Rare tax-free treat
But frequent-flyer miles aren’t always easily usable
Just ask Jacob Zuma or Dave King. Taxation consists largely of a long, endless, running battle between the state seeking to coerce citizens into paying over to it an arbitrary portion of that which they have earned through the sweat of their brow or the sharpness of their wits with the citizens stubbornly, but fruitlessly, resisting.
Generally, governments squander what they take from us. They conduct eternal meetings, spew forth dictionaries of acronyms, travel everywhere first class, stay at the best addresses, eat at the best restaurants and drink only the finest wines and spirits.
Thus it’s always such a pleasure to discover benefits – however small – that escape the vengeful grasp of the tax collector. A lottery win is one such, although, as any sensible person knows, the lottery is designed to take money away from people who don’t understand mathematics. And the odd gambling win at, say, the casino or the racetrack escapes the taxman’s grasp. And when even a hacker like your ageing correspondent wins a few rand on the golf course it’s not necessary to reveal that small triumph to the taxman.
And it was the great American humorist, Will Rogers, who once remarked that taxation had made more liars of men than even golf.
There’s another little opening in the taxman’s finely woven web. That concerns what are known as air miles, or points, or frequent-flyer rewards earned when we fly or use our credit cards, and so on.
Now that’s not to be confused with rewards in the shape of overseas holidays that companies make available, for example, to sales people exceeding their quotas. When this benefit is granted to the employee and paid for by the company that benefit is taxable in the employee’s hands.
However, an employee who travels on behalf of his company and earns frequent-flyer miles in the process isn’t liable to tax when using those frequent flyer miles for personal and family purposes. Further, in the case where the company earns points or miles settling its accounts via a credit card those benefits aren’t liable to tax in the hands of an employee who uses them.
As we all know, such miles and points aren’t always that easily usable because airlines who make a great fuss in their mar- keting about them most often don’t have seats set aside for that purpose available for months on end, making it difficult to use those benefits.
However, tenacity and persistence are often rewarded. You can also use SA Airways’ Voyager rewards on the Star Alliance network of, if memory serves, 17 airlines. Emirates appear to be among the most accommodating when it comes to redeeming rewards.
Now when you consider the cost of overseas travel it’s clear the benefits earned via rewards can be quite substantial and well worth exploiting as a rare tax-free benefit. Should the taxman object – which is unlikely, as revenue receivers worldwide have all washed their hands of rewards – you might direct him to a 2002 announcement by the Internal Revenue Service in the US: “The IRS will not assert that any tax- payer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied retrospectively.”
As for that “retrospective” don’t let it bother you. It’s just the taxman covering his rear end and I have no doubt that if there were the remotest chance that such benefits could be taxed then they would be.
In 2005 the auditors Deloitte noted that because rewards don’t cost the employer anything – for example, the air tickets would cost the same whether or not rewards were attached – “they, therefore, don’t have a fringe benefit value in the employee’s hands and would not be taxable”.
When the IRS announced it wouldn’t attempt to tax frequent flyer miles received from business travel but used for personal travel it cited as its reason the timing and valuation of the benefit as well as the complexities involved in determining the source of the reward.
A small step for taxpayers but a giant leap for frequent flyers. Enjoy.