Gift cards
Detail of a photo by Mike Mozart/Flickr.
  • An anonymous big retailer has won a tax-court case against Sars, which was demanding it pay tax on gift cards as they are sold.
  • The court said the Consumer Protection Act means the money doesn't belong to the retailer until gift cards are redeemed – or expire after three years.
  • The case gave us a rare glimpse of how many cards are never redeemed, and there is rather a lot of money involved, especially if you start counting interest.
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Retailers could be making rather a lot of money from gift vouchers bought but never redeemed, an obscure tax case decided this week shows.

In the 2013 tax year, a judgment discloses, the company (identified only as a "high street retailer of clothing, comestibles and general merchandise") had on its books R141 million of gift cards sold that year but not yet redeemed.

By law gift cards remain valid for three years and some of those may have been redeemed in subsequent years – but the amount is for only one retailer.

Gift vouchers are sold by everyone from banks to online shipping sites, and sold for use anywhere in a specific shopping centre to anywhere in a specific town.

Retailers and others do not typically disclose any information about how many gift cards they sell, or how many are not redeemed.

The retailer went to court to fight off a claim by the SA Revenue Service (Sars) that it should pay R13.1 million more in tax than it had, because the gift-card sales represented gross income.

The company is referred to only as "A Company" in the judgment delivered this week, in the tax court where matters are heard anonymously – although some matters are more anonymous than others.

See also: Spur just won a R48 million tax battle – with implications for executive share schemes

The court disagreed with Sars that tax becomes payable as soon as a gift card is sold, saying that rules built into the Consumer Protection Act (CPA) means the money belongs to the holder of the gift card, not the company that sold it, until it is either redeemed or expires.

In terms of the CPA gift cards must be honoured for at least three after they were issued. 

Unless the terms of the gift voucher specify a longer window, the money goes to the company that sold it after those three years. The fact that the company can keep the money in its own bank account for that period and earn interest on it makes no difference

And now, thanks to the judgment, the company only needs to pay tax on the money after the voucher is redeemed or expires.

"The status of any interest earned on the entrusted funds is not provided for in the CPA, and the issue of liability for income tax thereon does not arise on the facts of the current case," wrote judge Ashley Binns-Ward in his judgment.

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