Welcome to my nightmare. When Etihad announced an app to turn frequent flyer points or miles into cash at the point of sale with my tablet or phone it probably fulfilled the wildest dreams of some of the sharper minds in the ATO.

How? By converting the non-taxable generation of loyalty rewards into cash payments,  because cash payments are income that has to be declared, whether or not it comes with legitimate tax deductions.

It doesn’t matter if that cash is considered a discount on goods or services purchased, or a reward for supporting a product, because in the end, it is being rendered as a cash payment, not a ‘free’ seat from distressed inventory, for which the frequent flyer member in say the Qantas Classic pays all of the real costs like any other fare in terms of fuel levies, airport charges  and so forth, charges which these days sometimes exceed the special offers that are out there anyhow, but that’s another story most frequent flyers are painfully aware of anyhow.

In this nightmare, the ATO will in due course have to act, otherwise employers or contracting bodies might engage in massive tax and superannuation evasion by converting a component of their payments into rewards, which with the right app, can be used in stores, restaurants, pubs and theatres to spend untaxed monetary rewards.

Already the ability to convert points or miles in non-classic schemes into the cost of ‘any seat any time’ may have set in motion the finely grinding cogs of future taxation policy ‘reform’ to capture as income the cash equivalent of rewards rebated by an airline, a store, or a bank, to a customer.

As such, rewards taken as cash increase the income of the recipient. I realise we could have a discussion as to how income from gambling and state lotteries is, or isn’t taxed in the hands of the gambler or winner, but in most cases, the tax is hard wired into the structure of the gaming or lottery license and collected from the turnover prior to winnings being paid, and if such processes were applied to airline rewards, they would nevertheless cost the carriers more, and give the recipients even less than now.

Until now, Australian domiciled frequent flyer or other loyalty scheme members have enjoyed the comfort of rulings by the ATO that such rewards are not taxable, but once an instant conversion of notional rewards into real over-the-counter money becomes possible, and Etihad is presented as being the initial airline customer for the implementation of  this technology,  surely the temptation to treat the receipt of that money as income will be too great for the authorities to resist.

Which raises another alarming story in the US, in which Citibank, having showered American Airlines points onto new customers as part of a promotion, has now written to them valuing each point at 2.5 cents for taxation purposes, rendering them liable for tax on a gift which it can claim as a corporate deduction for the expenses of recruiting their business.

Naturally there is uproar in some circles in the US over Citibank claiming a 2.5 cents value for a point that is generally understand to be wholesaled by American Airlines for less than 1 cent.

Reflect on this for a moment. If you were a new US customer, Citibank has signed you up for an account with an AA points incentive, then given you a tax liability as a consequence of that reward, and is able to claim the cost of doing this to you as a tax deduction for them. Bad news for its American customers, but what about for the rest of the world?

We can be 100% confident that neither Qantas nor Virgin Australia would ever try to claim the points they disburse as a business expenses deduction if there was a direct link to increased tax liability for their loyalty program members based on the instantly convertible cash value,  since we’d all walk, and what is the most profitable activity of the Qantas Group would collapse.

But can we be confident that the clever little app from Loylogic, who are launching their points-for-cash technology for on-line gaming and Etihad frequent flyers, hasn’t started  something which will unlock all such loyalty programs as a source of taxable income in the hands of those being ‘rewarded’  with instant cash?