Cash prizes in sporting competitions - GST implications for organising club

Sections 5(10) and 10(14), Goods and Services Tax Act 1985 - supply where game of chance etc.

The secretary of a GST registered amateur sports club has asked us to clarify whether or not the club is able to claim GST input tax deductions on cash prizes awarded to participants in bowls competitions organised by the club. They have noted that section 10(14) permits the amount of prizes paid in cash to be deducted from total proceeds in relation to certain games and competitions, thus reducing the net amount of GST payable in respect of the competition. 

Many clubs run regular sporting competitions, and these competitions are part of the club's taxable activity.  A membership fee allowing a person to use the club facilities may be payable, and this fee may also allow members to enter competitions.  Alternatively, a separate fee may apply for entry into the competition.  In both cases such fees contribute towards the costs of administering and running the competition, as well as allowing the use of facilities. 

As a registered person, the club will return output tax on membership fees and competition entry fees. The club will be able to claim input tax on all the goods and services purchased in order to provide the competition.  "Goods" and "services" are both defined in section 2 of the Act.

"Goods" means all kinds of personal or real property; but does not include choses in action or money.

"Services" means anything which is not goods or money.

Trophies, bottles of wine, meat packs, or similar items fall within the definition of goods.  As such input tax deductions can be made.  If a prize is donated, there is no GST component as there is no consideration paid for that prize.

Cash prizes, however, are treated differently because they do not fall within either the definition of "goods" or "services".  The section 2 definitions of "goods" and "services" specifically exclude money.  Thus it is not possible for the club to claim GST on any money acquired for the purposes of awarding a prize, because money is not a good or a service.

Having concluded that money is neither "goods" nor "services", a further question arises as to whether the sporting competition is a "game of chance", "lottery", "prize competition", etc, in order for sections 5(10) and 10(14) to apply. 

Relevant sections of the Goods and Services Tax Act 1985 are:

Section 5:

(10) Notwithstanding anything in this Act, for the purposes of this Act where any person pays an amount in money to participate in a game of chance, lottery, New Zealand instant game, New Zealand lottery, New Zealand prize competition, or prize competition, the amount of money so paid to participate shall be deemed to be for a supply of services by the person, society, licensed promoter, or organiser who, pursuant to the Gaming and Lotteries Act 1977, conducts the game of chance, lottery New Zealand instant game, New Zealand lottery, New Zealand prize competition, or prize competition.

 (11) For the purposes of subsection (10) of this section-

(a)     The terms "game of chance", "gaming machine", "lottery",  "prize competition", and "society" have the same meanings as defined in section 2 of the Gaming and Lotteries Act 1977:

(aa) The terms "New Zealand instant game", "New Zealand lottery" and "New Zealand prize competition" have the same meanings as defined in section 71 of the Gaming and Lotteries Act 1977:

(b)     The term "amusement device" has the same meaning as defined in section 10 of the Gaming and Lotteries Act 1977:

(c)     The term "licensed promoter" has the same meaning as defined in Part V of the Gaming and Lotteries Act 1977:

(d)   The term "organiser" means the New Zealand Lotteries Commission established by section 72 of the Gaming and Lotteries Act 1977.

Section 10:

(14) Where a supply of services is deemed to be made under section 5(10) of this Act, the consideration in money for the supply shall be deemed to be such portion of the amount in money a person pays to participate in a game of chance, lottery, New Zealand instant game, New Zealand lottery, New Zealand prize competition, or prize competition, as represents the total proceeds (after deducting the amount of all prizes paid and payable in money) in respect of that game of chance, lottery, New Zealand instant game, New Zealand lottery, New Zealand prize competition, or prize competition.

(15) For the purposes of subsection (14) of this section:

(a)   The terms "game of chance", "lottery", and "prize competition" have the same meanings as defined in section 2 of the Gaming and Lotteries Act 1977:

(b)     The terms "New Zealand instant game", "New Zealand lottery", and "New Zealand prize competition" have the same meanings as defined in section 71 of the Gaming and Lotteries Act 1977.

In addition, the Gaming and Lotteries Act 1977 defines "game of chance" and "prize competition" in the following terms:

"Game of chance" means a game:

(a) In respect of which direct or indirect consideration is paid to participate; and

(b) That is played with a view to winning money or money's worth; and

(c) The outcome of which depends wholly or partly on chance;--

but does not include an athletic game, or a sporting event, or a New Zealand lottery, or a New Zealand prize competition:

"Prize competition" means a scheme or competition in respect of which direct or indirect consideration is paid to participate, and of which the result is determined partly by a considerable element of chance (whether chance plays the greater or lesser part), and partly by the performance by the contestants of some activity of a kind that may be performed more readily by contestants possessing or exercising some knowledge or skill, whether or not it may also be performed successfully by chance; but does not include--

(a)         An instant game; or

(b)         A New Zealand instant game; or

(c)         Any such scheme or competition to which Part VII of this Act applies:

Section 10(14) allows cash prizes to be deducted from the total proceeds of a "game of chance", "lottery", "prize competition", etc., thus reducing the net amount of GST  payable.  However, section 10(14) only applies to taxable supplies under section 5(10).   Section 5(10) deals with supplies where there is a "game of chance",  "prize competition", etc.  Paying money to participate in any of the defined "games of chance",  "prize competition", etc., is treated as payment for a supply of a service. 

The particular activities listed in the section are all defined in the Gaming and Lotteries Act 1977, including the term "prize competition".  "Prize competition" has the same meaning in the GST Act as it does under the Gaming and Lotteries Act.  Thus, if an event is a "prize competition", the rules of the Gaming and Lotteries Act will apply. 

The Gaming and Lotteries Act definition of "game of chance" excludes an "athletic game" and a "sporting event".  A "game of chance" by definition is one that depends on luck, and not the skill of the competitor.  In the context of the Gaming and Lotteries Act, the definition of "game of chance" refers to "chance" in a gambling sense, i.e. the Gaming and Lotteries Act deals with the promoting, licensing, and regulation of gambling-related activities by a person, society, licensed promoter, or organiser pursuant to that Act. 

A sports competition does not become a "prize competition" for the purposes of the Gaming and Lotteries Act, simply because prizes are awarded.  A "prize competition" requires there to be a considerable elements of chance, and some skill or knowledge. A sports competition will not generally come within the definition of "prize competition", as the participants are competing on the basis of their skill or knowledge in the relevant sport.  Nor will such sporting competitions come within any of the other definitions referred to in section 5(10) as they will not be organised, licensed, or promoted pursuant to the Gaming and Lotteries Act.

Because section 5(10) does not apply, section 10(14) will not apply either.  Section 10(14) contains a particular concession for games of chance in which GST is only payable on the proceeds of the game of chance, prize competition, etc., after the amount of the prize money has been deducted.

Therefore, the sports club will not be able to rely on the provisions of sections 5(10) and 10(14) to deduct the amount of any cash prizes from the total proceeds received from the amateur sports (bowls) competitions. Accordingly, the GST payable in respect of the competition will not be reduced, or other GST relief obtained, in respect of cash prizes for clubs’ sports competitions.

While every case will depend on its own facts, the Commissioner does not generally consider the awarding of minor "spot" prizes as part of the sporting competition would alter this characteristic unless part of the fee could be seen to be attributed to the possibility of receiving such spot prizes.