Are tradie loyalty rewards taxable?

As a tradie, you may be used to suppliers giving you loyalty rewards, such as gift cards or ‘free’ products, as part of your relationship with the supplier. You may also have been led to believe that these loyalty rewards are free of tax and don’t impact your taxable income.

However, in a recent tax update, the Inland Revenue has made it clear that it views any such loyalty rewards as taxable income, where tax should be paid by any affected tradespeople.

Let’s look at what the technical note says, and how it might impact your loyalty rewards.

What Inland Revenue has said regarding tradie loyalty rewards

The Inland Revenue (IR) technical note asks the key question, ‘What is the income tax treatment of gift cards and products provided as trade rebates or promotions?’

The answer provided by the IR can be summarised as follows:

1. Open-loop gift cards:

An Open-loop gift card can be used at any retailer that accepts a specific payment network (like Visa or Mastercard).

If an ‘Open-loop’ gift card is offered as a loyalty reward, the face value of the gift card is viewed as income of the business.

Deductions are available if the gift card is supplied to an employee and will be subject to fringe benefit tax (FBT). If you use the gift card to buy something that has a business purpose, you may be able to claim a deduction against this expenditure.

2. Closed-loop gift cards:

A Closed-loop gift card is limited to use at a single store or a specific group of retailers.

If a ‘Closed-loop’ gift card is given as a loyalty reward, the face value of the gift card is also considered income of the business.

Additionally, deductions are available if the gift card is supplied to an employee (including a shareholder-employee) and will also be subject to FBT. No deductions for gift cards provided to shareholders that are treated as dividends.

3. Products:

Finally, any product offered as a loyalty reward is counted as income of the business.

The income will be based on the second-hand value of the product. Deductions are available if the products are supplied to an employee (including a shareholder-employee) and will be subject to FBT. There are no deductions for products provided to shareholders – these should be treated as dividends.

NOTE: If you sell the product, the amount you receive will be classed as income and a deduction will be available for the realisable value of the products treated as income.

You can read the full IR technical note here.

An example: how this works in practice

The Inland Revenue has given several examples of how the taxation of tradie loyalty rewards may work in practice. Here’s one example, to give you an idea of the real-world application.

Example: Trade customer receives closed loop card and provides card to employee

Facts Builder Ltd carries on business as a builder and purchases building materials from Building Trade Supplies Ltd. To encourage customer loyalty, Building Trade Supplies Ltd gives its trade customers a rebate in the form of a gift card with a face value of $100 for every $1,000 of purchases.

The card is a closed loop card and can be used to buy products from only Building Trade Supplies Ltd. Builder Ltd purchases $4,000 of materials and receives a gift card with a face value of $400. It provides the card to an employee, who does not hold shares in Builder Ltd.

How the income tax laws apply

• The value of the card ($400) is business income of Builder Ltd.
• Builder Ltd is allowed a deduction for the value of the card ($400) provided to the employee.
• The card provided to the employee is an unclassified fringe benefit with a fringe benefit value of $400. FBT is payable on the unclassified benefit (subject to the application of minimum liability thresholds in s RD 45). If Builder Ltd is liable to pay FBT on the card, it is allowed a deduction for the FBT paid. Helping you understand the rules around loyalty rewards

We Can Help

Still confused? We don’t blame you. Understanding the tax implications of loyalty payments can be a complex and often confusing business.

But don’t worry. Come and talk to our experienced team and we’ll explain the rules, how they apply to your specific situation and what the best course of action is for your tax planning.

Together we can achieve more.