Abstract
Due to an increase in competition many businesses have to find new and innovative ways to attract customers businesses in the insurance, banking and mostly retail industries have resorted to incentivising customers through loyalty rewards programmes.
The intention behind the implementation of these loyalty rewards programmes is to encourage customers to bring repeat business in exchange for discounted rates or special offerings that apply only to customers that are members of these loyalty rewards programmes.
In essence, the mechanism behind these loyalty rewards programmes involves customers obtaining points determined by the rules of the loyalty rewards programme in exchange for obtaining goods and/or services from that specific business. In other instances, customers are offered goods and/or services at a discounted price as a reward for being a member of the applicable loyalty rewards programme.
Whilst guidance has been provided by the courts in respect of the application of the tax rollover relief provided in section 24C of the Income Tax Act 58 of 1962, very little guidance is provided by the legislature regarding the rules or provisions that address the tax implications of customer loyalty programmes.
This has resulted in a gap in legislation regarding the consequences of the accumulation of loyalty points by customers. Clarity is required in respect of the income tax implications of payment for goods and services using loyalty rewards and that Value-Added Tax (VAT) of such transactions. Similar to the status quo in South Africa, very little guidance has been provided by the legislation of other jurisdictions.
This is a desktop study which reviews and analyses whether current legislation can be applied to customer loyalty programmes, if so, the consequence of such application.
This study concludes that currently the accumulation of loyalty points is an accrual in the hands of the customer. Consequent to which the value of such accrual should form part of the gross income of the customer if declared...