Tax Updates: 25 November 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Trade rebate/promotion tax issues

Inland Revenue (IR) recently released a draft Questions We’ve Been Asked (QWBA) titled, “What is the income tax treatment of gift cards and products provided as trade rebates or promotions?” The document’s purpose is to help explain the income tax treatment of gift cards and products provided by trade suppliers to trade customers (business to business) as trade rebates, promotions, or rewards for trade customers buying goods or services from trade suppliers.

The QWBA is a 23-page read and splits the guidance between the income tax-related issues for the recipient trade customer, the employees of the trade customer who directly or indirectly receive the gift cards/products, and the trade suppliers.

For the trade customer:

The amount of the face value of the gift cards is income, while the “secondhand value” (realisable value) of the products is income – both income amounts via application of the section CB 1 business income provision.

For the trade customers’ employees:

With respect to gift cards, firstly, you need to identify whether the gift card is an “open loop card” (usually co-banded with a credit card and therefore generally accepted as such worldwide – i.e. you can use the gift card exactly like it was a credit card), or a “closed loop card” (recognised/accepted only by the issuer for payment – i.e. merchant specific, shopping mall-specific and transport cards).

For “open loop cards” provided to non-shareholder employees, the gift card is considered to be “any other benefit in money” as an “extra pay.” The face value of the open loop card will therefore need to be grossed up by the applicable PAYE tax rate. For gift cards provided to shareholder employees, similar gross-up treatment under the PAYE rules could apply, or alternatively, if the option is elected, the income amount could simply be reflected accordingly in the shareholder’s annual income tax return. 

For “closed loop cards” and products provided to non-shareholder employees, these are treated as unclassified fringe benefits (so consideration should be given to the applicable de minimis exemption in this regard). However, for shareholder employees, the employer can choose whether the “closed loop card”/products are equally treated as a fringe benefit or are instead treated as a dividend (fringe benefit tax applies if no election is made).

Finally, with respect to the trade suppliers:

Expenditure incurred by a trade supplier on product and card trade rebates is incurred in carrying on their business and is deductible under the general permission, provided no general limitation applies (it is very unlikely that any general limitation will have application).

The draft QWBA completes its guidance discussion with a number of examples to illustrate its content, and should you wish to make any submissions with respect to the draft, the closing date is 18th December 2024.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.