Edited version of your written advice

Authorisation Number: 1013000650467

Date of advice: 20 April 2016

Ruling

Subject: Consumer loyalty program

Question 1

Are goods and services redeemed from reward points received assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the answer to question 1 is yes, what valuation methodology should be used for the reward points?

Answer

No response required as the answer to question 1 is no.

Question 3

Does it matter that the number of points received (but not redeemed) significantly exceeds 250,000 points in a year?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

During the financial years ending 20XX and 20YY you were one of the owners of a business. Many of the services provided to your clients require the payment of significant government fees (official fees) at the time of providing those services. These fees were normally paid by credit card and the business would subsequently reimburse for those official fees.

Most of the fees were paid for services to an Australian government agency (the Agency). The Agency provides an electronic transaction channel known as eServices. The eServices system only permits payment by certain credit cards. During the 20XX financial year it may have been possible to pay the Australian official fees by using a different process but in practice the eServices system was used. By the end of June 20XX the Agency shutdown the alternatives and all new matters and payments had to go through the eServices system.

The eServices system was used by business owners as well as some employees, who were provided with the business credit card details.

In 20XX the eServices system was used in part because the Agency had made it clear that they intended to shut down the alternative system. It was also used as it provided administrative benefits such as fraud and error control, electronic correspondence and ease of access. The eServices system would automatically calculate many of the required fees and charge those costs to the credit card preventing manual under and over payments. It was administratively efficient insofar as it avoided the need to separately authorise a large number of small payments for different clients to the same creditor on a daily basis. At the end of June 20XX the use of eServices was mandatory when the Agency shut down the alternative.

The payment of official fees on credit cards had an incidental benefit of generating a large number of reward points for the business owners. It was a matter for each owner how they used their reward points. In theory it was possible for an owner to receive well in excess of 250,000 reward points in a year.

Your circumstances

In the financial year ending 20XX and 20YY you received credit card reward points for business related expenditure associated with the payment of official fees. During the same period you did not redeem any reward points. You left the business after the end of the 20YY financial year and subsequently converted all accrued reward points into specific frequent flyer points (FFP) in advance of cancelling the credit cards.

Although it was possible that your credit card was used to pay in excess of AUD300,000 of official fees, the term and conditions of the credit card limits the total number of reward points awarded in a year number to 200,000. The reward points convert at a 2:1 ratio to other FFP. According to the term of the specific FFP scheme, 100,000 related FFP could convert into gift cards having total dollar value of $X.

Relevant legislative provisions

Income Tax Assessment Act 1936 21A,

Income Tax Assessment Act 1936 23L,

Income Tax Assessment Act 1936 26(e),

Income Tax Assessment Act 1997 6-5 and

Income Tax Assessment Act 1997 15-2

Reasons for decision

Question 1

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs and Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) Taxing consumer loyalty program rewards set out the Commissioner's view on whether or not flight reward received from consumer loyalty program are fringe benefits or assessable income. The tax ruling provides interpretive guidance in response to the Federal Court decision in Payne v FC of T 96 ATC 4407 (Payne's case).

Although TR 1999/6 does not consider rewards in general other than flight rewards paragraph 3 contains the following definition of a consumer loyalty program such as that considered in Payne's case.

"A 'consumer loyalty program' is a marketing tool operated by a supplier of goods or services (including credit card providers), or a group of such suppliers, to encourage customers to be loyal to the supplier(s). The standard features of these programs are:

(a) the customer is dealing with the supplier in a personal capacity, that is, in accordance with the normal arm's length commercial relationship that exists between consumers and suppliers;

(b) membership is restricted to natural persons;

(c) membership of the program is usually by application, which may require an application fee and/or annual fees;

(d) points are received with each purchase of goods or services;

(e) members and non-members pay the same amount for the goods or services purchased; and

(f) points are redeemable for goods or services".

Income according to ordinary concepts

The question of whether flight rewards are assessable was considered in Payne's case, where the Federal Court looked at whether the flight reward was income according to ordinary concepts.

Under section 6-5 of the ITAA 1997 assessable income includes "income according to ordinary concepts" which is also called ordinary income. This phrase however, is not defined under tax law but a large body of case law has identified the factors that indicate if an amount is income according to ordinary concepts. These include:

• Whether the amount has the characteristic of periodicity or regularity, even where the receipts are not directly referrable to employment or services rendered,

• Whether it is convertible into money or money's worth,

• Whether it is associated with business activities or services rendered, as distinct from the mere sale of property, and

• Whether it is solicited, as distinct from a windfall.

No one factor is decisive to determine if a receipt is ordinary income. The circumstances of each situation must be examined. The character of the receipt in the hands of the recipient must be determined as it is in this context that the nature of the receipt is determined (Liftronic Pty Ltd v. Commissioner of Taxation (1996) 66 FCR 175; 96 ATC 4425; (1996) 32 ATR 557).

In Payne's case the Federal Court found that the taxpayer was not assessable in relation to flight reward points she accrued from employer-paid travel and which she used to acquire airline tickets in the name of her parents who travelled from England to visit her. The key finding was that the tickets were not money and could not be turned into money or money's worth, i.e. they were not income according to ordinary concepts. As the tickets were provided under a contract which existed between the taxpayer and the airline company, they could not be regarded as a benefit under the former paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936). The court also found that the benefits were provided by the airline company not because of the taxpayer's employment, but because she had become entitled to them under the scheme for which she had paid the membership fee. In other words, it is because the flight reward arises from a personal contractual relationship that is not linked to employment or business. The Court gave no merit to the assertion - but for the employment, the taxpayer would not have received the benefits.

Assessability of rewards from consumer loyalty programs

Following the decision in Payne's case, the Commissioner issued TR 1999/6 and PS LA 2004/4 (GA) expressing views on the tax treatment of rewards received under consumer loyalty programs. Generally, reward received under a consumer loyalty program by an individual that results from private or business expenditure is not assessable as the rewards arise as a result of a personal (that is, non-service/non-business) contractual relationship. The exception being where the person renders a service on the basis that an entitlement to a reward (flight reward) will arise (eg a person enters into a secretarial service contract with an understanding that a flight reward will be received) or, in a business context, where the activities associated with the obtaining of the rewards amount in themselves to a business 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 recipient is carrying on a business and section 21A of the ITAA 1936 includes the value of the non-cash business benefit in the recipient's assessable income.

PS LA 2004/4 (GA) went further to state that receiving rewards may be subject to tax but receiving reward points is not, even if the points are transferred from one loyalty program to another.

Application to your circumstances

You are a holder of a personal credit card. As a credit card customer you became a member of a consumer loyalty reward program offered by the bank. Under the reward program you received loyalty reward points in exchange for credits drawn against the credit card account. The points can be redeemed for goods and services such air travel tickets subject to terms and condition set out by the program operator. The reward points cannot be redeemed for cash but can be transferred to another loyalty program.

Your credit card was used to make payment for business related expenses from which you have earned 200,000 (capped under the credit card terms and conditions) reward points. The points have not been converted to redeem goods and services.

The loyalty reward points do not display the characteristics of ordinary income. The reward points are not convertible into money and would not be assessable under section 6-5 of the ITAA 1997.

Subsection 21A(1) of the ITAA 1936 requires that any non-cash benefits that are provided in the context of a business relationship, and which are not convertible into cash, are regarded as convertible into cash for the purpose of determining whether the non-cash benefits are assessable income. You did not receive the reward points as a result of a business relationship between you as the recipient of the reward and the credit card company as the reward provider. Therefore, the reward points are not assessable under subsection 21A(1).

Under subsection 15-2(1) of ITAA 1997 (formerly paragraph 26(e) of ITAA 1936) assessable income includes any non-cash benefits which are given to a taxpayer in respect of any employment or services rendered by the taxpayer. However, paragraph 26(e) is limited in that it does not apply to a benefit that is either a fringe benefit or an exempt benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

With reference to the Court's view in Payne's case, rewards received under a private and domestic consumer loyalty program are generally not assessable under subsection 15-2(1) of ITAA 1997 or the former paragraph 26(e) of the ITAA 1936, particularly where the rewards arise from a personal contractual relationship that is not linked to the taxpayer's employment or business.

Where the taxpayer received income by way of a fringe benefit, the income is not assessable and is not exempt under section 23L of ITAA 1936. Further, as explained in paragraph 7 of TR 1999/6 'flight rewards' received under consumer loyalty program are not subject to FBT except where:

• the employer and the employee have a family relationship and the flight reward is received in connection with the employment, or

• a flight reward is provided to the employee, or the employee's associate, under an 'arrangement for the purposes of the FBTAA, that resulted from business expenditure.

The exceptions which would result in a fringe benefit being provided do not apply to the circumstances in your case and section 23L would not apply.

Conclusion

In applying the findings in Payne's case and the Commissioner's view in TR 1999/6 and PS LA 2004/4 (GA), we have determined that the loyalty reward points you received as a result of paying business expenditure (payment of government fees) are not assessable as ordinary or statutory income under the ITAA 1997.

Question 3

Practice Statement PS LA 2004/4 (GA) requires Tax Office staff to apply the principles set out in TR 1999/6 in determining whether a reward received under a consumer loyalty program is an assessable income. The Practice Statement also explains at item 5 which cases ATO officers should refer to a senior technical leader for review. The case must be referred where at one of the following criteria exist:

• The arrangement is contrived and artificial that it has no commercial purpose other than to allow the recipient to receive the rewards, or

• The nature of the arrangement suggests that the rewards are a substitute for income which would otherwise be earned, or

• The points accumulated exceed 250,000 points per annum.

In general term, points accumulated from a business relationship may be questionable when more than 250,000 points are accumulated per annum. However, this restriction does not apply to your situation as the conditions of your credit card limits the total number of reward points awarded in a year to 200,000.