Taxed for being rewarded

By - , Build 139

The rewards from loyalty schemes can be substantial, but are they tax-free? A recent IRD decision highlights when they might be considered a dividend and therefore liable to be taxed.

A NUMBER OF LOYALTY rewards schemes are offered to the building industry, and over the years, we have seen clients receive significant rewards – from fishing rods to boats and motor vehicles.

Recently, Inland Revenue has adopted the position with a client that the rewards points redeemed by a shareholder for personal purposes were taxable.

Company, not personal, points

Although Inland Revenue generally takes the view that the accumulation and redemption of rewards points under loyalty programmes is not income for tax purposes, this situation was different because the rewards points were earned by the company and therefore belonged to the company.

As an asset of the company, Inland Revenue considered that the use by the shareholder of the points for personal purposes equated to a dividend, and they were therefore taxable in the hands of the shareholder.

This created a tax shortfall dating back a number of years. Tax shortfalls are subject to penalties and interest accruing back to the time the reward was enjoyed.

As part of this investigation, Inland Revenue corresponded directly with the rewards points providers to access details regarding the points and the rewards redeemed.

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Basics of how points are treated

If you operate your business via a company structure and receive rewards points, you need to know that:

  • Inland Revenue has access to rewards points provider databases to see what points you earn and what rewards are redeemed
  • the rewards points may rightfully belong to your company, regardless of the name that the membership is under
  • if a shareholder receives a private benefit from the company, the benefit could be treated as a dividend and taxable.

If the points are redeemed for legitimate business purposes, for example, for business travel, this should not create a dividend.

In some situations, the benefit may be able to be classified as a fringe benefit. If the value is under the fringe benefit tax unclassified benefit threshold, it will not be subject to fringe benefit tax.

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Is more IRD interest likely?

This case was thoroughly investigated by Inland Revenue, including serving Notices to Furnish Information to the rewards points provider. Although a negotiated outcome was possible, it still cost the taxpayer a significant amount of tax.

The case has raised a number of issues as to how rewards point balances should be recorded in the company financial statements, how the use of the rewards points should be tracked from an employer perspective and how redemption by a shareholder should be classified for accounting and tax perspectives.

Given Inland Revenue’s increased focus on the property and construction industry and the ease of access they have to this information, we may see more attention focused on rewards points.

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