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How to Use Reward Points to Pay Off Your Credit Card

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How to Use Reward Points to Pay Off Your Credit Card

Customer loyalty and reward programs have been a part of our lives for some years now. Credit cards are frequently used to pay business expenses whether you have a business credit card or use your personal credit card to do so.

I was recently asked an interesting question about how to process an entry through the business accounting system when reward points were redeemed to make a payment on the credit card. Now that is an interesting question that sent me down a path investigating further just how we should be treating reward point transactions.

Let’s look at some basic facts:

  1. Paying business expenses with a credit card may result in an Australian Taxation Office (ATO) audit if you accumulate more than 250,000 points in a year.
  2. Use of reward points for business costs is perfectly fine; however, use of reward points for personal benefit may be considered a ‘salary’ payment to the employee.
  3. There’s no requirement for recipients of reward points to keep an account of the points in the business accounting system. This is because points are personally held and not held by the business.

There are two types of credit cards and how they are accounted for in your business accounting records is different.

Firstly, there are business credit cards.

Cards that are issued as business credit cards and used by the owner or employees of the business. As we all know, points are allocated to the individual, not the business. Thus, my advice would be that the use of reward points to pay off the business credit card would be either a loan from the individual whose points are used or a reimbursement of expenses which would be income of the business.

The facts of the situation would dictate which applies. For example, if the payment came from an employee’s points and the reason his points were used for payment of the employee’s share of costs, this would be a reimbursement. However, if the payment was from the business owner who decided to redeem points to pay down the credit card to help with cash flow, then this would be a loan from the owner.

Secondly, there are personal credit cards of the business owners.

These are used for paying business expenses and potentially personal expenses too. For many, the easiest way to keep track of the expenses on their cards is to account for them in their business accounting system. In reality, these cards are not liabilities of the business, but rather loans from the owners to the business. In this situation, there is no question that payment of the credit card by the use of reward points held by the credit card owner is a loan from the owner.

But beware, the ATO may crack down on reward points used to provide benefits to employees. These may become subject to Fringe Benefits Tax in the future.

You may also be aware that the points allocations have been reduced significantly recently on most credit cards due to increased charges the banks are required to pay to ‘buy’ the points. The benefit of reward points has been reducing for some time as more and more people use their points for personal purposes. The airlines have been increasing the points needed for flight sectors and upgrades, and interestingly business class seats on international flights are mostly fully booked, often with a significant number of reward point upgrades filling the seats.

There are questions in my mind about the sustainability of the reward point business model as millions upon millions of points have been accumulated. While the point cost of redemption has kept increasing, there will have to be further restrictions on the availability of their use such that the points may become worthless and unusable at some point. In the meantime, whilst the status quo remains as it is, and the ATO doesn’t change the rules around Fringe Benefits Tax, or the assessability of the reward points, use them and enjoy the benefits.

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