1. Winning the Lottery
Smit says National Lottery winnings are generally regarded as capital in nature and not included in the taxable income of the individual.
It is also excluded from capital gains tax (CGT). However, the individual would need to declare the winnings to the South African Revenue Service (Sars).
Smit says when the individual completes his tax return he needs to state that he received a non-taxable amount during the tax year. This would activate a section in the tax return where the amount can be declared, although it won’t be taxed.
2. Winning at the casino
Smit says, in this instance, one has to distinguish between two scenarios. The most common one is where an individual gambles as entertainment. In this case, the gambling will be considered a hobby (not a scheme of profit-making).
Smit says for tax purposes, the treatment will be the same as National Lottery winnings – it will be capital in nature (not gross income) and so not subject to tax or capital gains tax.
About 95% of scenarios fall into this category, he says.
However, if an individual systematically undertakes gambling activities it becomes a business, or “entering a scheme of profit-making”, Smit says.
In this case, winnings will not be capital in nature, but the taxpayer will be able to claim gambling losses as deductions and the net winnings will be subject to normal tax.
Smit says it is “really the exception” to be considered a professional gambler. Even though some might regularly gamble as a hobby or entertainment, they are not considered professional gamblers.
3. Winning in a competition, if:
(a) winnings related to job
Smit says there is a specific inclusion in the gross income definition that says amounts received for services rendered – even if voluntary– will be included in gross income and subject to tax.
Where the employee receives a reward related to his job function, it will be considered gross income.
Smit says there is no requirement that an employer-employee relationship must exist. The prize money merely had to be received for services rendered.
He says a classic example would be a prize received for employee of the month. The prize could be cash or otherwise, but will be subject to tax.
“If it is a non-cash prize, the monetary worth of that specific item will be included in gross income and subject to tax.”
However, if someone outside the company awarded the prize and did not receive the benefit of the services, the situation could be different.
Smit says in such a case it could be argued that the money was not received in relation to services rendered directly (therefore no causal link between the services and the price) and should therefore not be subject to tax.
(b) winnings unrelated to job (like a lucky draw)
Smit says the money would usually be capital in nature and not subject to normal tax.
