Gift cards and trade rebates: Inland Revenue sparks tax debate

By Viola Trnski, Annalie Hampton & Sam Hornbrook

Inland Revenue has been churning out consultation items in 2024 and with the year drawing to a close there are still some items out for consultation. One of the more interesting items is the draft Question We’ve Been Asked: What is the income tax treatment of gift cards and products provided as trade rebates or promotions? (draft QWBA). Following the release of this item, based on the feedback we’ve received, everyone knows someone or has heard of someone who is benefiting from “free” stuff from a supplier. Inland Revenue has released guidance to set taxpayers on the right path when it comes to giving away (or receiving) gift cards and products. Inland Revenue clearly sets out in the draft QWBA that it is aware of “an increasing practice of trade suppliers providing rebates to their trade customers...that in some instances...are being incorrectly viewed or are being promoted as “tax free” to the trade customers.”

What does the draft QWBA say?

In short, where trade rebates are provided in the form of gift cards or products (as opposed to a traditional price discount rebate), they are income to the recipient for tax purposes, and therefore must be returned as such.  In practice, trade rebates are provided to encourage customer loyalty, and historically have been in the form of price discounts. However, Inland Revenue has concerns that there appears to be an increasing practice of trade suppliers providing rebates to their trade customers in the form of products and gift card trade rebates. In addition, some trade customers are then handing these products or gift cards on to their employees.

When a trade rebate is provided in the form of products or gift cards, generally, trade customers (the person/business that buys the goods or services from the supplier) is liable to pay income tax on these. The taxable amount is the face value of the gift card or the secondhand market value of the product if it was sold. An example Inland Revenue uses in the draft QWBA is a microwave provided as a trade rebate. The taxable amount of the microwave is the price the trade customer would receive for the microwave if they it sold, as it is “something of a kind that can be turned into money”. This may be the value they are sold for on an online platform rather than the retail value.  If the product received will be depreciable property of the trade customer there will be no depreciation loss available on the basis that the customer has incurred no cost to acquire the product.

If products or gifts cards are passed on directly (or indirectly) to employees, they are subject to tax by both the business and the employee.  Products that are passed on to employees are subject to FBT, as they are a fringe benefit provided in connection with employment. The tax treatment for gift cards depends on whether the cards are “open loop” (e.g., prepaid card co-branded with a credit card that can be accepted by any merchant) or “closed loop” (e.g., only accepted by a specific merchant or multiple merchants at the same location) cards and whether they are provided to non-shareholder employees or shareholder-employees. 

Closed and open loop...?

The draft QWBA distinguishes between “closed loop” and “open loop” gift cards for the purpose of determining whether the amount is taxed under the PAYE or FBT rules, when the gift cards are passed onto employees. Open loop gift cards (which are considered akin to cash) are, according to the draft QWBA, taxable under the PAYE regime. Closed loop gift cards are generally taxable under the FBT rules as an unclassified fringe benefit. There are specific rules that apply to shareholder-employees.

The reasoning behind Inland Revenue’s position on open loop cards is that since they are like cash they should be treated in the same way that cash provided to employees would be (i.e. PAYE is payable). While this distinction seems reasonable, it is a departure from existing practice and may cause confusion more broadly (it is currently common business practice to tax certain open loop cards under the FBT rules).

If you currently receive gift cards or products as trade rebates, you should be thinking about the type of gift card or product you receive and the correct tax treatment that follows.

Application of shortfall penalties

The draft QWBA also includes a number of examples that clearly explain that taxpayers will be liable for shortfall penalties in instances where tax is not returned correctly. Shortfall penalties can apply to omitted business income and then again for the non-payment of FBT or PAYE. We expect that Inland Revenue will be taking a closer look at this issue within the trade industries where this practice may be prevalent. Given that guidance has been published, it will be expected by the Inland Revenue that taxpayers will be aware of their obligations around trade rebates and are paying the right amount of tax.

Our thoughts

Commercial implications

The draft QWBA suggests that the correct amount of tax (or any) is not always being paid on trade rebates that have been provided in the form of product or gift cards and serves as a reminder to trade customers of their tax obligations. This is positive news for the trade industry (and in particular, suppliers who are aware of competitors who may be promoting rebate schemes as being free from tax) and will improve the integrity of the tax base as a whole. The expected increased Inland Revenue focus in this area is likely to help even the playing field by reducing unfair pricing, incentives, and competitive advantage that can result when suppliers provide trade rebates incorrectly purported to be tax-free. While it is hard to know exactly how common this practice is, releasing proactive guidance on this issue provides certainty to taxpayers on how the tax rules apply and what Inland Revenue expects. In the broader tax climate, Inland Revenue audit activity is increasing and this draft QWBA serves as a timely reminder to ensure your tax affairs are in order.

It is worth emphasising that this draft QWBA applies to trade rebates, and it is not applicable to ordinary business-to-consumer offers (where gift cards may be provided when spending over certain amounts), and also is not relevant for non-rebate situations; for example a supplier providing a Christmas gift to a customer.

Record-keeping

Businesses that provide or receive gift card and product trade rebates need to think about how they keep and maintain a record of trade rebates receipt of gift (for their own purposes – and in case Inland Revenue comes knocking). A register that includes relevant details, including how the rebate was provided/received and how tax was accounted for, should be maintained, even if not strictly required.

It is best practice that businesses have written policies and procedures for staff to follow in relation to these issues (particularly if they may receive trade rebates without the employer being overtly aware) and that finance and accounting teams are clear on the tax implications. Further, trade rebates should never be treated as “mere gifts”, they will always subject to tax, no matter how they are received. Inland Revenue has a specific guidance (IS 23/11) that covers income tax and gifts. 

GST

The draft QWBA does not address how GST should be accounted for on the receipt of gift cards and and product trade rebates. However, treating these amounts as income would imply that the trade customer has made a “supply” to the trade supplier for GST purposes (e.g., a supply of a service of agreeing to buy a sufficient amount of product to qualify for a rebate). This interpretation would create a significant amount of confusion and complexity. We therefore expect there will be submissions on this point, as there are separate GST questions that may arise from the proposed income tax treatment.

The deadline for comment is 18 December 2024.

If you have any questions on how these changes will affect you, your business or employees, please reach to your usual Deloitte advisor.