If an employer creates a competition for employees. The competition is open to all employees regardless of rank or job requirement. Would the winnings be subject to PAYE in the hands of the employee?
Important:
This answer is based on tax law for the tax year ending 28 February 2018.
Answer:
We don’t have enough information to provide the guidance required.
The principle, both from a paragraph (c) or (i) of the definition of gross income in section 1(1) of the Income Tax Act, is that it must be in respect of services rendered for it to be included in gross income (see below). It must be remembered that the taxpayer bears the burden of proof should the matter be disputed by SARS - in this instance if the view is taken that it is not gross income (because it is capital in nature).
The tax consequences of a prize are not specifically dealt with in the Income Tax Act. As there is a receipt one must apply the principles of the definition of gross income to determine if it will have tax consequences. Our courts have laid down the law in this regard. According to Judge Smalberger (in CIR v Pick ‘n Pay Employee Share Purchase Trust) “... any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by product. They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.” Judge Southwood in CSARS v Wyner agreed with this and stated the principle as follows: “This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for...”
The capital nature of the receipt is irrelevant if the amount is received (or accrues) in respect of services rendered (as mentioned above). If so, it would be gross income in terms of paragraph (c) of the Income Tax Act irrespective of being capital in nature.
Judge Howie (in the Stevens case) said “… the expressions ‘in respect of’’ … in paragraph (c) … connote a causal relationship between the amount received and the taxpayer’s services or employment.” (The reference to paragraph (c) is to the paragraph in the definition of gross income).
In SARS’s draft guide on professional sportspersons it is said that “the professional sportsperson would have entered the sporting event with the purpose of winning the prize and the prize, whether paid in cash or in kind, will form part of the sportsperson’s gross income and fall to be taxed as such.” This may well also apply in your instance.
The Seventh Schedule may also apply, unless the prize is in cash. It would apply if it is any way meant as a benefit or advantage of or by virtue of employment or as a reward for services rendered.