Don't Get Caught Out: The Tax Rules for Tradie Rewards

A Practical Guide to the Tax on Supplier Loyalty Rewards

In short, loyalty rewards from suppliers, such as gift cards and products, are considered taxable income by Inland Revenue. Recent guidance has clarified that the common assumption of these rewards being a "tax-free" perk is incorrect. For any tradesperson receiving these benefits, it is crucial to understand and correctly account for their tax implications.

This guide breaks down the rules into a practical question-and-answer format to clarify the treatment of these common rewards.

Frequently Asked Questions on Tradie Rewards

1. Are supplier rewards genuinely considered income?

Yes. Any reward received as a direct result of your business purchasing activities is considered to be derived from the business. Under the Income Tax Act 2007, amounts derived from a business are income. This applies whether the reward is cash, a cash equivalent like a gift card, or a physical product.

2. Does the type of gift card matter?

Yes, the tax treatment is different for "open-loop" and "closed-loop" cards.

• Open-Loop Cards: These function like debit cards and can be used almost anywhere (e.g., Prezzy cards). Inland Revenue treats them as equivalent to cash. Their face value is business income.
• Closed-Loop Cards: These are restricted to a specific retailer or group of retailers (e.g., a Bunnings gift card). They are not considered cash but are valued as "money's worth." Their face value is still treated as business income.

3. What about physical products received as rewards?

Products, such as tools, appliances, or holidays, are also taxable. The amount to be recognised as income is the product's realisable value at the time you receive it, which essentially means its second-hand market value.

4. What are the tax implications if I give a reward to an employee?

This is a key area where the rules differ significantly based on the type of reward.

• Open-Loop Card: Providing an open-loop card to an employee is treated as a payment of salary or wages. You must account for PAYE on the card's value.
• Closed-Loop Card or Product: Giving a closed-loop card or a physical product to an employee for their private use is an unclassified fringe benefit. Your business will be liable for Fringe Benefit Tax (FBT) on the value of the reward, subject to the standard FBT thresholds and rules.

5. What if I use the reward for a business purpose?

If you use a reward for a legitimate business expense, the tax treatment is straightforward.

1. Recognise Income: You must first declare the value of the gift card or product as business income.
2. Claim a Deduction: You can then claim a deduction for the business expense when the item is used for that purpose.

For example, if you receive a $200 closed-loop hardware store card (income) and use it to buy materials for a job (expense), the two entries effectively cancel each other out for tax purposes.

Summary of Tax Treatments

The table below provides a clear overview of how different loyalty rewards should be handled.

Understanding these distinctions is essential for correct tax compliance and planning. Businesses should ensure their accounting processes are set up to correctly identify and record these rewards as they are received and used.