These Loerie Awards given - would they fall under Gross Income? They can be quite a bit of income.
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
According to information found on http://www.loeries.com/loeries2018.aspx?link=site_home, the Loerie is an “award that recognises, rewards, inspires and fosters creative excellence in the advertising and brand communication industry”. It also mentions that “winning a Loerie is the highest accolade for creativity and innovation across our region.”
The tax consequences of awards 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. The cases of Stander v CIR and CSARS v Kotze are relevant – in them, the judges discussed the nature of a testimonial or accolade receipt. In the Kotze case, Judge Foxcroft said:
“The payment on the present facts is clearly not one of the nature of a testimonial or accolade, but is, as was said in Moore v Griffiths, one which has ‘the quality of remuneration for services rendered’. It is trite that ‘services need not be rendered by virtue of any contract, nor need the amount received or accrued be by reason of any contract or obligation: it can be a purely voluntary payment’.
Judge Foxcroft also said the “more important question is the proximate or direct cause of the payment, or as expressed in Latin, causa causans.” In this regard the process of how the Loerie is awarded is relevant.
If the award is not in respect of services rendered, it will be excluded form gross income if it is of an accrual of a capital nature. Our courts have laid down the law with regard to the capital nature of a receipt or accrual. 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...”
More recently, being 9 February 2016, Judge van Der Merwe confirmed (in the SCA in CSARS v Capstone 556 (Pty) Ltd) that “…our courts have … consistently applied the test that a gain made by an operation of a business in carrying out a scheme of profit-making, is income and vice versa.” With ‘income’ the judge of course refers to ‘gross income’.
The taxpayer may argue that the work was originally not done for the purpose of entering the work for the award. The taxpayer must also ensure that the entry is eligible. Only work that has been approved by the brand or client, and that has been commercially published, launched or aired to a substantial audience for the first time between 1 June 2017 and 31 May 2018, for instance, can be entered.
The capital nature of the receipt is however 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. Paragraph (i) uses the words “in respect of employment”.
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.”
The Seventh Schedule, or paragraph (i), will apply if the prize is not in cash and 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.
It is suggested that you provide the client with a tax opinion, if the view is taken that it is not gross income. The above guidance can be used in preparing a tax opinion for your client.