Tax treatment of customer loyalty programmes

Reference Acts

Income Tax Act no. 58 of 1962
Value-Added Tax Act no. 89 of 1991

Sections 1(1) – definition of “gross income”, 11(a), 23(g) and 23h of the Income Tax Act
Sections 1(1), – definitions of “consideration”, “input tax”, “supply” and “services”, 7(1)(a), 10(23) and 21 of the Vat Act

A customer loyalty programme (CLP) can be defined as a programme where customers accumulate points or miles based on the purchase of goods or services from a supplier and where these points or miles can be redeemed at a later stage for goods, services or a discount on a next purchase transaction at the supplier.

In 2016 SARS issued a binding class ruling (BCR 055) determining the income tax and value-added tax consequences for suppliers making customer loyalty payments. The ruling stated that the CLP allocations will be deductible under section 11(a) in the year of assessment in which the points or miles are granted.

The Class Members to whom this ruling applied consists of the Applicant, its subsidiaries and the joint ventures in which the Applicant or its subsidiaries have an interest, that participate in the customer loyalty scheme.


The ruling made in connection with the proposed transaction is as follows:

a) The Act

i) The allocations made by the Class Members will be deductible under section 11(a) read with section 23(g) in the year of assessment in which the board has determined all the participants’ allocations as contemplated in the scheme rules. Should the board make such determination after the end of the year of assessment relating to the annual allocation period, the allocations will fall to be deductible in the latter year of assessment.

ii) Section 23H will not apply to the deduction mentioned in

i) above.

iii) The Settling Entity will not be entitled to a deduction under section 11(a) read with section 23(g), in respect of payments made on behalf of the relevant Class Member to a participating customer.

iv) The Settling Entity will not be required to include in its “gross income” the value of the right to be reimbursed by the Class Member in respect of payments made by it to customers on behalf of the relevant Class Member.

b) The VAT Act

i) The allocation is not “consideration” as defined in section 1(1) in respect of any supply of goods or services made by the participating customer, and the Class Member may not deduct any
amount as input tax in relation to it.

ii) The allocation by the Class Member does not have any VAT implications in relation to that Class Member.

iii) The allocation is determined based on the overall business conducted and the availability of profits for the allocation. It therefore does not result from an agreement envisaged under section 21(1)(c) to alter the previously agreed consideration for any taxable supply of goods or services. Consequently, no adjustment must be made under section 21(2) and no credit note must be issued under section 21(3) on a tax invoice previously issued by the Class Member concerned for the supply of goods or services.

In May 2021, the Constitutional Court ruled out any uncertainty regarding the income tax treatment of a CLP transaction in the hands of the supplier when it determined that suppliers offering CLPs cannot claim a deduction for future CLP expenses (when points or miles are granted).

In this case (Clicks Retailers (PTY) Limited v CSARS) the supplier (Clicks Retailers (PTY) Limited) argued that the future CLP expenditure is deductible under section 24C of the Act. Section 24C provides a deduction for certain future expenditure that will be incurred by the taxpayer in the performance of its obligations under a contract from which it has derived income. This section therefore grants taxpayers an allowance for future expenditure against income already received (and included in ‘gross income’).

The supplier was of the opinion that they had met the requirements in section 24C, as the income earned from the sales transaction with CLP members was used to finance future obligations to deliver goods or services when points or miles were redeemed. The court, however, found that the obligation to incur future CLP expenditure came from the CLP contract and not from the sales contract that resulted in the income.

This ruling overrules BCR 055 having income tax implications for all South African CLPs.


To date, SARS has issued no specific guidance relating to the income tax treatment of CLP transactions in the hands of the customer.

Author Craig Tonkin

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