Edited version of private advice

Authorisation Number: 1051550924194

Date of advice: 19 July 2019

Ruling

Subject: Fringe benefits tax - credit card reward points

Question 1

Is the Employer providing a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to its Employee when they earn (but does not yet redeem for goods and services) reward scheme points accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer?

Answer

No

Question 2

Is the Employer providing a 'fringe benefit' as defined in subsection 136(1) of the FBTAA to its Employee when they redeem reward scheme points that have been accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer?

Answer

No

This ruling applies for the following period(s)

1 April 2017 to 31 March 2019

The scheme commences on

1 April 2017

Relevant facts and circumstances

The Trustee for a Trust ('the Employer') commenced a business of purchasing various kinds of goods and reselling these goods to customers.

The Employee of the Employer is a director of the Trustee Company and a beneficiary of the Trust.

The Employee's Personal Credit Cards

The Employee uses a personal credit card to purchase goods on behalf of the Employer in respect of the Employer's business.

With the exception of some minor personal expenses, the Employee uses their personal credit card primarily for the business expenses of the Employer, which includes the purchase of various goods.

The Employee is the main card holder for their personal credit card, and pays the annual credit card fee on the card.

The Employer's Business Process

The Employer's high-level business process is as follows:

1.    Customers place an order for the purchase of a certain number of goods from the Employer's business.

2.    Customers pay for their order in advance. Funds for the order are deposited into a bank account in the name of the Employer.

3.    Once the funds for each customer's order is deposited into the Employer's bank account, the Employee will then use their personal credit card to purchase (on behalf of the Employer) the goods (at a discount) ordered by the Employer's customers.

·         To ensure there are sufficient funds prior to purchasing goods, the Employee will generally not purchase the goods (on behalf of the Employer, using their personal credit card) until after clients have confirmed their orders and paid the relevant monies in full into the Employer's bank account.

·         The Employee purchases goods online through a program that the Employee has membership of (in the name of the Employer). As part of this program, the Employee (on behalf of the Employer) can purchase goods at a discount and then on-sell them.

·         There is only a very small margin/profit made on the sale of each good.

·         Once the Employee uses their personal credit card to purchase the goods ordered by the Employer's customers, the amount of the purchase is recorded on the Employer's books as an 'Employee Loan'.

4.    Using the funds in the Employer's bank account, the Employer regularly pays the Employee back for the goods that were purchased using the Employee's personal credit card (and for any other business expenses incurred).

·         Once the Employer reimburses the Employee for the cost of the goods that were purchased using their personal credit card (and for any other business expenses incurred), the amount recorded on the Employer's books as an 'Employee Loan' is reduced accordingly.

The Employer's business has a number of customers, each of whom is an unrelated party.

Employee Remuneration

Since the inception of the Employer's business until XXX 2019, the Employee did not receive any Employee's fees or salary/wages. During that time, the Employee was only remunerated through the Employee's redemption of reward points (that had been accumulated on their personal credit card through the purchase of goods for the Employer's business) for their personal use.

However, from XXX 2019, the Employee was also remunerated through the receipt of director's fees.

The Employee also has a full-time job separate to the Employer's business.

Apart from the Employee, the Employer only has one other employee (who is not related to the Employee). This employee is employed on a casual basis for one day per week and receives an hourly wage.

Accumulation and Redemption of Credit Card Reward Points

The Employee has earned over 250,000 reward points per year on their credit card since the inception of the Employer's business. These reward points were accumulated as a result of purchasing goods on behalf of the Employer for the Employer to on-sell as part of its business.

Of the total reward points accumulated on the Employee's personal credit cards, a component of these points was redeemed by the Employee for their personal use.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 137

Taxation Administration Act 1953 Schedule 1, Section 12-40

Reasons for decision

Question 1

Is the Employer providing a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to its Employee when they earn (but does not yet redeem for goods and services) reward scheme points accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer?

Summary

The Employer is not providing a 'fringe benefit' as defined in subsection 136(1) of the FBTAA to its Employee when they earn (but does not yet redeem for goods and services) reward scheme points accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer.

Detailed reasoning

The receipt of credit card reward points is regarded as a consumer loyalty program.

A 'consumer loyalty program' is not defined in the taxation legislation. However, paragraph 3 of Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs (TR 1999/6) provides the following definition:

A consumer loyalty program is a marketing tool operated by a supplier of goods or services to encourage customers to be loyal to the supplier.

The standard features of a consumer loyalty program are:

• the customer deals with the supplier in a personal capacity, that is, in a normal arm's length commercial relationship that exists between the customer and the supplier
• membership is restricted to natural persons
• membership of the program is usually by application, which may require an application fee and/or annual fee
• points are received with each purchase of goods or services
• members and non-members pay the same amount for the goods or services purchased, and
• points are redeemable for goods and services.

Practice Statement Law Administration (General Administration) PS LA 2004/4 (GA) Taxing consumer loyalty program rewards (PS LA 2004/4 (GA)) discusses whether rewards received under consumer loyalty programs from banks and credit providers are taxable. Relevantly, paragraph 2 of PS LA 2004/4 (GA) provides that:

... receiving rewards may be subject to tax but receiving points is not, even if the points are transferred from one loyalty program to another.

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA, which holds that the following conditions must be satisfied:

1. A benefit is provided at any time during the year of tax.
2. The benefit is provided to an employee or an associate of the employee.
3. The benefit is provided by:

a.    their employer; or

b.    an associate of the employer; or

c.    a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

d.    a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

                                          i.        participates in or facilitates the provision or receipt of the benefit; or

                                         ii.        participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

4. The benefit is provided in respect of the employment of the employee.
5. The benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

In order to determine whether the accumulation of credit card reward points by the Employee - earned through using their personal credit card to purchase goods that are used in the Employer's business - constitutes a 'fringe benefit' as defined in subsection 136(1) of the FBTAA, a discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit is satisfied.

A benefit is provided

Subsection 136(1) of the FBTAA provides a broad definition of a 'benefit' as including:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a)  an arrangement for or in relation to:

                                    (i)        the performance of work (including work of a professional nature), whether with or without the provision of property; ...

The Employee will receive a benefit of credit card reward points when she uses their personal credit card to purchase goods that are used in the Employer's business.

This element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is therefore satisfied.

Is the benefit provided to an employee or an associate of an employee?

An employee is defined in subsection 136(1) of the FBTAA to include a current, future and former employee. Subsection 136(1) defines a 'current employee' to mean a person who receives, or is entitled to receive, salary or wages.

'Salary or wages', as defined in subsection 136(1) of the FBTAA, includes payments of remuneration to a director from which an amount must be withheld (even if the amount is not withheld) under section 12-40 of Schedule 1 to the Taxation Administration Act 1953.

Section 137 of the FBTAA extends the definition of 'salary or wages' to include benefits that would constitute salary or wages if they were instead provided by way of a cash payment.

Since the inception of the Employer's business until XXX 2019, the Employee did not receive any director's fees or salary/wages. During that time, the Employee was only remunerated through the Employee's receipt of credit card reward points (that had been accumulated on their personal credit card through the purchase of goods that are used in the Employer's business), which were available for the Employee to redeem for their private use (for example, for flight rewards and/or other goods and services).

From XXX 2019, the Employee was also remunerated through the receipt of director's fees.

The Employee has therefore been a current employee of the Employer since the inception of the Employer's business.

The Employee intended to (and did) redeem credit card reward points for flights (or other goods and services) for their own benefit. The provision by the Employer of non-cash benefits to the Employee will be benefits provided to an employee.

This element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is therefore satisfied.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within either paragraph (e) or (ea) of the 'fringe benefit' definition?

The definition of 'provide' and 'provider' in subsection 136(1) of FBTAA are as follows:

provide:

(a)  in relation to a benefit - includes allow, confer, give, grant or perform; and

(b)    in relation to property - means dispose of (whether by sale, gift, declaration of trust or otherwise):

                                     (i)        if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

                                    (ii)        in any other case - the legal ownership of the property.

provider, in relation to a benefit, means the person who provides the benefit.

The right to reward points is provided to the Employee by their credit card provider. As the credit card provider is not the employer or an associate of the employer, it is necessary to consider the application of paragraphs (e) and (ea) of the 'fringe benefit' definition.

Paragraph (e) applies where the benefit is provided by a person who is not the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of 'arrangement' in subsection 136(1) of the FBTAA.

Paragraph (a) of the definition of 'arrangement' in subsection 136(1) of the FBTAA states that an arrangement is:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

The reward scheme points are provided to the Employee under a personal (that is, non-employment), contractual agreement with their credit card provider. The agreement is not between the Employer and the credit card provider. Therefore, paragraph (e) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA does not apply.

A fringe benefit will arise under paragraph (ea) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA where the employer or an associate of the employer participates, facilitates or promotes the provision or receipt of a third party benefit. A third party benefit will be a fringe benefit only if the employer knew, or ought to have known, that the employer was participating, facilitating or promoting the provision or receipt of the benefit.

The Employee uses their personal credit card to benefit the Employer by purchasing goods that are used in the Employer's business. The Employer is aware that the Employee obtains a benefit of reward points from their credit card provider when this occurs.

Further, once the Employee uses their personal credit card to purchase the goods ordered by the Employer's customers, the amount of the purchase is recorded on the Employer's books as an 'Employee Loan'. The Employer regularly pays the Employee back for the goods that were purchased using the Employee's personal credit card, with the amount recorded on the Employer's books as an 'Employee Loan' being reduced accordingly.

The Employer is therefore knowingly facilitating the provision by the Employee's credit card provider of a third party benefit in the form of reward scheme points.

As such, a benefit is provided by a third party in a situation that comes within paragraph (ea) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA.

This element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is therefore satisfied.

Is the benefit provided in respect of the employee's employment?

In considering whether a benefit is provided to an employee 'in respect of' their employment, subsection 136(1) of the FBTAA defines 'in respect of', in relation to the employment of an employee, to include:

by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

The meaning of 'in respect of employment' was considered by the Full Federal Court in J & G Knowles & Associates v. Federal Commissioner of Taxation [2000] FCA 196; (2000) 96 FCR 402; 2000 ATC 4151; (2000) 45 ATR 1101 (Knowles Case). In that case, a trustee company that built and operated retirement villages provided interest-free loans to its directors via their family trusts. The Full Federal Court said that there must be a sufficient and material connection or relationship between the loans and the employment for a fringe benefit to exist, but remitted the matter back to the Administrative Appeals Tribunal (AAT) to determine that question of fact. In AAT Case [2000] AATA 846, Re J&G Knowles & Associates Pty Ltd v. FCT,the AAT decided that although the directors did not own the business in law, the loans were provided to them in their capacity as effective owners of the business, and not in respect of their employment.

The benefit of the reward points is obtained when the Employee uses their personal credit card to purchase goods that are used in the Employer's business. The Employer will record the loan in its books of account and credit the account when it reimburses the Employee. The Employer has not incurred costs related to the Employee's credit card. The fees are paid on an annual basis by the Employee themself. It is a situation where the Employee is effectively providing a short-term loan to the Employer. This type of transaction is more likely to be made by the owner of a business rather than an employee. An employee is unlikely to have the funds to sustain an employer's debt in the hope of a future reimbursement. However, even when loan repayments are made by an employer to an employee, it is unlikely that a benefit of reward points in connection with the loan would be a benefit as defined in subsection 136(1) of the FBTAA, but rather a benefit derived from the discharge of a pre-existing right (Slade Bloodstock Pty Ltd v FCT [2007] FCAFC 173; 2007 ATC 5276).

It is considered that the use by the Employee of their personal credit card to accumulate reward points cannot be sufficiently and materially connected, per the Knowles Case, to those activities in the context of an employment relationship. As such, the accumulation of reward points (from the use of the Employee's personal credit card to purchase goods for use in the Employer's business) was derived by the Employee in respect of their ownership of the business (through being a beneficiary of the Trust) rather than in respect of any employment relationship.

In the Employer's circumstances, while the Employee can earn credit card reward points when using their personal credit card to purchase goods for use in the Employer's business, the receiving of the points (by the Employee) resulted from a personal (that is, non-employment) contract between the Employee and the credit card provider. The points are not received in respect of employment. It cannot be said that there is sufficient nexus between receiving the credit card reward scheme points and the Employee's employment. Hence, in applying PS LA 2004/4 (GA), the Commissioner's view is that FBT does not arise in respect of the reward points that are received/accumulated by the Employee through the use of their personal credit card to purchase goods that are used in the Employer's business.

Therefore, this element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA is not satisfied.

Conclusion

As all of the elements/conditions of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA could not be satisfied, the Employer is not considered to be providing a 'fringe benefit' to the Employee when she earns (but does not yet redeem for goods and services) reward scheme points through the use of their personal credit card to purchase goods that are used in the Employer's business.

Question 2

Is the Employer providing a 'fringe benefit' as defined in subsection 136(1) of the FBTAA to its Employee when she redeems reward scheme points that have been accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer?

Summary

The Employer is not providing a 'fringe benefit' as defined in subsection 136(1) of the FBTAA to its Employee when she redeems reward scheme points that have been accrued through the use of their personal credit card to purchase goods that are used in the business operated by the Employer.

Detailed reasoning

The definitions of a 'fringe benefit' and an 'arrangement' in subsection 136(1) of the FBTAA are as stipulated in the response to Question 1 above.

Taxation Ruling TR 1999/6 Income tax and fringe benefits tax: flight rewards received under frequent flyer and other similar consumer loyalty programs (TR 1999/6) was also introduced in the response to Question 1 above, which also defined a 'consumer loyalty program'.

As further mentioned in the response to Question 1, paragraph 2 of Practice Statement PS LA 2004/4 (GA) Taxing consumer loyalty program rewards (PS LA 2004/4 (GA)) provides the general principles of consumer loyalty program rewards:

... receiving rewards may be subject to tax but receiving points is not, even if the points are transferred from one loyalty program to another.

Where loyalty points are redeemed for a reward, which has occurred as part of an income earning activity, taxation may be appropriate. This is the case when the following factors are evident (per paragraph 2 of PS LA 2004/4 (GA)):

·         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 section 21A of the ITAA 1936 operates to include the reasonable value of the non-cash business benefit in the taxpayer's assessable income.

In response to the Federal Court decision in Payne v FC of T 96 ATC 4407 (Payne) interpretive guidance in terms of how business relationships and arrangements for FBT purposes are viewed is included at paragraph 7 of TR 1999/6 as follows:

Employer

7. Flight rewards, with the following exceptions, are not subject to FBT as they result from a personal (that is, non-employment) contractual relationship. The first exception is where the person with the personal contract is also an employer and provides the flight reward received to an employee in respect of the employment. That is, under the conditions of the flight reward program, FBT only applies where the employer and employee have a family relationship and the flight reward is received in connection with the employment. The second exception is where, 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. It should be noted the Commissioner has determined that flight rewards accrued from membership of consumer loyalty programs are distinct and separate from any benefit resulting from the payment by the employer of membership fees.

Paragraph 25 of TR 1999/6 further details the dynamic of how the relationship is determined in accordance with Payne's decision:

The Court further found the flight tickets were provided in 'consequence' of the taxpayer's employment in that the flights that earned the necessary points were undertaken in the course of her employment and paid for by her employer. The employment was, therefore, an indirect or 'contributory cause' of the receipt of the benefit. However, this was not sufficient for the benefit to be taxable under paragraph 26(e) of the ITAA 1936 (now section 15-2 of the ITAA 1997) as, per Foster J (FCR at 321; ATC at 4425; ATR at 535), 'for a benefit, etc, to be caught by the section, there needed to be a role played by the employer in the giving, etc, of the benefit'. This is lacking where the employee is the person who makes the decision to join or not join the loyalty program. In Payne's case, the taxpayer's employer had no part in the program and did not encourage, arrange or pay for the employee to participate.

Furthermore, Foster J in Payne makes it clear with respect to the flight reward that:

Qantas provided the free ticket not because of Payne's employment with KPMG, but because she had become entitled to it under Qantas' own scheme.

The reasoning in Payne can be applied to the Employer's circumstances. In Payne's case, it was found that benefits provided by an airline to the taxpayer were neither wholly nor partly because of the taxpayer's employment, but because the taxpayer had become entitled to them under the rewards scheme for which the taxpayer had paid the membership fee. The employment nexus could not be established merely by asserting that, but for the employment, the taxpayer would not have received the benefits.

Therefore, for a benefit to be taxable, there needs to be a role played by the employer in the giving of the benefit. This is lacking in the Employer's circumstances, as the Employee is the person who made the personal decision to join or not to join the consumer loyalty program offered by their credit card provider. The Employer had no part in the consumer loyalty program offered by the Employee's credit card provider and the Employer did not encourage, arrange or pay for the Employee to participate, which is analogous to Payne's case.

In the Employer's circumstances, the Employee had a personal credit card which was used to purchase goods for the Employer's business. The credit card was obtained from the Employee's credit card provider, and is linked to the Employee's membership of the credit card provider's consumer loyalty program. In accordance with the Employee's agreement with their credit card provider, credit card reward points accumulate when certain conditions are met. Pursuant to paragraph 2 of PS LA 2004/4 (GA), as discussed in the response to Question 1, the Employer is not subject to taxation in respect of the credit card reward scheme points that the Employee accumulates.

The Employee redeems their credit card reward points for their personal use. The Employee has full control over how the points are redeemed and the Employer does not influence how or when she does this. As iterated above, the Employer had no part in the consumer loyalty program offered by the Employee's credit card provider and the Employer did not encourage, arrange or pay for the Employee to participate in the program.

Any benefits that the Employee receives upon redemption of their accumulated credit card points are a result of the Employee's personal (that is, non-employment) contractual relationship with the Employee's credit card provider under the consumer loyalty program, and not under an arrangement between the Employee and the Employer, or between the Employer and the Employee's credit card provider.

For these reasons, an arrangement (as defined in subsection 136(1) of the FBTAA) does not exist.

Therefore, it is considered that a fringe benefit (as defined in subsection 136(1) of the FBTAA) is not being provided by the Employer to its Employee when the Employee receives benefits for their private use upon the redemption of reward scheme points accumulated through the use of their personal credit card purchase goods that are used in the Employer's business.

It is worth noting, however, that PS LA 2004/4 (GA) states at paragraph 5 that a referral to a Senior Technical Leader in the Australian Taxation Office (ATO) for review is necessary if the reward (that is, the benefit obtained from redemption of credit card reward points) is considered to be assessable income or a fringe benefit because:

·         The arrangement is so contrived and artificial that it has no commercial purpose other than to allow the recipient to receive the rewards.

·         The nature of the arrangements suggests that the rewards are a substitute for income which would otherwise be earned.

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

Administrative action is only considered warranted if at least one of the above criteria exist.

As per the Facts, the Employee has accumulated over 250,000 reward points per year on their personal credit card since the inception of the Employer's business.

However, in this case, after discussions with a Senior Technical Leader and the information available, it is considered that these points are not subject to FBT as they are generated from a personal relationship between the Employee and the Employee's credit card provider.