Are Farm Source Rewards taxed?

The IRD has been focusing heavily of late on the tax treatment of rewards points and rebates such as Farm Source rewards. Depending on how the rewards points were used, they had always been subject to tax however most farmers weren’t aware of this – the IRD just hasn’t had such a strong focus until now.

This also doesn’t just apply to Farm Source rewards and is common with commercial businesses too such as Smart Trade, Bunnings/Carters and Capricorn rewards schemes. This even includes credit card cash back reward points if it is a business credit card used for business purposes.

The issue is that these reward points are convertible to ‘money’s worth’ items which until now, most taxpayers weren’t paying tax on as were taking it as a benefit of being in business and flying under the radar.

The IRD says these reward schemes are income, and there are 3 factors that determine this. Firstly, it’s something that comes in. Secondly, it’s regular and periodic. And thirdly, in the hands of the recipient they have done something to earn it.

So what’s the problem with this?

The problem is that these rewards points (in most cases) create taxable income for the business but may not be a tax-deductible expense depending on how the rewards points are used.

When receiving products or gift cards from suppliers (ie. Farm Source), the value of the item is considered income of the business. The amount is inclusive of GST therefore GST must be paid on the income.

If providing the product or gift card to employees or shareholder employees, the value of the item is subject to fringe benefit tax (FBT). FBT rates can be as high as 63.93% so this can be an expensive option. The exception to this is if the value being provided is below the de minimis threshold of $300 per quarter per employee and $1200 per year per employee (total per year threshold is $22,500 however most farming businesses wouldn’t have this many staff). In either case, this is tax deductible for the business but can cost a fair bit in fringe benefit tax.

If providing to a shareholder that is not an employee, it is considered a deemed dividend which is not a tax-deductible expense.

If applying the item for business use, then the business can claim for GST and income tax. For example, if giving item to an employee and paying FBT then the business can claim as a deduction. Alternatively, if the item is purchased for business use such as tools or equipment, the value can be claimed for GST and income tax.

Recently, changes were made so that if the rewards points were used to purchase a farm asset, GST and depreciation can be claimed.

Case law provides that if the points are redeemed for something that is non transferrable and non-assignable such as air travel tickets this is not considered income as it is not convertible to cash. Even if those points could be redeemed for cash or convertible but you choose to use them for air travel it is still not considered income. However, providing air travel to employees or shareholders is still subject to FBT.

Case law also provides that if the reward is only redeemed very infrequently (ie. once every 3 years) then that is also not considered income for the business.

If the reward points are only earned on private purchases, this is not subject to tax.

As there are a multitude of options available for use of the rewards points, we cannot cover all scenarios here in this article therefore it is best to contact your accountant to discuss your personal situation.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.