Trade Rebates and Promotions: Tax Guide
Inland Revenue (IR) has released a draft of Questions We’ve Been Asked (QWBA) titled, “What is the income tax treatment of gift cards and products provided as trade rebates or promotions?” This guidance aims to clarify the tax treatment of gift cards and promotional products provided by trade suppliers to trade customers (business-to-business) as rebates, promotions, or rewards.
The document covers income tax implications for three key groups: trade customers, their employees, and trade suppliers. Below, we summarise the key insights to help your business navigate these potential tax issues.
Key Points for Trade Customers
When trade customers receive gift cards or products as part of a promotion or rebate:
Gift Cards: The face value is treated as income.
Products: The realisable or “secondhand value” is treated as income.
These amounts are considered business income under section CB 1 of the Income Tax Act.
Implications for Trade Customers' Employees
The tax treatment for employees depends on the type of gift card or product received and whether they are shareholder or non-shareholder employees.
1. Open Loop Gift Cards
Definition: Co-branded with credit card companies (e.g., Visa, Mastercard) and usable like cash.
Non-Shareholder Employees: Treated as “extra pay,” requiring the employer to gross up the card’s face value for PAYE purposes.
Shareholder Employees: The employer can either gross up the card value under PAYE rules or include the value in the employee’s annual income tax return.
2. Closed Loop Gift Cards and Products
Definition: Restricted for use at specific merchants or locations (e.g., a shopping mall or retailer gift card).
Non-Shareholder Employees: Treated as fringe benefits. The employer may use the de minimis exemption (if applicable) to avoid fringe benefit tax (FBT).
Shareholder Employees: These can be classified as fringe benefits or dividends, with FBT applying if no election is made.
Considerations for Trade Suppliers
For trade suppliers offering gift cards or products as trade rebates or promotions, the costs are generally deductible:
Expenditure on rebates is deductible under the general permission rule, provided no general limitation applies.
Limitations are unlikely to apply since these rebates are provided as part of conducting business.
The draft QWBA includes several examples to illustrate these tax treatments, providing practical business guidance. Inland Revenue is inviting feedback on this draft until 18 December 2024. This is an excellent opportunity for businesses to contribute to the final guidelines and seek clarification.
Source: https://www.taxtechnical.ird.govt.nz/consultations/2024/pub00462