FBT And Customer Loyalty Programs For Food And Hospitality Businesses
There is a growing trend for food and hospitality businesses to utilise an employee’s personal credit card in the payment of everyday business expenses, in order to accumulate customer loyalty points through a customer loyalty program (e.g., Qantas frequent flyer points).
While there are obvious benefits to this approach, business owners need to be aware that there are potential consequences in respect of fringe benefits tax (FBT).
This is particularly important as the Australian Taxation Office (ATO) has committed to making the treatment of such customer loyalty programs a point of emphasis for the 2017 FBT Year.
Historically, rewards or benefits received by an employee as a result of employer-paid expenditure were generally not subject to FBT, as the Australian Tax Office (ATO) recognised that these points were not accumulated due to a taxpayer’s employment.
In 2004, the ATO reviewed their position in response to the rising popularity of this practice, and adopted the view in PS LA 2004/4 that:
“A reward received by an employee under a consumer loyalty program may be a fringe benefit ... where the facts demonstrate that there is an arrangement between the employee and employer so that the provision of the reward has sufficient and material connection to employment” [emphasis added]
In light of this, the ATO note that FBT may apply where circumstances reveal that a benefit was provided by a third party (e.g. an Airline) under an ‘arrangement’ for FBT purposes, or provided to an employee (or associate) in respect of employment.
Whilst there are no ‘hard and fast’ rules to determine whether a customer loyalty program reward has sufficient material connection to employment, the ATO’s likely judgement can be considered on a spectrum, in terms of the arrangement between the employee and employer.
On one end of the scale is the scenario where the employer has no involvement and no knowledge that the employee is putting the expenses through their card for points, and thus FBT should not apply.
The other end of the scale is whereby the employer has full knowledge of the points accumulation. For example, they may have a formal written agreement in place for the employee, the points accumulation may be in lieu of (or deemed to be in lieu of) salary/wages, and/or the arrangement has no commercial purposefor the employer, other than for that employee to accumulate the points. In these situations, it is likely that FBT will arise on the benefits when they are redeemed.
It is important that employers are aware that any employee (noting that ‘employee’ includes Directors) involvement in processing business expenditure through their personal credit cards to accumulate loyalty points may be considered a fringe benefit when they are redeemed, and thus may create an FBT liability exposure for the business.
If you believe that your business may be at risk of exposure to such fringe benefits liability, please contact us or speak to your ESV engagement partner on 02 9283 1666.