Loyalty programs have become a staple in New Zealand’s consumer landscape, offering rewards ranging from points and gift cards to discounts and exclusive offers. While these incentives enhance customer experience, it is essential to understand their tax implications to ensure compliance with the IRD regulations.
Generally, when individuals earn loyalty points through personal purchases, these rewards are not considered taxable income. For instance, points accumulated from grocery shopping or personal travel are typically tax-exempt. However, if these points are converted into cash or cash equivalents, different tax rules may apply. The IRD has recently published a discussion in a Questions We’ve Been Asked (QBA) bulletin that addresses the income tax treatment of gift cards and products provided as trade rebates or promotions.
Trade customers often make significant purchases from a supplier, and in return, the supplier may reward them with gift cards or products as part of a loyalty program or incentive scheme.
When a business receives a gift card from a supplier as part of a trade rebate or incentive scheme, it is considered income, and is therefore taxable to the recipient (trade customers). The cards may be used by the company, however they are often used by shareholders, or “gifted” to employees. This is generally considered a fringe benefit and may be subject to Fringe Benefit Tax (FBT).
The tax treatment of gift cards can depend on whether they are closed-loop or open-loop cards.
Open-loop card: functions like a prepaid debit card (e.g., a Visa or a Prezzy card) and can be used in multiple locations. These cards are considered equivalent to cash. Open-loop cards provided to employees are income, and is therefore treated as extra pay, subject to PAYE.
For a shareholder-employee who receives a salary that is not subject to PAYE, the income is added on top of the shareholder salary and is taxable in the shareholder’s personal tax return. If the shareholder is receiving regular salary or wages, the income is subject to PAYE like other employees.
Closed-loop card: a prepaid card that is accepted for payment by only a specific retailer or group of retailers.
For tax purposes, closed-loop cards are not treated as cash when gifted to a shareholder or an employee, but will be subject to FBT.
Products provided as trade rebates are money’s worth because the products can be sold for money. The IRD uses the example of a microwave as a trade rebate which can be sold by the trade customer. In this instance, the money’s worth of the microwave is the second-hand price the trade customer would receive for the microwave if sold.
If the product is gifted to an employee, as a non-cash benefit, and the market value of the microwave exceeds the de minimis threshold ($300 per quarter or $1,200 per year), it will be subject to FBT.
The QBA states that the trade customer cannot claim a tax deduction for the trade rebate products (or gift cards) because they incur no direct expenditure to obtain these rebates. Deductions are allowed only for the cost of the goods and services purchased from trade suppliers, not for the rebates received.
For the same basis that the trade customer incurs no acquisition cost for the products, depreciation deduction is not allowed, even if the products are used in the business.
Key Points:
- Trade rebates and benefits are taxable income for the business
- No deduction is allowed for rebates or free goods, even if used in the business
- FBT applies when goods are given to employees unless treated as a taxable salary
- Open-loop gift cards are considered cash and taxed as extra pay
- Closed-loop gift cards are subject to FBT
- Cashback benefits are treated as taxable income and cannot be deducted as a separate expense
If you would like to discuss this or anything else with our team, please do not hesitate to contact us on 07 885 1022 or email info@grahambrown.co.nz