Picture this: A small business owner excitedly unwraps a $500 gift card received as a trade rebate for purchasing supplies. She considers its potential uses - staff bonuses, business expenses, or personal indulgence. But as she contemplates, a question arises:  how does this impact her tax obligations? 

Draft PUB00462, Inland Revenue (IR)'s guidance on the income tax treatment of gift cards and products provided as trade rebates or promotions, offers clarity but also raises critical questions.

What is PUB00462 about?

The draft PUB00462 states that when a trade customer receives a gift card, it is considered income at its face value. It distinguishes between open loop and closed loop gift cards and clarifies that trade suppliers can deduct the cost of the gift cards or products provided as rebates or promotions.

Key considerations include:

1. Open and closed loop gift cards

Open loop gift cards

Examples include Visa or Mastercard gift cards, which are considered monetary equivalents. These are treated as taxable income when received by a trade customer at their monetary value. If passed on to employees, they are subject to PAYE as employment income. However, the draft does not address whether GST applies when a business uses these cards for taxable expenses, which remains an area of uncertainty.

Closed loop gift cards

These are store-specific cards.  When given to non-shareholder employees they attract fringe benefit tax (FBT), while for shareholder-employees they may be treated as dividends or fringe benefits. CA ANZ questions why certain semi-open loop cards — such as store-branded Visa or Mastercard gift cards — are classified as closed loop rather than open loop, despite functioning similarly to cash. 

2. Products as trade rebates

Products received as trade rebates are taxable as income based on their realisable value. If these products are given to employees, FBT applies. For example, if a plumbing business receives $200 worth of tools as a rebate and gives them to employees, the tools' market value determines the FBT liability.

3. Deductions for trade suppliers

Suppliers can deduct the cost of providing trade rebates, whether in the form of gift cards or products. However, the timing of these deductions is a key issue. Under the draft guidance, deductionscan only be claimed in the year the rebates are distributed. 

CA ANZ’s insights

CA ANZ has identified areas where the draft could be improved to make the guidance more practical and equitable.  

While CA ANZ advocates for the inclusion of the GST implications of these arrangements, we acknowledge that this aspect will not be addressed at this stage.
CA ANZ also highlights the inconsistent treatment of gift cards compared to loyalty program rewards, which are typically excluded from tax. 

The draft focuses on the receipt of gift cards or products in the hands of the trade customer and the income tax or FBT consequences if passed on. However, it does not adequately address cost base or deductibility considerations.

Additionally, the valuation of closed loop gift cards at face value does not reflect their real-world use, as discounts often apply in secondary markets. For example, if a store-specific gift card worth $500 typically sells for $450 in secondary markets, taxing it at full face value seems inequitable. CA ANZ recommends adopting a "second-hand" valuation principle to reflect actual market value.

Guidance on unredeemed or expired gift cards is also necessary. Taxing these as income, despite their non-utilisation, places an undue burden on businesses. For example, a business receiving $1,000 worth of gift cards that remain unredeemed should not face tax liabilities for unrealised benefits.

In addition, CA ANZ challenges the timing of deductions for trade suppliers. Allowing deductions to align with the incurrence of obligations, rather than the year of distribution, would more accurately reflect business practices. This adjustment would particularly benefit suppliers with multi-year rebate arrangements.

Finally, to ease compliance, IR should offer a prospective start date and transitional measures. These steps would give businesses time to adjust their systems and processes to meet the new requirements.

CA ANZ will continue advocating for refinements that balance compliance with commercial realities. Businesses should stay informed and prepare for potential changes once the final version is released.