Imagine seeing the winning numbers on your Lotto ticket, or the slot machine lighting up and coins flying everywhere.You’re rich; you think your money troubles are over.Not anymore, according to Finance Minister Pravin Gordhan.Sporadic winnings in the hands of gamblers are not subject to personal income tax.In addition, as a general rule capital gains and losses arising from gambling, games and competitions will not be subject to capital gains tax (CGT), unless –
•the recipient is a company, close corporation or trust;
•the gains arise from foreign gambling,games or competitions (such as the Euro Lotto); or
•the gambling, games or competition is illegal.
From an income tax perspective, it is important to note that people who regularly conduct gambling activities as a business in order to make a profit may find that their winnings are seen by SARS as revenue in nature and therefore subject them to income tax. In other words, SARS is likely to include in a person’s gross income regular winnings from activities such as horse racing, the National Lottery and casino winnings where the activities are carried out on a large and frequent scale as a profit making scheme.
In his budget speech, Minister Gordhan highlighted that the practice of exempting fortuitous winnings in the hands of gamblers from personal tax would be reviewed.The reason given for this change in attitude was to limit the opportunity for monetary abuses. Of these abuses, unlicensed online gambling was specifically mentioned.It is not clear how taxing the gains will assist in reducing abuse, but it is obviously a handy way to widen the tax net.
In a digital age where online gambling sites are widely advertised and can be accessed by anyone at any time, it is an impossibly huge challenge for SARS to monitor such activities.Poker lovers no longer have to drive to their nearest casino, but can gamble in their homes or even during work hours for as long as they please.As indicated, SARS considers systematic and businesslike gambling to be in a scheme of profit making and therefore seek to tax the winnings.
The question has always been, however – how does one become a systematic gambler in the eyes of the taxman? A person logging on once a month betting R50 would hardly be considered systematic but what about once a week or once a day? What about someone betting R5 000 or R50 000? It is currently a very subjective issue and SARS needs to provide more clarity on exactly what they consider sporadic gambling and what is considered to be gambling in a scheme of profit making.
It appears that SARS is considering amending the Income Tax Act so that all winnings from gambling activities are included in gross income.This can be achieved quite simply by including a specific inclusion in the definition of gross income.However, before doing this, SARS will need to determine the method of taxation.By merely adding winnings to taxable income, taxpayers who win a substantial amount on a once-off basis will be pushed into a higher tax bracket, resulting in a higher tax rate on all income earned for the year.
This could be especially detrimental to taxpayers who only earn employment income, as the PAYE withheld by the employer will not be enough to cover the taxes due at the end of the year of assessment. It will be interesting to see whether SARS will take this into account and consider taxing winnings separately and at a different rate.
It would also be necessary to have a clear indication as to what SARS wishes to tax.In a world where we play the lotto on mobile phones, enter competitions by sending text messages, bet on horses and sporting events via the Internet and play in online casinos, it will be very important to make clear what is seen as taxable winnings from gambling. Without a clear definition, a person could find themselves taxed on the car they win by texting an answer to a radio station.
It will also be very interesting to see if SARS will allow losses incurred while gambling as a deduction against taxable income or whether SARS believes that they are the ones winning the lottery – taxing gains but limiting the deductions!
Finally, how will SARS approach the issue of tracking an individual’s winnings? Yes, it can be done with lifestyle audits, but small regular winnings can easily be lost in day to-day expenses (or more expensive cigars and whisky!).Perhaps we will see SARS introducing reporting obligations on gambling enterprises such as are already in place on employers and financial institutions.
Source: By Claire Barnes and Sarike Bezuidenhout (TaxTALK)