Subject: Rewards Program

Question

Are the reward points Entity A receives from the rewards program assessable income?

Answer

No.

Question

Is Entity A entitled to a deduction in relation to points used to obtain flights for business purposes?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

Entity A is planning to subscribe to a rewards program with an airline.

Employees of Entity A are sometimes required to travel for business purposes.

When Entity A has accumulated sufficient reward points to redeem, they will be used to obtain flights for business purposes.

Enitity A does not have a business relationship with the airline.

The reward points earned cannot be converted to money.

The reward points are not a substitute for income for Entity A or their employees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Assessable income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Generally speaking, a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment, business activities or income producing activities.

Where income is not regarded as ordinary income, it may be assessable as statutory income. Section 6-10 of the ITAA 1997 defines statutory income as amounts that are not ordinary income but are included by some provision of the tax law. Section 10-5 of the ITAA 1997 lists a summary of the provisions which includes section 21A of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 21A of the ITAA 1936 includes the arm's length value of non-cash business benefits in the assessable income of a taxpayer. Non-cash business benefits are defined to be property or services provided wholly or partly in respect of a business relationship; or wholly or partly for or in relation directly or indirectly to a business relationship.

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs sets out the tax implications of flight rewards received.

Rewards received under flight rewards programs will be assessable where they are 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 the reward is considered a non-cash business benefit, or

• where the activities associated with obtaining the reward amount to a business or commercial activity, or

• there is an arrangement between the employer and the employee, where an entitlement to a reward will arise as a result of services rendered and the employee receives a reward, in substitution for income.

Where the rewards are received and they are not a result of any services provided or business activity, the rewards are not generally regarded as assessable income.

In this case, Entity A does not have a business relationship with the airline. The rewards under the rewards program are not regarded as a non-cash business benefit. The receipt of the reward points do not amount to a business or commercial activity and are not a substitution for income.

Accordingly the reward points received are not assessable income.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income. 

Losses or outgoings will not be deductible under section 8-1 of the ITAA 1997 where another provision prevents it. 

Subsection 21(1) of the ITAA 1936 provides that  

where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.

The Federal Court in Payne v FC of T (1996) 66 FCR 299; 96 ATC 4407; (Payne's Case), held that a flight reward received by an employee taxpayer was not assessable on the basis of the reasoning in FC of T v Cooke & Sherdan (1980) 29 ALR 202; 80 ATC 4140 (1980) 10 ATR 696, because the flight reward was not 'money' or 'money's worth' and it was not convertible into cash. 

Where an entity acquires an airline ticket by voluntarily redeeming points under a flight rewards program, the redemption of the reward points is a transaction according to the wide meaning of the word under case law. As the consideration for the airline ticket was not paid or given in cash, the value of the consideration attributable to the airline ticket is determined according to subsection 21(1) of the ITAA 1936.

For the purposes of subsection 21(1) of the ITAA 1936, the money value of the consideration given is nil because the reward points are not convertible into cash (Payne's Case).  

To be eligible for a deduction under section 8-1 of the ITAA 1997, you must incur a loss or outgoing. Where points are used, a loss or outgoing of any pecuniary value has not been incurred because the consideration deemed to be paid or given for the transaction is nil.  

Accordingly, Entity A is not entitled to a deduction under section 8-1 of the ITAA 1997 in relation to any points used to acquire flights.

Other information - Fringe Benefits Tax (FBT)

Benefits provided to employees may be subject to FBT.

However, where a benefit provided would've been fully deductible to the employee if they had of incurred expenditure to obtain the benefit, then the 'otherwise deductible' rule would apply to reduce the FBT to nil.

In the present case, Entity A will only use the reward points for the purpose of obtaining flights for its employees to undertake business travel. In those circumstances there would be no FBT liability.