Freebies aren’t free

Phillip Joubert, manager of the Centre of Tax Excellence at the South African Institute of Professional Accountants (SAIPA)

Social Media is in our faces. Daily. Since the rise of social media in 2005 with websites such as Facebook and Twitter, there has been no stopping the increase in this phenomenon that has seen social media users now  account for almost 78% of the global population. You only have to look around you to see people grabbing their phones to “Insta” a moment, a funky cocktail, or a delectable plate of food.

This gave rise to a whole new profession – the social media influencer. It is something we are well aware of. Look at famous (or infamous) social media influencers such as the Kardashian sisters,  Charli D’Amelio, even sports personalities such as Christiano Ronaldo (who is the most followed person on all major social media platforms), and politicians such as former US President, Barack Obama.

In South Africa, social media influencing is no different. Just look at Mihlali, Somizi, Bonang Matheba or musicians like Black Coffee, to name a few, who all use social media to allow audiences into their lives through a lens. Connecting with their thousands, sometimes millions, of followers, they have the capability to link businesses and products with a wide audience in seconds, with a simple social media post.

But, the question to ask: do social media influencers know the tax implication of their new profession or side hustle?

The Income Tax Act

The definition of gross income as contained in the Income Tax Act is quite long, with its list of exclusions, special inclusions and so on, but this is the basis on which any taxpayer, not just influencers, must measure whether a receipt or accrual should be included in their gross income.

What will be taxed

Influencers have different ways of generating income for themselves, from endorsement deals to appearances. These types of transactions usually have a contract between the parties and the fee earned, on whatever basis, is included in the influencers taxable income as it meets the definition of gross income as defined in section 1 of the Income Tax Act.  When influencers do “unboxing videos” and review products, which are then usually kept by the influencer, this also meets the definition of gross income.

But, what are the tax implications if an influencer buys a product, actually loves the item, and posts on their social media to promote it? Let’s say sales for the product soar, and the company sends a hamper of all their major products to the influencer to say thank you. This was done purely because the taxpayer is happy with the product, there was no contractual obligation. So was this a gift? A donation? Or was it income?

It would be difficult for an influencer to convince SARS that the value of the hamper was a gift and completely gratuitous, if the taxpayer has done work on a regular basis for the company.

What also seems to be a trend is a new generation of influencers who try and negotiate free or discounted goods or services from various businesses, and in return do a “shout-out” to their followers. If you analyse a transaction such as this, the taxpayer is providing a service, being marketing, in return for consideration – a “free” meal. Would this meet the definition of gross income? Most definitely yes!

Value of services rendered

So, if the consideration of a “free” meal, such as in the example above, should be included in the taxable income of an influencer, at what value? The answer is very simple – open market value. If the meal in question would have cost Influencer X R800, then that is the value that must be included in the taxable income of the taxpayer.

Taxpayers should also note that, in many instances, providing a marketing service to a business is a trade as defined in the Tax Act. Therefore, within the framework of the Income Tax Act, costs incurred in the production of income should be allowed to be claimed as a deduction to reduce taxable income.

Other considerations

In providing these services to businesses, influencers and their tax practitioners should consider the possibility that the taxpayer may actually be defined as a Personal Service Provider. If the value of the consideration received be in excess of the threshold, VAT would need to be considered,  as the definition of what constitutes a supply is quite inclusive and the services offered by influencers will most likely meet the definition.

How would SARS know?

Many revenue authorities worldwide have started monitoring social media sites to identify potential ‘high risk’ influencers. A number of South African taxpayers are also well-versed in being on the receiving end of lifestyle audits, and a similar process will likely be followed.

If your growth in assets doesn’t match your income and lifestyle, this triggers alarm bells. It is very likely that SARS will follow the worldwide trend in monitoring influencers closely, as we continue to close the tax gap.

As a social media influencer in South Africa, it is important for you to be mindful of your tax obligations and accurately report all income earned, including endorsement deals, appearances, and the value of freebies or discounted goods/services. SAIPA’s Centre of Tax Excellence advises influencers to understand the definition of gross income as per the Income Tax Act and comply with their tax obligations to avoid potential penalties and audits, as revenue authorities worldwide, including SARS, are monitoring social media sites for potential non-compliant influencers.