Perth tax accountants have discussed the taxation of frequent flyer points over the years. This blog post provides a comprehensive understanding of the income tax and fringe benefits tax implications surrounding frequent flyer programs and classic reward flights in the wake of the Federal Court’s decision in Payne v. FC of T (1996) 66 FCR 299, often referred to as Payne’s case. We will delve into the taxation characteristics of flight rewards and consumer loyalty programs, examine their tax impact on different individuals and entities, and discuss the valuation methods of frequent flyer points.
Frequent Flyer Rewards Received by Employees
Flight rewards obtained by employees through loyalty programs often tread a path distinct from traditional taxable income. These rewards are exempt from Fringe Benefits Tax (FBT) due to their roots in personal, non-employment contractual relationships. Simply put, employees need not fret about tax obligations when accumulating loyalty program points for travel or enjoyment.
For example, Tonya travels a lot for work. She has personally registered for various frequent flyer programs, including Qantas, Velocity and Krisflyer. As the registration of the frequent flyer programs is with Tonya the airline fringe benefits tax will not apply when Tonya takes the flights for personal use.
Of course, whenever you deal with taxation, you always have exceptions.
1. Employer and Employee Family Relationship:
One exception arises when the employer shares a family relationship with the employee, such as a spouse, child, grandchild, parent, grandparent, or another closely connected family member. In this scenario, if the employer provides flight rewards to the employee, which are connected to the employee’s job, fringe benefits tax may come into play.
For example, consider a family-owned business where the employer is a parent, and the employee is their child. If the parent-employer offers flight rewards to the child-employee in connection with their employment, this situation could trigger FBT liability that the parent incurs.
2. Flight Rewards Resulting from Business Expenditure:
Another exception occurs when flight rewards are generated directly from business expenditures. This means that if an employer’s expenses lead to the accumulation of flight rewards, these rewards might be subject to FBT.
To illustrate, consider a business that pays significant costs through a reward card like American Express. These Amex Points ultimately result in flight rewards for a staff member, as they are transferred to the employee’s personal frequent flyer account.
If the employee uses those frequent flyer points for business-related travel, then fringe benefits tax will not apply. The “otherwise deductible rule” under s24 of the Fringe Benefits Tax Assessment Act will reduce the fringe benefits tax on transferring the points to nil.
Using the otherwise deductible rule, with proper substantiation, is a primary fringe benefits tax planning tool engaged by a tax accountant in Perth and around the country.
If the flights are used for private purposes, transferring the points from the employer to the employee will become taxable for fringe benefits tax. The employer has transferred value to an employee due to the employment relationship.
The payment of the surcharge (if any) by the employer will be tax-deductible to the employer, and the GST attached to the surcharge will enjoy a tax credit.
It’s important to note that these exceptions require careful assessment of the specific circumstances and relationships involved. When these exceptions apply, employers and employees should know their FBT obligations to ensure compliance with Australian tax regulations. If you have questions or need further clarification, consulting with a tax professional or Perth tax accountant can provide tailored guidance for your unique situation.
How does the ATO value Frequent Flyer Point Rewards
For assessing the value of free air tickets and ticket upgrades, a widely accepted valuation method relies on a percentage of the full published fare, often referred to as the undiscounted fare, for various travel classes the relevant airline offers. This method accounts for different travel classes, such as economy, business, and first class. Here are the key percentages applied:
International Economy Class: Typically, flight rewards in international economy class are valued at 35% of the full published fare.
International Business or First Class: For flight rewards in international business or first class, the valuation percentage is usually set at 70%.
Domestic Economy Class: Regarding domestic travel, specifically in economy class, the valuation percentage is 45%.
Domestic Business or First Class: Flight rewards for domestic business or first-class travel are typically valued at 70% of the full published fare.
These percentages consider any restrictions that may apply to flight rewards in each class and are based on fare information provided by the airline industry. Tax accountants in Perth and around Australia will commonly provide these percentages to their clients to prepare fringe benefits tax returns.
Fringe benefits tax can also apply to other forms of travel including that provided by one tonne utility vehicles.
Alternative Valuation Methods
While the above-mentioned percentage-based method is commonly used, the Commissioner also accepts alternative valuation methods that result in a fair market value. This flexibility allows for a more tailored approach when percentages may not accurately represent the flight reward’s value.
An example could be where the employer enjoys significantly discounted airfare rates due to their high travel costs. In that case, the employer could use the rates they ordinarily pay for their staff rather than a percentage of the publicly available rack rate.
Tax impact of frequent flyer programs for sole traders
The tax landscape for Perth tax accountants takes a somewhat different route for individuals engaged in business endeavours who accumulate flight rewards through personal loyalty program memberships. Typically, flight rewards obtained this way are not regarded as assessable income, aligning with the principle that these rewards stem from personal, non-service, and non-business contractual relationships.
Further, fringe benefits tax cannot apply to a sole trader for frequent flyer points used personally. The sole trader cannot pay fringe benefits tax on frequent flyer points they consume as they cannot have an employment relationship with themselves.
However, exceptions to this general rule exist, as with any nuanced area of taxation. Let’s explore these exceptions and shed light on their implications, supported by practical examples:
1. Flight Rewards as Part of a Service Contract:
One notable exception arises when frequent flight rewards are expected to be a component of a service contract. In simpler terms, if an individual enters a service contract with the understanding that flight rewards will be a part of the package, tax considerations may come into play.
Imagine an individual providing secretarial services to a client, and their service agreement explicitly includes flight rewards as part of the contract price. In such cases, the flight rewards could be deemed assessable income, given the clear linkage between the services rendered and the rewards received.
Example: Sarah operates her secretarial service business, and she enters into a service contract with a client. As part of the agreement, the client offers Sarah flight rewards for her professional assistance. In this situation, the flight rewards received by Sarah may be considered assessable income, as they are explicitly tied to her service contract.
2. Business Activities:
The second exception comes into play when the activities related to flight rewards begin to resemble bona fide business activities. In other words, tax implications may arise if the pursuit of benefits starts to mirror business endeavours.
Consider an individual engaged in a business context where the activities associated with accruing flight rewards resemble regular business operations. These activities may include extensive travel for business purposes or other actions that directly contribute to the accumulation of flight rewards.
Example: Michael runs a consulting business that requires frequent travel to meet clients and attend industry conferences. Over time, his business-related travel resulted in a substantial accumulation of loyalty program points, later redeemed for flight rewards. In this scenario, because the activities contributing to the rewards are integral to his business operations, the flight rewards may be subject to taxation as assessable income.
A tax deduction offsetting the assessable income is possible if the flights consumed through the frequent flyer program are used for business. However, a private flight will not enjoy that reduction, and the flight ultimately increase taxable income.
Conclusion
Understanding the taxation of flight rewards from consumer loyalty programs is essential for Perth tax accountants advising individuals and employers. The Payne case has established the significance of the personal contractual relationship in determining taxation implications. Employers and individuals involved in such arrangements should seek expert advice to effectively navigate the complex landscape of taxation laws in Australia. At Westcourt, we are intimately familiar with the taxation of frequent flyer programs and fringe benefits tax overall – so contact us today about how to enjoy your flight rewards without taxation today!
