Winning the lottery and being “set for life” is a dream for many Australians. With prize money coming in regularly, winners may wonder if these lottery winnings are tax-free in Australia. The quick answer is that lottery winnings are generally considered assessable income, which means they are subject to tax. However, there are some exceptions and specific rules around how lottery winnings are taxed. Understanding the tax implications is an important part of financial planning for major prize winners.
Are lottery winnings taxed in Australia?
In general, lottery winnings are considered assessable income by the Australian Taxation Office (ATO). This means the winnings must be reported as income on your tax return. The good news is lottery winnings are only taxed when the winnings are actually received by the winner, not when the prize is announced.
According to the ATO, the following lottery winnings are considered assessable income for tax purposes:
- Winnings from lotteries conducted by lottery operators and organizations like TattsLotto, Powerball, OzLotto etc.
- Prizes from game shows, competitions and puzzles
- Winnings from Keno
- Winnings from betting, including sports betting and racing
- Scratchies or instant lotteries
- Winnings from raffles, sweeps and other games of chance
The tax treatment applies regardless of whether the winnings are paid out in a lump sum or as ongoing payments, like with “Set for Life” style lottery games. For these types of lottery prizes paid out over time, the taxable income may be spread out over several years as the payments are received.
What tax rate applies to lottery winnings?
Lottery winnings are taxed at your marginal tax rate like other forms of personal income. Your marginal tax rate is the rate you pay on each additional dollar of income, based on your total taxable income for the year. The more total income you have, the higher your marginal tax rate.
The marginal tax rates for the 2022-23 income year are:
| Taxable income | Tax on this income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | 37c for each $1 over $120,000 |
| Over $180,000 | 45c for each $1 over $180,000 |
In some cases, such as for significant lottery prizes spread over many years, the ATO may agree to tax the winnings at a fixed 30% rate rather than marginal tax rates. This can help simplify tax calculations on large prizes over time.
Are small lottery winnings tax free?
Yes, there is a tax-free threshold for gambling and lottery winnings. For the 2022-23 tax year, the tax-free threshold is for winnings of $1,000 or less from an individual lottery or gambling event.
If you have total gambling winnings of $1,000 or less for the entire year from all forms of gambling combined, the winnings can be considered hobby income and remain tax-free. But if you have total gambling winnings exceeding $1,000 for the year, the entire amount becomes assessable income for tax purposes, even if each individual win was under $1,000.
Is tax withheld on lottery winnings?
If you win one of the major national lottery games like Powerball or OzLotto where the prize is paid by the lottery operator, tax will automatically be withheld from the winnings before you receive the prize money. The amount withheld and remitted to the ATO is based on an estimate of the tax owing on the prize amount.
The lottery operator will provide you with a payment summary outlining the total prize money, tax withheld and net amount you received. This payment summary should be included in your tax return to reconcile the tax on your lottery winnings.
For smaller prizes or winnings from gambling operators, tax is generally not withheld upfront and you are responsible for declaring these amounts and paying any tax owing through your annual tax return.
Do you pay tax on lottery winnings from other countries?
If you win a lottery while in another country, the tax rules apply based on your residency status for tax purposes.
For Australian residents, most foreign lottery winnings are taxable in Australia regardless of where you purchased the ticket or the lottery was held. This includes winnings from online lotteries purchased while overseas.
If tax was withheld on the lottery winnings in the foreign country, you can claim a foreign income tax offset on your Australian tax return to avoid double taxation.
Is tax payable on gifts or donations from lottery winnings?
If you decide to gift some or all of your lottery winnings, or donate to charity, this does not exempt the winnings from tax. As the winner, you are still assessed for tax on the total lottery winnings amount.
However, you may be able to claim a tax deduction or tax offset for gifts or charitable donations made with your lottery winnings. For example:
- Donations of $2 or more to registered Australian charities may be deductible
- Gifts to recipients with a total value of $10,000+ may require filing a Gift Tax Return
Make sure to keep receipts or other records for any gifts or donations made from lottery winnings, as documentation will be required to claim deductions or offsets.
Can you reduce tax on lottery winnings?
There are some steps lottery winners can take to potentially minimize the amount of tax payable on their prize money:
- Claim any expenses incurred in generating the winnings as deductions – this may include travel costs to purchase tickets or collect winnings, or costs to seek professional advice about the win such as from a lawyer or financial advisor.
- Offset any foreign tax paid on overseas lottery winnings
- Contribute to superannuation – winners can potentially claim a tax deduction for personal super contributions made from the lottery winnings
- Invest in income-producing assets – this can provide deductions for expenses like interest on loans and depreciation
- Spread wins over multiple tax years – this may allow the winner to utilize multiple low and middle income tax brackets over time rather than only the top bracket
- Claim eligible deductions for donations or gifts made from the lottery winnings
Getting professional tax planning advice is highly recommended to ensure lottery winners pay only what is legally required in tax, and utilize available deductions and offsets.
Do lottery winnings affect tax brackets, levies or government benefits?
Lottery winnings can impact your overall tax situation beyond just the tax owing directly on the winnings. Some potential flow-on effects include:
- Higher marginal tax bracket – Large lottery wins may push you into a higher tax bracket for that year, meaning a higher tax rate applies to your ordinary income.
- Higher Medicare Levy – Applies if your total taxable income plus lottery winnings exceeds thresholds.
- Budget Repair Levy – An additional 2% tax may apply if total taxable income exceeds $180,000.
- Government benefits – Eligibility for benefits like tax offsets may be reduced if your income, including lottery winnings, exceeds certain limits.
- Super co-contributions – The government low income super contribution phases out above $42,016 taxable income.
Lottery winners should consider the full range of tax implications when financial planning to minimize overall taxes paid.
Are lottery winnings considered assets for Centrelink purposes?
For Australians receiving government pension or allowance payments, lottery winnings are treated as financial assets and can impact your Centrelink or Department of Veterans’ Affairs (DVA) entitlements.
Lump sum lottery winnings are considered income for the fortnight they are received. Ongoing lottery prize money payments are considered income when each payment is received.
Once received, any unspent portion of the winnings becomes an assessable asset. There are special rules around gifted amounts from winnings.
The best approach if receiving government payments is to speak with Centrelink or DVA before claiming any significant lottery prizes to understand the impact on your benefits and entitlements going forward.
Is tax payable on interest earned from lottery winnings?
If you invest all or part of your lottery winnings, any interest, dividends or capital gains earned on those investments becomes taxable income in its own right. Even if the original lottery winnings were tax free, subsequent investment earnings are generally taxed.
Common scenarios where tax may apply include:
- Bank account interest – Money held in savings accounts can earn taxable interest.
- Managed funds – Distributions and capital gains from fund investments are taxable.
- Share dividends and gains – Dividends and profits from selling shares are taxable.
- Rental property income – Any profits made from rental properties purchased with winnings are taxed.
Appropriate records need to be kept on investment earnings to calculate capital gains, determine cost bases, and account for any expenses that can be claimed as tax deductions.
Is tax applied when transferring lottery winnings overseas?
If you want to transfer your Australian lottery winnings to another country, tax implications can arise.
Firstly, Australian tax will apply to the winnings, even if you intend to send the money overseas. You cannot avoid this by transferring the winnings out of Australia immediately.
Secondly, sending large sums of money internationally may trigger reporting requirements to the Australian Transaction Reports and Analysis Centre (AUSTRAC) under anti-money laundering laws.
Thirdly, if you transfer funds into foreign bank accounts or investments, tax obligations may then arise in those countries. You need to understand the tax laws in your destination countries regarding receiving gambling winnings or gifts from Australia.
To meet all your Australian and foreign tax obligations, professional tax advice is recommended when transferring lottery funds overseas.
Do professional services for winners reduce tax?
It is common for big lottery winners to enlist professional services like financial advisors, lawyers, tax specialists and wealth managers. The fees paid for these services are generally tax deductible in Australia.
Common deductible expenses when engaging professionals include:
- Fees for financial planning and tax advice
- Legal fees for advice on wills, trusts, asset protection etc.
- Fees for investment portfolio management by wealth advisors
- Fees for accountants to provide tax filing services
Keeping receipts or invoices is crucial for claiming deductions for professional services related to your lottery winnings and new financial affairs.
Does pooling change the tax treatment for group winners?
For lottery wins by groups, syndicates or collections, each member of the group is individually assessed for tax purposes based on their share of the winnings.
For example, if a lottery syndicate of 10 people wins $1 million ($100,000 each), every member includes their $100,000 share on their own individual tax return. The pooling of funds does not change the tax treatment.
The only exception is for professionally managed betting syndicates treated as joint income earners. In those cases, the syndicate manager handles distribution of shares and tax obligations centrally.
Are prizes from TV game shows, contests and puzzles taxed?
Similar to lottery prizes, winnings from game shows, enter-to-win contests, trivia nights and puzzle solving competitions count as assessable income for tax purposes. For example:
- Prizes from TV shows like “The Chase Australia” or “Millionaire Hot Seat”
- Winnings from radio station call-in contests
- Prizes from trivia events at local pubs or clubs
- Winnings from puzzle magazines or problem-solving challenges
If the total prizes received from these types of competitions exceeds $1,000 for the tax year, the amounts are generally taxable at your marginal tax rates.
When are raffles treated differently for tax?
Raffles are generally treated the same as lotteries, where the prizes count as assessable income. But in some cases, raffle winnings may be exempt from tax:
- If purchased for charitable purposes
- If valued at or below $10,000 and not won previously within 12 months
- If conducted by exempt organizations like schools or charities
You may also be able to claim a tax offset for the price paid to purchase charitable raffle tickets.
Do frequent lotto players pay extra tax?
For very frequent lottery players, the ATO may consider your level of play to constitute a business activity rather than a recreational hobby.
In those cases, your total spend on lotto tickets can be claimed as a tax deduction. But any wins then become fully assessable income, with no $1,000 tax-free threshold.
This approach may benefit prolific players who win infrequently, allowing them to offset losses on ticket purchases against the tax on those rare wins.
But for most typical lotto players, treating it as hobby income is the best approach to utilize the $1,000 tax-free threshold on smaller wins.
Do multiple small wins avoid tax?
A common lottery tax myth is that you can avoid tax by spreading wins across multiple small prizes below the $1,000 threshold. This is incorrect.
The $1,000 threshold applies per lottery or gambling event. Your total assessable gambling income across all winnings for the entire year determines if any tax applies.
For example, if you had 50 individual $500 lotto prize payments in one year totalling $25,000, the total amount would become taxable income. The $1,000 threshold only exempts each individual win amount, not the annual total.
Conclusion
In summary, lottery winnings in Australia are generally taxable income subject to your marginal tax rate in the year received. Small infrequent wins below $1,000 are tax-free, but multiple small wins can become assessable income based on your total gambling proceeds for the year.
There are some opportunities to offset the tax burden through deductions and spreading wins over time. But most major lottery prizes will attract substantial income tax when claimed by Australian residents.
Seeking professional tax planning advice is essential to minimize taxes and deal appropriately with all reporting obligations to the ATO and other government agencies.
