An analysis of the income tax treatment of gift card transactions by South African suppliers

Abstract

Gift cards are popularly used in businesses especially in the retail sector. This widespread business practice has become popular worldwide and is continuing to grow. Gift cards are increasingly used as a marketing strategy and a promotional tool by businesses in order to increase sales and grow profits. This strategy strengthens customer loyalty, enhances brand awareness, and retains customers. Non-redemption of gift cards is a notable part of the retail sales economy and has a significant impact on the company’s profits in the long term. Customers also prefer gift cards because they reduce the dead weight loss of unwanted gifts. There are no specific income tax rules, tax provisions or tax guidelines that currently address the income tax implications of gift cards in South Africa. It is thus uncertain what the correct income tax treatment of gift cards is, and this could potentially result in inconsistencies for different taxpayers in South Africa. The main objective of this study was to analyse the South African income tax legislation to determine what the areas of uncertainty are in the current legislation on the income tax treatment of gift cards in the hands of suppliers and how these uncertainties have been dealt with in the United States of America (USA). There are hardly any countries that provide guidance on the income tax treatment of gift cards, the USA was selected because it is one of the few that do. This study employed a qualitative research approach and largely followed an interpretive research method and doctrinal research methodology. The findings of this study indicate that gift cards are generally classified into two categories, viz. closed-loop and open-loop gift cards. They have varying features and characteristics; however, their transaction process is fairly similar. The South African income tax legislation has been found lacking in the following aspects with regard to the income taxation of gift cards; the issue of the taxability of the proceeds from issuing gift cards, specifically the timing of inclusion in gross income; the issue of how non-redemption should be treated for income tax purposes; and the issue of the deductibility of costs to fulfil the gift cards. Guidance on the income tax treatment of gift cards in the USA was analysed in order to draw lessons on the uncertainties identified in the South African income tax legislation on gift cards transactions.