South African income tax implications for income earned in virtual worlds

Abstract

There has been a significant increase in the number of internet business and e-commerce transactions over the last few years. More recently, the development of virtual worlds on the internet has become an important feature of the business environment. Although some research has been conducted in the United States of America into the tax consequences of income earned in virtual worlds, no such research has been conducted in South Africa. This study adds to the American research by providing a critical analysis of the topic from the South African tax perspective. The specific aim of the study was to determine whether income earned by South African residents from structured and unstructured virtual worlds respectively would qualify as gross income in terms of the South African Income Tax Act 58 of 1962. It builds on previous international research, but offers a new perspective from the South African point of view. The study will make a valuable theoretical contribution to the application of the basic principles of gross income, and will deal with a brand new concept which did not exist when the principles were laid down. The research was limited to determining whether the income earned in virtual worlds by South African residents who are taxed on their world-wide income would be included in gross income as defined by the South African Income Tax Act. Capital gains tax consequences were not considered in any transaction where the income was classified as being of a capital nature. Also excluded were deductions available to taxpayers in terms of the income included in gross income, and there is no detailed discussion on when a taxpayer would be regarded as engaging in virtual worlds as a hobby as opposed to conducting a business. Future research could be extended to this particular area. This research concluded that most transactions in virtual worlds resulting in income would qualify as gross income under the South African Income Tax Act. At this stage, the only possible disqualification in terms of the South African gross income definition appears to be income received "of a capital nature".