The task of buying someone a gift for a special occasion can be a daunting one, particularly if you don't have the time or are indecisive. If you are like me, purchasing a gift card is often the best way to get around this dilemma.
If you are interested in tax you may have wondered whether the sale of a gift card must be included in the suppliers gross income when the gift card is initially sold or when the gift card is redeemed / expires.
The recent Tax Court case (number IT 24510), A Company v The Commissioner for the South African Revenue Service (IT 24510) [ZATC] 1 (17 April 2019), dealt with exactly this issue and came to an interesting conclusion. SARS had issued the taxpayer with an additional assessment for its 2013 year of assessment in which it characterised receipts of the taxpayer in respect of unredeemed gift cards as part of the taxpayer's gross income. However, it did allow the taxpayer to claim an allowance in respect of future costs to be incurred. The taxpayer was thus assessed for an additional R13 million income tax liability.
The taxpayer's practice had always been to separate its receipts in respect of unredeemed gift cards for accounting purposes. However, for tax purposes the taxpayer treated the receipts in the following manner:
- Prior to its 2013 tax year, it included in its gross income all revenue generated from the sale of gift cards (redeemed and unredeemed).
- From its 2013 tax year onwards, it included in its gross income only the revenue generated from the sale of gift cards that had been redeemed by the customers or had expired.
The Taxpayer advanced the following two arguments for the change in treatment:
- The monies received by the taxpayer in respect of the sale of gift cards were held in a separate bank account and not applied in the conduct of the taxpayer's business until the cards are redeemed or expire. As a result, the money is not received by it for its own benefit but rather held for the benefit of another (i.e. the person who redeems the gift card (Bearer)).
- Alternatively, the effect of the provisions of sections 63 and 65 of the CPA cause receipt of the gift cards monies as 'trust money' in the taxpayer's hands until such time as the cards are redeemed or expire, or a refund is made.
The Court held that SARS was correct that the taxpayer would, under common law, become the owner of the money paid for the gift cards as soon as it changed hands thus the taxpayer's first argument did not succeed.
However, the Court accepted that this change in policy / treatment could be justified as a result of the enactment of the Consumer Protection Act No. 28 of 2011(the "CPA"). An integral part of the Court's conclusion was that the common law approach had been impacted by sections 63 and 65 of the CPA, which read as follows:
'any consideration paid by a consumer to a supplier in exchange for a prepaid…card…or similar device…is the property of the borrower of that…card…or similar device to the extent that the supplier has not redeemed it in exchange for goods…' and 'when a supplier has possession of any prepayment…or any other property belonging to…a consumer, the supplier…must not treat that property as being the property of the supplier…'
Based on these provisions of the CPA, the Court agreed with the taxpayer's second argument and held that 'the pertinent provisions of the CPA create a legal construct that results in the taxpayer initially taking the gift cards receipts not for itself, but for the card bearers'.
The court further held that this finding is, in principle, no different from the determinations made in prior tax court cases of Geldenhuys v Commissioner for inland Revenue 1947 (3) SA 256 (C), Holly v Commissioner for inland Revenue 1947 (3) SA 119 (A), Commissioner South African Revenue Service v Cape Consumers (Pty) Ltd 1999 (4) SA 1213 (C), 61 SATC 91 and Secretary for Inland revenue v Smant 1973 (1) SA 754 (A).
Even though it is only a timing issue - this judgement will no doubt be of great interest to retailers who have not been treating the accruals / receipts from the sale of gift cards on this basis.
It is also a reminder to taxpayers in general that tax legislation must not be applied in isolation but regard must also be had to the legislative framework within which taxpayers conduct their business.
An interesting aspect that was not necessarily addressed by the Court (or SARS) is whether, by holding the monies in trust, a separate taxpayer may have come into existence. A trust is defined in the Income Tax Act No. 58 of 1962 as "any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person".
If, for instance, the provisions of CPA are sufficient to constitute an agreement between the supplier (acting in a fiduciary capacity) and the Bearer, perhaps a separate tax paying trust may have come into existence for tax purposes in relation to these gift card monies. This would obviously have its own unintended tax consequences.