Concepts
Prize
A prize is something of value won in a competition or draw, and its GST and income tax treatment depends on who provides it and whether the winner is in business.
A prize is a reward given to a winner of a competition, raffle, promotion or draw. It might be cash, goods, a holiday or a service. The tax treatment of prizes covers several different parties, namely the organiser who gives the prize, the entrants who may pay to enter and the winner who receives it, and each is treated differently under GST and income tax.
For the organiser, the cost of providing a prize is generally a business expense if it is incurred for a business purpose such as promoting the business. A registered organiser can usually claim an input tax credit for the GST in the cost of buying the prize, provided it has a tax invoice for purchases over $82.50 and the prize is bought for the enterprise. Where the prize is given away free to a winner who gave nothing in return, the giving is generally not a taxable supply because there is no consideration. A promotion where entrants must make a purchase is different, because the purchase price may be consideration for both the product and the chance to win.
Entry fees are another matter. If entrants pay to take part, the organiser is receiving consideration for something, and it needs to consider whether the activity is a game of chance, which falls under the special rules for gambling, or a skill-based competition with its own treatment. A registered organiser would generally charge GST in the entry price for a taxable competition. Raffles and lotteries run by non-profit bodies have special rules and state or territory regulation, so they should check with their gaming regulator as well as the ATO.
For the winner, the tax treatment differs depending on circumstance. In general, an individual who wins a lottery or a private competition prize is not taxed on it as income, since it is not income from a business or employment. A prize won in connection with a business, or as a reward for work, may be assessable income. A prize won by an employee as part of their employment may also involve fringe benefits tax for the employer in certain cases, so employers should be careful with staff competitions.
Winners who are registered for GST should also think about whether receiving or using the prize has any GST effect. A prize received free for private use has no GST credit effect. If a winner then uses the prize in their business, for example winning equipment, there is generally no GST in the cost to claim because they did not pay for it, although other rules may apply to goods provided by non-registered suppliers.
Common mistakes include claiming a credit for prizes that are really private gifts, not recording the value of non-cash prizes and assuming that all prizes are tax free for the winner. Organisers also sometimes overlook consumer law and state or territory competition rules, which are separate from tax.
Whether a prize has tax consequences depends on the circumstances of each party. This is general information only, so please confirm your situation with the ATO or a registered tax professional.
Worked example
A registered shop buys a $1,100 gift pack, including GST, as a prize for a customer promotion where no entry fee is charged and nothing is bought to enter. If the shop holds a tax invoice, it can claim a credit of $1,100 divided by 11, which is $100, and the net $1,000 cost is a business expense. The winner, a private individual, generally has no GST or income tax to pay on the prize.
Practical tips
- Keep the tax invoice for any prize you buy for a promotion, and record who received it and why.
- If entrants pay or must buy something to enter, check whether the arrangement is gambling or a taxable supply before you start.
- Employers should check fringe benefits tax before giving prizes to staff, and winners in business should check whether the prize is assessable.