Abstract
M.Com.
Customer Loyalty Programmes (‘CLPs’) are popularly used in business sectors such as retail, banking, hospitality, health, insurance and telecommunication, to mention a few. This marketing strategy is used by businesses in order to grow and retain their customer base by providing rewards to customers who are loyal to their brand. Customers are also motivated by the concept of being rewarded for spending and are seen to actively sign up for various reward programmes, as they perceive them to be both beneficial and not costing anything (i.e. free).
There are no specific tax rules, guidelines or provisions that address tax implications of rewards from CLPs in South Africa (‘SA’). Through the use of an interpretive paradigm and employing a qualitative research approach, this study embarked on determining the tax treatment of rewards received or accrued by trading and non-trading customers (collectively ‘customers’) from retail store CLPs. This was achieved by conducting a detailed tax study on rewards from CLPs, analysing the nature of the rewards and conducting a critical literature review of various tax studies on the topic at hand.
By largely following the doctrinal research methodology, a detailed analysis of the nature of retail store CLP rewards and the gross income definition set out in section 1 of the Income Tax Act No. 58 of 1962 (‘Income Tax Act’), this study concluded that rewards from retail store CLPs are the goods or services that the customers obtain and not the points and/or the virtual currency that emanate from the transaction. The study therefore concluded that rewards received by or accrued to non-trading customers are not taxable as they are capital in nature and therefore do not meet all the requirements of the gross income definition. However, rewards received or accrued to trading customers are taxable as they are revenue in nature and meet all the requirements of the gross income definition. Furthermore, rewards received by or accrued to both trading and non-trading customers could constitute a deemed donation as set out in section 58 of the Income Tax Act and could potentially attract donations tax.