SARS threat­ens to tax your gam­bling win­nings

Con­fu­sion over the def­i­ni­tion of a sys­tem­atic gam­bler in the eyes of the tax­man

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - BER­NADETTE AB­BOTT

MAG­INE see­ing the winning num­bers on your Lotto ticket, or watch­ing a slot ma­chine light up and coins fly­ing ev­ery­where. You’re rich and you think your money trou­bles are over. Not any more, says Fi­nance Min­is­ter Pravin Gord­han.

At present, spo­radic win­nings in the hands of gam­blers are not sub­ject to per­sonal in­come tax. Fur­ther­more, 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 the South African Rev­enue Ser­vice (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 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,

ISARS con­sid­ers sys­tem­atic and busi­nesslike gam­bling to be in a scheme of profit-mak­ing and there­fore seeks 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 a sub­jec­tive is­sue and SARS needs to pro­vide more clar­ity on ex­actly what is 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 that 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 pay-as-youearn (PAYE) tax 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 through the in­ter­net and play in on­line casi­nos, it will be 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 in­ter­est­ing to see whether 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. Per­haps we will see SARS in­tro­duc­ing re­port­ing obli­ga­tions on gam­bling en­ter­prises such as are al­ready in place on em­ploy­ers and fi­nan­cial in­sti­tu­tions.


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