Bingo! You’ve won the lottery – now what?

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There comes a time in pretty much everyone’s life where we find ourselves daydreaming about what it’d be like if we won big on the lottery. Or, if you’re like me, daydreaming about winning approximately $3000 after watching too many episodes of coin-based game show Tipping Point.

It’s a nice dream, and never mind the fact that the chances of winning the lottery are vanishingly low; one in 134 million for popular draws such as the Powerball. Even lower division prizes, which can still pay out thousands of dollars, have extremely low odds.

You’re probably not going to win the lottery or strike it rich on a game show … but what if you did?Credit: Nathan Perri

Game shows aren’t much better, given their relative infrequency and the fact it’s reliant on your personal skill and ability to best other contestants. Some popular game shows don’t even pay out monetary prizes (looking at you, Hard Quiz).

What’s the problem?

But, as someone from a movie once said, never tell me the odds! It’s far more entertaining to imagine what could happen. And if you’ve imagined enough, your thoughts may have touched upon what it all might mean from a tax perspective, and how best to spend your money (and not blow it all in the first few months).

What you can do about it

If that’s the case, here are some answers to your questions:

• How winnings are taxed: In good news for any would-be winners, the tax office takes a favourable view of these sorts of unexpected earnings. Mark Chapman, head of tax communications at H&R Block, says the ATO classifies prizes such as lottery and game show wins as “windfall gains”, which means they are not subject to income tax. “However, if you win a prize or award from your bank, building society, credit union, or investment body, this is taxable. This applies to both cash and non-cash prizes, such as holidays, cars, or interest-free loans,” Chapman says. It’s also worth noting that any income earned from investing or using your winnings will be taxed accordingly.

• Do you take the lump sum or annuity? Winnings from a lottery can be paid out in two ways: a lump sum (e.g. the whole amount all at once) or an annuity, where your winnings are paid out over 30 years, with the amount paid increasing 5 per cent each year. General wisdom is to take the annuity, as it leaves you with less of a chance of blowing your winnings all at once, but David Currie, financial advisor at Wealthy Self, says it depends on what relationship you have with money. “For example, a client with impulsivity or poor financial literacy may benefit from taking an annuity as opposed to the lump sum,” Currie says. “Some people need to be saved from themselves.”

• What should you actually spend it on? Herein lies the age-old question: if you won the lottery tomorrow, what would you do? As a thought experiment, this is a lot of fun, but in reality, winning big can be extremely fraught – about one third of winners in the US ended up bankrupt after five years (though it’s worth noting that in general, lottery winners’ lives are significantly improved by their winnings). To reduce the likelihood of you falling into that camp, Money guru and financial advisor Paul Benson says it’s important to carefully plan how to use your winnings – after having a little fun first, of course. “Take some time to reflect on what is important to you and what you want the long-term impact of this money to be. What will make you happy?” he says. This could be clearing out all your debt, or establishing some sort of charity, though he cautions against immediately quitting your job. “Sitting around home looking at the walls would get boring pretty quickly. Maybe a shift to part-time, or a different job with less stress would work better,” he says.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.