The Cape Town Tax Court delivered a judgement on 17 April 2019 on the timing of income tax in relation to gift cards issued by a retailer.[1]
Here, the taxpayer “sold” gift cards to its customers to be redeemed at any of the taxpayer’s stores. The question under consideration was whether the revenue from the “sale” of the gift cards constituted “gross income” for purposes of the Income Tax Act[2] as soon as it was received by the taxpayer, or only when the gift card was redeemed or has expired.
In terms of section 1 of the Income Tax Act,[3] a taxpayer must include in “gross income” all amounts “received by or accrued to or in favour of” that taxpayer. Initially, the taxpayer included all amounts received in respect of the gift cards in the year in which the cards were issued and paid for.
However, the Consumer Protection Act (“CPA”)[4] came into effect with specific provisions on the treatment of gift cards. It stated that any consideration paid by a customer to a supplier for a gift card is the property of the bearer of the card until the supplier redeems it. Also, a supplier may not treat any prepayments in its possession as the property of the supplier.[5]
As from 2013, the taxpayer, therefore, transferred the revenue from the gift cards to a separate bank account until such time as the cards were redeemed or become expired and accounted for these amounts in its financial records as an unredeemed gift card liability. The taxpayer also did not include these amounts in its “gross income” at the time of the “sale” based on the argument (and irrespective of the CPA provisions) that the money was not received by the taxpayer for its own benefit, but was held for the benefit of the card bearer. Secondly, the effect of the CPA provisions rendered it inconsistent with being “gross income” for income tax purposes.
The Court found that the mere segregation of monies in a separate bank account did not by itself mean that the funds were somehow held “in trust” for the benefit of the cardholders as opposed to the taxpayer. However, the result of the CPA and the treatment of these amounts in order to comply with its requirements was that the taxpayer did not receive such monies for its own benefit until the cards were redeemed. The Court held that these receipts therefore only constituted “gross income” when it was redeemed or had expired.
[1] Reported as A Company vs The South African Revenue Service (IT24510) [2019] ZATC 1 (17 April 2019).
[2] 58 of 1962
[3] See definition of “gross income”
[4] 68 of 2008
[5] See sections 63 and 65 of the CPA
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