Edited version of your written advice

Authorisation Number: 1013005892996

Date of advice: 3 May 2016

Ruling

Subject: Consumer loyalty reward

Question 1

Does a fringe benefit as defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) arise where the employee receives (but does not redeem), reward points when using his personal credit card to pay for business expenses incurred by his employer?

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 require as the answer to question 1 is no.

Question 3

Does it matter if 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 April 2017

The scheme commences on:

1 March 2016

Relevant facts and circumstances

The applicant is an Australian resident company (Aus Co).

As an employee of AIP, the director of the Aus Co makes payment for business expenses using their personal credit card which they are later reimbursed by the company. The credit card is linked to a consumer loyalty reward program which the director is a member of and receives reward points from the business and personal expenditure payments made using the credit card. Although there is a potential for a large amount of reward points accrued as the business grows and more expenses are being paid using credit, the term and conditions of the credit card and the reward program limit the total number of reward points awarded in a year to 200,000 points. The reward points received may expire after a period of time or cancelled through cancellation of membership contract from the program.

The accrued reward points can be converted into other reward programs points. For example, accrued points can be converted into Virgin Frequent Flyer Points (VFFP) at a 2:1 ratio, i.e. 100,000 Qantas or VFFP. The Qantas or VFFP points can be redeemed for gifts, other goods and services and air travel vouchers. The director intends to convert the points for business related purposes including flights to promote the company's business.

Relevant legislative provisions

Fringe Benefit Tax Assessment Act 1986 Subsection 136(1)

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

(d) and/or annual fees;

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

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

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

Generally, flight rewards or other rewards received under similar consumer loyalty programs are not subject to FBT as they result from a personal, non-employment contractual relationship between the employee and the program provider. However, there are 2 exceptions outlined in TR 1999/6 where such rewards may be fringe benefits:

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

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

In addition to the above, where an employer pays an employee's membership fee for a reward program, that fee itself will be a fringe benefit; most likely an expenses payment fringe benefit.

Essentially, if the employer was a party to the agreement or arrangement between the airline and the employee and there is sufficient connection with the employee's employment, the benefits arising under the program may be taxable as a fringe benefit.

The direct or indirect connection to the employment and the benefit received is the key element in the definition of a fringe benefit under subsection 136(1) of the FBTAA.

In Aus Co's case, although reward points can be earned when business expenses are paid using the director's personal credit card, the receiving of the points resulted from a result of a personal contract between the director and the credit provider. The points are not received in respect of employment. It cannot be said that there is sufficient nexus between receiving the reward points and the director's employment. Therefore, in applying TR 1999/6 and PS LA 2004/4 (GA), the Commissioner's view is that FBT does not arise in respect to the reward points that are received by the director through the use of his personal credit card notwithstanding that the reward points were received as a result of business expenditures.

Furthermore, although the exchange of reward points for goods and services may be subject to tax, PS LA 2004/4 (GA) states that receiving reward points are not, even if the points are transferred from one loyalty program to another.

Question 3

Detailed reasoning

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 gives rise to assessable income or a fringe benefit. 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 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 the director's situation as the conditions of their credit card limits the total number of reward points awarded in a year to 200,000.