Rare tax-free treat

But fre­quent-flyer miles aren’t al­ways eas­ily us­able

Finweek English Edition - - Letters -

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.

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