Edited version of your written advice

Authorisation Number: 5010048056788

Date of Advice: 13 February 2018

Ruling

Subject: The fringe benefit tax implications of frequent flyer points

Question 1

Is Employer providing a fringe benefit as described in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986(FBTAA) to its employees, when it provides the frequent flyer points accumulated in its business account to the individual employee’s frequent flyer account?

Answer

Yes

Question 2

Alternatively, if the benefits received by an employee are not subject to fringe benefits tax, is the employee required to declare the fair value equivalent of the accrued frequent flyer points as assessable income?

Answer

No, as the answer to question 1 above is yes.

This ruling applies for the following period:

Year ended 31 March 2018

The scheme commences on:

1 March 2017

Relevant facts and circumstances

Employer is a registered charity based in a state or territory in Australia.

Employer’s staff travel to various locations to attend conferences, professional development courses or for relocation purposes.

Employer uses Airline as their flight carrier for their staff due to greater flexibility with travel bookings, choice of flights and schedules provided by the airline.

Employer does not have a business relationship with Airline.

Employer registered with the Airline Business Rewards Program (Program) which is a loyalty program open to small and medium sized businesses with valid ABNs, for a small one-off registration fee.

The program allows businesses to earn frequent flyer points on eligible flights and purchase of eligible goods and services through various Airline business partners. The business partners provide various goods or services which include, but not limited to, car rental, business insurance, office supplies, fuel, accommodation, equipment hire and other business expenses.

The business and the individual related to the organisation accrue two sets/parcels of frequent flyer points each, for the same travel, purchase of goods and/or services. That is, when the individual traveller books a flight, purchases goods/services they quote the business ABN and their Frequent Flyer number to accumulate points for the business as well as their individual account. Both accrue points according to a scaling system based on their membership levels and the terms of the scheme.

The individual linked to the business rewards account may be an owner, director, officer, employee, contractor, consultant, partner or principal. These individuals could accumulate points for the business, provided they quote the ABN at the time of the travel booking and or purchase of goods/services.

The points earned by the business must be transferred to an individual’s Airline Frequent Flyer membership account at a minimum of 3,000 per transfer, before they can be redeemed for rewards. The frequent flyer points earned cannot be converted to money. The allocation of the points to specific employees is at the discretion of Employer.

Any or all of these individuals listed above could potentially be nominated by the employer or owner to receive the points from the business reward account. Once the points have been transferred to the individual’s account, the redemption of the transferred points and the points earned by the individual are collectively subject to the Airline Frequent Flyer terms and conditions. The points could be redeemed for eligible goods or services.

Under the scheme a business member is entitled to earn a maximum number of points specified in the airline earn table in any year but an individual has no such restriction, subject to the individual’s account terms and conditions.

Employer currently has two employees linked to the business rewards account and envisages that potentially up to a maximum of six employees could be linked to the account.

Employer contends that the business would be unlikely to accrue more than 20,000 points per year on travel and eligible business expenditure.

Employer currently has no arrangement or agreements in place to determine the basis of transfer of points from the business rewards account to the individual’s Frequent Flyer account. The basis of transfer could be decided based upon the advice received thorough the ruling process.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 148(1)

Fringe Benefits Tax Assessment Act 1986 section 58P

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 42

Fringe Benefits Tax Assessment Act 1986 section 43

Fringe Benefits Tax Assessment Act 1986 paragraph 43(a)

Summary

The provision of frequent flyer points to an employee under the Airline Business Rewards Program will be a property benefit as defined in subsection 136(1) as the benefit is provided in respect of employment. However based on the notional taxable value of the benefit, it may be classified as an exempt fringe benefit.

Reasons for decision

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

(a) A benefit is provided at any time during the year of tax.

(b) The benefit is provided to an employee or an associate of the employee.

(c) 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;

(d) The benefit is provided in respect of the employment of the employee.

(e) 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.

Subsection 136(1) of the FBTAA defines ‘arrangement’ as:

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

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

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; …

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).

TR 1999/6 defines a consumer loyalty program as a marketing tool being operated by (and including) credit card providers. The objective of these schemes is to encourage their customer’s loyalty. The ruling provides that flight rewards received under consumer loyalty programs are generally not taxable. However, it also notes that FBT may apply 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 an employee, or the employee's associate, under an 'arrangement' for the purposes of the FBTAA, that results from business expenditure.

'Consumer loyalty program' for the purposes of TR 1999/6 is defined in paragraph 3 of TR 1999/6 which states:

For the purposes of this Ruling, 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.

For the purposes of this Ruling, a 'flight reward' has the following characteristics (being the characteristics of the program considered in Payne's case):

(a) the reward consists of a free flight (including a free holiday package), a flight upgrade, or free hotel accommodation or car hire that may attach to such free flights or paid flights;

(b) a flight reward can only be taken by the member or an immediate family member (i.e., spouse, child, grandchild, parent, grandparent, etc.);

(c) a flight reward is not transferable for cash; and

(d) a flight reward is not redeemable for cash.

The Ruling considered a consumer loyalty program in the context of Payne’s case. However most of the features are equally applicable to the characteristics of the Airline Business Rewards Program. It is noted that the consumer loyalty program outlined above differs from the Airline Program in that the membership is restricted to ABN holders only.

It is considered that paragraph 1 of PS LA 2004/4(GA) states that there may be cases where a reward from a consumer loyalty program or flight reward will fall outside the guidelines in TR 1999/6 but notes that FBT may be applicable if certain factors are present.

In the context of the Airline Business Rewards program, the flight reward features listed above are valid for the individual employee who ultimately redeems the flight rewards from the points received from the business.

Practice Statement PS LA 2004/4 (GA) Taxing consumer loyalty program rewards provides guidance about whether rewards are taxable.

Paragraph 2 states that a reward received by an employee under a consumer loyalty program may be a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the facts demonstrate that there is an arrangement between the employee and employer so that the provision of the reward has a sufficient and material connection to employment.

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.

A discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit in subsection 136(1) is satisfied-

A benefit is provided

Based on the facts, Employer allocates the frequent flyer points from its Airline Rewards Account to its employees’ Frequent Flyer account. Once transferred, the individual redeems them in accordance with the terms and conditions of the frequent flyer program.

The right created by Employer in allocating the frequent flyer points for future redemption falls within the definition of a ‘benefit’ as defined in subsection 136(1) of the FBTAA as Employer creates a right to receive goods or services on redemption of the points.

As such, the first condition (i.e. the provision of a ‘benefit’) of the definition of a ‘fringe benefit’ – as defined in subsection 136(1) of the FBTAA – would be satisfied.

The benefit is provided to an employee or an associate of the employee

An ‘employee’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employee.

The facts state that the Employer intends to allocate reward points to its employees as it is required to under the terms of the Program.

Therefore, as the benefit is provided to employees of Employer, the second condition (i.e. a benefit is provided to an employee) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA would be satisfied.

The benefit is provided by an employer, an associate of the employer or a third party

‘Employer’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer.

Employer is the employer who provides the benefit to its employees. That is Employer has the sole discretion to allocate the points to any of its individual employees.

Therefore, the third condition (i.e. a benefit is provided by an employer) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA would be satisfied.

The benefit is provided in respect of the employment of the employee

Subsection 148(1) of the FBTAA stipulates that a benefit will be provided in respect of the employment of an employee:

(a) whether or not the benefit also relates to some other matter or thing;

(b) whether the employment is past, present or future;

(c) whether or not the benefit is surplus to the recipient's requirements;

(d) whether or not the benefit is also provided to another person;

(e) whether or not the benefit is offset by any inconvenience or disadvantage;

(f) whether or not the benefit is provided or used, or required to be provided or used, in connection with any employment;

(g) whether or not the provision of the benefit is in the nature of income, and

(h) whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.

The term 'in respect of', in relation to the employment of an employee, is defined in subsection 136(1) to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'.

The Full Federal Court in Knowles stated at ATC 4158 that:

22. The words ``in respect of'' have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found…….

23. The AAT was correct in stating that the phrase requires a ``nexus, some discernible and rational link, between the benefit and employment''. That, however, does not take the matter far enough. For what is required is a sufficient link for the purposes of the particular legislation: see Scully at ATC 4121 [38] to [40]; HCA [38] to [40]. It cannot be said that any causal relationship between the benefit and the employment is a suffienct link so as to result in a taxable transaction…..

The Court further found it instructive to consider Smith before stating at ATC 4158:

● ... what must be established is whether there is a sufficient or material , rather than a , causal connection or relationship between the benefit and the employment.

...

● 27. Here the question whether there is a sufficient or material connection or relationship between a benefit and employment is assisted by having regard to the purpose or object of imposing FBT on employers. That purpose was stated by the then Treasurer, Mr Keating, in the Second Reading Speech (2 May 1986, Hansard, House of Representatives) at 3020 to be to ``ensure that all forms of remuneration paid to employees bear a fair measure of tax...''

28. While the width of the definition of ``fringe benefit'' was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit.

In considering whether the frequent flyer points are credited in respect of the employee's employment it is relevant to note the presence of the following characteristics:

● the employer participates in the scheme,

● the employer participates in the scheme for its own benefit, namely the prospect of obtaining the flexibility with booking flights and accruing frequent flyer points for other goods and services purchased through the Airline partners,

● the employer arranges for the business frequent flyer points to be credited to specific employees’ individual Frequent Flyer account,

● awarding of points is limited to employees.

These features provide the sufficient or material connection referred to in Knowles and enable the crediting of the frequent flyer points to be distinguished from the decision in Payne. Therefore, as there is a sufficient or material connection between the crediting of the frequent flyer points and the employment of the employee, the frequent flyer points are provided in respect of the employee's employment.

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

The benefit is not specifically excluded from the definition of a fringe benefit

With respect to paragraphs (f) to (s) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA, the relevant paragraph to consider is paragraph (g) which provides that an exempt benefit will not be a fringe benefit.

In considering whether the internet benefits provided by Employer fall within any of the exempt benefits listed in Part III of the FBTAA, it is necessary to initially determine the types of fringe benefits that are applicable under the FBTAA.

In considering whether the benefit is a fringe benefit it is necessary to determine the type of benefit that has been provided.

Under the arrangement, Employer will arrange to transfer the reward points from its business account to the individual’s frequent flyer account. This will give rise to a property fringe benefit.

As stated above, a benefit that is an exempt benefit will not be a fringe benefit. For the purpose of this Ruling the relevant exemption to consider is the exemption contained in section 58P. The conditions that must be satisfied for a benefit to be an exempt benefit under section 58P are discussed in Taxation Ruling TR 2007/12 Fringe benefits tax : minor benefits (TR 2007/12).

Paragraph 8 of TR 2007/12 states that a benefit will be an exempt benefit under section 58P where the following two conditions are met:

(a) the notional taxable value of the minor benefit is less than $300, and

(b) it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

The term 'notional taxable value' is defined in subsection 136(1) to mean:

... the amount that, if it were assumed that:

(a) in the case of a car benefit - the car benefit was a residual benefit, and

(b) in all cases - the benefit was a fringe benefit in relation to the employer in relation to the year of tax,

would be the taxable value of the fringe benefit in relation to the year of tax

The definition of 'property benefit' in subsection 136(1) provides that a benefit will be a property benefit if it comes within section 40 and is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 10 (inclusive) of Part III. Divisions 2 to 10 cover car benefits, debt waiver benefits, loan benefits, expense payment benefits, housing benefits, living-away-from-home allowance benefits, board benefits, meal entertainment and tax-exempt body entertainment. As the provision of the frequent flyer points does not come within any of these divisions, the provision of frequent flyer points will be a property benefit if it comes within section 40.

Section 40 states:

Where, at a particular time, a person (in this section referred to as the ``provider'') provides property to another person (in this section referred to as the ``recipient''), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

'Property' is defined in subsection 136(1) to mean 'intangible property' and 'tangible property'

'Intangible property' is defined in subsection 136(1) to mean:

(a) real property,

(b) a chose in action, and

(c) any other kind of property other than tangible property,

but does not include:

(d) a right arising under a contract of insurance, or

(e) a lease or licence in respect of real property or tangible property

As discussed above, Employer in arranging to transfer the frequent flyer points to its employees’ Frequent Flyer account, under the Airline Business Rewards Program is providing the employee with the right to receive goods or services. These rights come within the definition of intangible property as they are a form of property, but are not 'tangible property' which is defined to mean goods. Therefore, a property benefit will arise from the provision of the frequent flyer points.

Under section 40 a property benefit is taken to be provided at the time the property is provided to the employee. This will be at the time the frequent flyer points are credited to the Frequent Flyer membership account of the employee.

The methods used to value a property benefit are contained in sections 42 and 43. Section 42 applies if the property benefit is an in-house property fringe benefit and section 43 applies if the property benefit is an external property fringe benefit.

The definitions of 'in-house property fringe benefit' and 'external property fringe benefit' contained in subsection 136(1) provide that intangible property is an external property fringe benefit. Therefore, the taxable value of the property fringe benefit that arises from the provision of the frequent flyer points will be determined in accordance with section 43.

Section 43 provides three alternate valuation methods. The appropriate method depends upon whether the provider is the employer or an associate of the employer and whether the employer incurs expenditure in relation to the provision of the property.

Section 43 states:

Subject to this Part, the taxable value of an external property fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients property was purchased by the provider under an arm's length transaction at or about the provision time - the cost price of the recipients property to the provider,

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the property - the amount of that expenditure, or

(c) in any other case - the notional value of the recipients property at the provision time, reduced by the amount of the recipients contribution.