Loyalty programmes: are customers cashing in or is SARS entitled to a cut?

Customer loyalty programmes have exploded in popularity, enticing consumers with points for everyday actions, swiping a credit card, hitting the gym, or making a purchase. 

These points, redeemable for discounts, free products, or even cash, feel like a windfall. 

But here’s the provocative question: Should SARS, South Africa’s tax authority, get a slice of this pie?

The answer hinges on a critical distinction—whether these rewards are revenue or capital in nature—and it’s a distinction that could reshape how businesses and customers approach these schemes.

Let’s cut to the chase: If loyalty points are revenue—earned through deliberate effort or a profit-making scheme—they’re likely taxable as income.

Revenue is what you hustle for, the fruit of your work or strategic capital use. Contrast this with capital, which arises fortuitously, like a birthday gift, and escapes the tax net.

Most loyalty points fall into the capital camp. They’re a perk, an incidental bonus from activities customers would do anyway, like buying groceries or filling up the tank. SARS would struggle to argue these are the spoils of a revenue-generating hustle.

But there’s a twist. 

Some savvy customers game the system, chasing loyalty programmes and tailoring their spending to maximise points.

If this crosses into a calculated profit-making venture—say, orchestrating purchases to churn points for cash—it could tip the scales toward revenue, inviting income tax. The line is blurry, and SARS’s ability to enforce this hinges on proving intent, a daunting task in practice.

Now, what if points are capital and thus dodge income tax? 

The next question is whether redeeming them triggers a capital gains tax (CGT) event. A reward point is a personal right, a claim against the issuing company for a benefit.

Disposing of such rights can, in some cases, spark tax—like selling a share, a bundle of rights against a company.

But not always.

Consider selling a house: The seller trades the property for a right to payment, then swaps that right for cash when the buyer pays. SARS’s own Comprehensive Guide to Capital Gains Tax confirms this final swap isn’t a taxable disposal. Common sense prevails, as affirmed in Zim Properties Ltd v Proctor (1984), a case SARS endorses.

Applying this to loyalty points, their redemption isn’t a separate tax event—it’s the natural culmination of their existence.

Points are valuable only because they can be redeemed; it’s baked into their DNA.

Taxing their redemption as a distinct disposal risks absurd outcomes, like taxing every “buy one, get one free” deal. Instead, the accrual and redemption of points form a single transaction, maturing into a benefit without triggering CGT.

This isn’t just academic. 

With loyalty programmes now a cornerstone of consumer culture, businesses and customers must wake up to the tax implications.

Ignoring this could lead to unexpected tax bills, especially for those aggressively milking these schemes.

Companies offering loyalty programmes should also take note: If SARS starts eyeing these points as taxable, it could dampen customer enthusiasm or complicate programme design.

The stakes are high, and the rules aren’t crystal clear. Taxpayers—whether individuals chasing points or businesses dangling them—should seek expert advice to navigate this murky terrain. 

SARS may not yet be knocking, but with billions in rewards flowing through these programmes, it’s only a matter of time before they sharpen their knives.

Doelie Lessing, Head of Tax and Robyn Schonegevel, associate at Werkksmans Attorneys.

BUSINESS REPORT

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