ATO targets customer loyalty programs
It is common practice for small business owners to pay business expenses such as insurance, telephone bills, stationery and parking fees on personal credit cards that accumulate “frequent flyer points”. These points may be later redeemed for a wide range of rewards including flights, accommodation, merchandise and shopping vouchers.
In a practice statement, the Australian Taxation Office (ATO) outlined three scenarios where the rewards received under the customer loyalty programs may trigger an audit and result in the payment of income tax or a fringe benefits tax (FBT):
1. The arrangement is so contrived and artificial that it has no commercial purpose other than to allow the recipient to receive the rewards;
2. The nature of the arrangements suggests that the rewards are a substitute for income which would otherwise be earned.
3. The points accumulated exceed 250,000 points per annum
For example, John is an employee and a director of XYZ Company. He uses his personal credit card for private expenditure. John places the majority of the company’s business expenditure on his personal credit card. The company reimburses him for the expenditure he has paid on its behalf. Under this arrangement, John acquires points from the business expenditure and, hence FBT may apply in this case. The FBT is payable when the points are redeemed.
Another situation where a review by the ATO may be triggered is when the rewards are received in lieu of a performance bonus. Sam is employed by XYZ Company. Rather than paying Sam a Christmas bonus, Sam will pay a significant portion of the company’s business expenses on his credit card each October and the company will reimburse Sam when the payment on his card falls due. Under this arrangement Sam will accrue points in a consumer loyalty program that he can redeem for significant rewards. This arrangement has no apparent purpose other than to enable Sam to receive significant rewards by redeeming the points accumulated from business expenditure as a substitute for income he would otherwise have been expected to receive.
The ATO noted that there are no income tax consequences or FBT exposure where involvement in the customer loyalty program can be justified using legitimate commercial reasons (eg. to obtain administrative benefits) or where the points are redeemed for work-related purposes (eg a business trip).
If you wish to clarify any of the points raise in this article, please contact our team of tax accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.