GST and loyalty points

Sections 2(1), 9(9), 9(10), and 11C of the Goods and Services Act 1985

Changes have been made to the Goods and Services Tax Act 1985 to allow certain loyalty programme operators to defer the imposition of GST until the redemption of loyalty points to ensure that GST is being paid at the correct rate.

Background

GST is charged on goods and services consumed in New Zealand. Since exported goods and services are consumed outside of New Zealand, as a general rule, exports of goods and services are zero-rated. Zero-rating allows a supplier of goods and services not to charge GST, but to still be able to claim input tax deductions.

Before the current amendment to the GST Act, because of the involvement of an intermediary, supplies of what are normally considered zero-rated goods or services could be subject to GST at the standard rate. For example, a loyalty programme operator (such as an airline) could enter into a transaction with a purchaser whereby the purchaser paid consideration to the loyalty programme operator for crediting loyalty points to a customer. The customer would later redeem the loyalty points for a zero-rated reward supplied by the loyalty programme operator. By imposing GST on the loyalty points at the time they were issued, GST was in effect imposed on what would normally be a zero-rated supply. This anomaly would not exist if the supply was acquired directly from the operator for a monetary consideration instead of through the use of loyalty points.

The amendment to the GST Act allows certain loyalty programme operators to defer the imposition of GST until such time as the nature of the reward and the normally applicable GST rate is known.

Key features

New section 9(9) of the GST Act allows certain loyalty programme operators to defer the imposition of GST on a sale of loyalty points to another person until such time that the loyalty points are redeemed.

New section 11C specifies the requirements which have to be satisfied before a loyalty points operator can defer the imposition of GST under section 9(9). A loyalty programme operator is able to use the rules if it makes supplies for consideration under an arrangement with another person to provide loyalty points to a third person and the following conditions are satisfied:

• 25% or more of the loyalty programme operator’s or its associated person’s business involves the provision of zero-rated goods or services.
• The operator or its associated person has a business activity outside the activity of operating a loyalty programme (the main business activity) and the loyalty points are able to be redeemed for rewards supplied by the operator or associate as part of the main business activity.
• The loyalty programme operator is able to identify, at the time of the redemption of loyalty points, whether GST was imposed on the points in question when they were issued or whether the GST liability was deferred until the redemption of points under proposed section 9(9).

A new section 11C(6) states that the second requirement will still be satisfied if, in addition to being redeemable for rewards supplied by the operator’s or associated person’s main business activity, the loyalty points are able to be redeemed for a reward supplied by an operator’s partner under an associated loyalty programme.

New section 9(10) states that when the GST “reverse charge” provisions in the GST Act treat the New Zealand-resident purchaser of the loyalty points as supplying the loyalty points, the purchaser is able to choose whether to defer the payment of the GST until those points are redeemed. If the purchaser chooses to defer the imposition of the GST, they must be able to meet the requirement of being able to identify whether GST has been paid and deferred.

The legislation also introduces a definition of the term “loyalty programme” in section 2, and makes a consequential amendment to the meaning of the term “supply” in section 5(14).

Application date

The amendments apply from the day of Royal assent, being 6 October 2009.