Inland Revenue's Final Position on Rebates and Gift Cards: What Small Business Owners Need to Know
If you're a small business owner, you’ve likely used rebates or gift cards as part of your promotions or incentives to keep customers and employees happy. But with Inland Revenue finalising its position on the tax treatment of these tools, it’s important to know how they affect your tax obligations.
We’ve broken it all down so you can stay on top of your business’s tax requirements without any surprises. Let’s go through the key points you need to know about rebates and gift cards, and how to ensure you're staying compliant with the latest tax rules.
How Rebates Are Treated for Tax Purposes
We all know rebates are a great way to reward customers for their loyalty. But here’s something to keep in mind—rebates—whether they’re in the form of products, gift cards, or cash—are considered business income by Inland Revenue. So, if you’re offering rebates to your customers, you’ll need to treat these as income for tax purposes.
If you're a small business receiving a rebate, you should report it as income. And if you're selling the products that were part of a rebate, the sale amount is also considered income. However, you can claim a deduction for the realisable value of those products when you dispose of them. This means if you’ve received products as part of a rebate and then sell them, the income from that sale can be offset by a deduction for the actual value of the products.
Gift Cards: What You Need to Know
Now, let’s talk about gift cards. You might give them to employees as a reward or use them in customer promotions. Inland Revenue makes a distinction between open loop and closed loop gift cards, and the tax treatment depends on which type you're using.
Open Loop Cards (Think: Prezzy Cards)
Open loop cards are the ones that are co-branded with a payment network like Visa or Mastercard, and they can be used at a wide range of merchants, both in-store and online. Inland Revenue treats these as money, which means when you give an open loop card to an employee, it is taxed as PAYE income—just like wages.
As a small business owner, this means that when you provide open loop cards to employees, you'll need to withhold tax and report it under PAYE.
Closed Loop Cards (Think: Mall Vouchers)
On the other hand, closed loop cards are only valid at specific merchants (for example, a shopping mall or a particular store). These cards are treated as fringe benefits and are subject to Fringe Benefit Tax (FBT) when given to employees.
In short:
Open loop cards = Treated as money, taxed under PAYE
Closed loop cards = Treated as fringe benefits, taxed under FBT
What’s Changed for Employers?
Inland Revenue has cleared up a common misconception. For some time, employers have been incorrectly treating open loop cards as fringe benefits (subject to FBT). However, Inland Revenue has now confirmed that open loop cards should be taxed under the PAYE system.
If you’ve been treating open loop cards as fringe benefits in the past, don’t worry—Inland Revenue has said they won’t be chasing up any past mistakes. However, from now on, you’ll need to apply the PAYE regime for these cards.
It’s important to make this change going forward to avoid any compliance issues. We know it can be a bit more complicated than the FBT return, but making the switch will keep you on the right side of the rules.
What About Shareholder Employees?
If you provide gift cards or products to shareholder employees (those who own part of the business), you can choose to treat them as either fringe benefits or dividends. The tax treatment depends on the specifics of the arrangement and your business structure.
So, if you’re offering gift cards or products to shareholder employees, just be sure to review the rules and pick the correct tax treatment based on how the gift is provided.
The Key Takeaways for Small Business Owners
So, what should you do now? Here’s a quick checklist for managing rebates and gift cards in your small business:
Treat Rebates as Income: If you’re offering rebates, ensure you report them as income for your business, and remember you can claim deductions for trade customers when you sell rebate products.
Understand Open vs Closed Loop Cards: Know whether the gift cards you're giving are open or closed loop cards. If they’re open loop cards (like Prezzy Cards), you’ll need to report them under PAYE. Closed loop cards are subject to FBT.
Switch to PAYE for Open Loop Cards: If you’ve been treating open loop cards as fringe benefits (FBT), make the switch to PAYE from now on. You won’t have to correct past returns, but you’ll need to make sure your future payroll reflects this change.
Talk to Your Accountant: Tax laws can be tricky, especially when it comes to employee rewards and rebates. If you're unsure, your accountant can help you stay compliant and ensure you're applying the right rules.
Stay on Top of Your Business’s Tax Requirements
Keeping up with tax rules can feel like a headache, but understanding the rules around rebates and gift cards will help you avoid any surprises come tax time. By getting it right now, you'll save yourself from potential penalties or unnecessary complications down the road.
If you’re unsure how to navigate these changes, or if you need help with your business’s tax requirements, My Two Cents Accounting is here to help. Get in touch today, and we’ll guide you through the process so you can focus on what really matters—growing your business!
