Edited version of your written advice

Authorisation Number: 1051427633159

Date of advice: 12 September 2018

Ruling

Subject: Income Tax Implications of a Voucher Arrangement

Question 1

Does the taxpayer derive income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) under the voucher arrangement at the time the value of the voucher is paid to their account?

Answer

No.

Question 2

a) Does the taxpayer derive income under section 6-5 of the ITAA 1997 on the full face value of the voucher, when the customer redeems the voucher?

b) If the answer to a) is yes, is the taxpayer entitled to a deduction under section 8-1 of the ITAA 1997 for the amount it pays to the customer, who cashes out the voucher at the time of redemption ?

Answer

a) Yes.

b) Yes.

Question 3

Does the taxpayer derive income under section 6-5 of the ITAA 1997 when the voucher expires?

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx – 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The taxpayer runs a retail business and accounts on an accruals basis.

The taxpayer entered into an agreement with another unrelated entity to install a machine on the shop’s premises.

The other entity owns the machine.

Customers can return used beverage containers through the machine and when they do so, receive a voucher from the machine.

When a voucher is generated from the machine, the owner of the machine will make a deposit into the taxpayer’s bank account for the same dollar value as the value of the voucher issued.

Customers can use the voucher in the taxpayer’s shop to reduce the payable amount when they make a purchase, or cash out the equivalent dollar value on the voucher from the taxpayer without making a purchase, or a combination of both.

If a voucher is not used in the taxpayer’s shop within a certain period from the date the voucher is issued, the voucher expires and the customer cannot use the voucher in the shop and cannot redeem the voucher for cash.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, or ordinary income

Under subsection 6-5(2) and (3) of the ITAA 1997 taxpayers must include in assessable income the gross income derived.

When income is derived is to be determined in accordance with general understanding among practical business people. In Arthur Murray (NSW) Pty Ltd v FC of T (1965) 14 ATD 98 at 99-1200; (1965) 114 at 318, the High Court stated:

As Dixon J observed in Carden’s Case: ‘Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form’. The word ‘gains’ is not here used in the sense of the net profits of the business, for the topic under discussion is assessable income, that is to say gross income. But neither is it synonymous with ‘receipts’. It refers to amounts which have not only been received but have ‘come home’ to the taxpayer; and that must surely involve, if the word ‘income’ is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust of charge in favour of the payer – not only that they have been received beneficially – but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.

The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income. A conclusion as to what that understanding is may be assisted by considering standard accountancy methods, for they have been evolved in the business community for the very purpose of reflecting received opinions as to the sound view to take of particular kinds of items. This was fully recognized and explained in Carden’s Case, especially in the judgment of Dixon J; but it should be remarked that the Court did not there do what we were invited to do in the course of the argument in the present case, namely to treat the issue as involving nothing more than an ascertainment of established book-keeping methods. A judicial decision as to whether an amount received but not yet earned or an amount earned but not yet received is income must depend basically upon the judicial understanding of the meaning which the word conveys to those whose concern it is to observe the distinctions it implies. What ultimately matters is the concept, book-keeping methods are but evidence of the concept.

The High Court further stated that the word ‘income’ was to be understood in the sense which it has in the vocabulary of business affairs.

In Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418 at 427-428; 71 ATC 4195 at 4200; (1971) 2 ATR 563 at 569-570, Gibbs J, in considering the meaning of the word 'derived' said:

The word "derived" is not necessarily equivalent in meaning to "earned". "Derive" in its ordinary sense, according to the Oxford English Dictionary, means "to draw, fetch, get, gain, obtain (a thing from a source)". It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which "is calculated to give a substantially correct reflex of the taxpayer's true income" (Commissioner of Taxes (South Australia) v The Executor, Trustee and Agency Company of South Australia Limited (Carden's Case) (1938), 63 CLR 108, at pp 152-4; 1 AITR 416, at pp 441-2).

His Honour then quoted Dixon J, with whom Rich and McTiernan JJ concurred, in Carden's Case:

Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form.

According to established accountancy and commercial principles, amounts received in advance of goods being sold, or of services being rendered, are not entered to the credit of any revenue account until the sale takes place or the services are rendered.

In the present case, payments are received up-front for the voucher, but nothing is exchanged until the consumer presents the voucher at the taxpayer’s store. The voucher may also expire without being presented after a certain timeframe.

The taxpayer, for accounting purposes, records the money received for the voucher in cash at bank and in a contra account.

Therefore, the Commissioner considers that the payment by the unrelated party in respect of the voucher is not income derived by the taxpayer as provided for by section 6-5 of the ITAA 1997.

Where the voucher expires, before being redeemed within its validity period, the taxpayer is deemed to have derived the income at that point in time when the voucher has so expired.

The taxpayer has derived income when the customer redeems their voucher in the shop. The amount derived under section 6-5 of the ITAA 1997 is equal to the face value of the voucher.

Deduction for cashout expense

Taxpayers are allowed a deduction under section 8-1 of the ITAA 1997 from their assessable income of any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income or it is necessarily incurred in carrying on a business. However taxpayers cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of capital or of a capital nature.

The Courts have laid down guidelines for distinguishing capital and revenue expenses. In examining an expense, three elements are looked at:

● the nature of the advantage sought

● the way it is to be used or enjoyed, and

● the means adopted to get it.

Where the expense results in bringing into existence an asset or an advantage for the enduring benefit of the business, the expenditure is likely to be capital in nature. Similarly, where the expense is a single payment for the future use or enjoyment of the asset, the expenditure is likely to be capital.

In the present case, the cash out expense is directly related to taxpayer gaining or producing assessable income from the redemption of the voucher. It is not an expense that involves the bringing into existence any type of enduring advantage or is a single payment for the future use or enjoyment of an asset. The taxpayer is therefore entitled to a deduction under section 8-1 for the cash out amount.