Babka v. Federal Commissioner of Taxation

Hill J

Federal Court

Judgment date: Judgment handed down 21 September 1989.

Hill J.

Before the Court are assessments of income tax of the applicant, Mr Babka, for the years of income 1972 to 1982 inclusive excluding the 1976 year.

In each of the years before the Court the applicant had gambling wins in excess of his gambling losses. The figures are not in dispute, nor could they be, because the applicant kept meticulous records from which it was possible to compute his yearly wins and losses although those records did not record incidental expenditure such as admission fees, cost of transport to race meetings and the like.

In all but the 1982 year the Commissioner had originally assessed the applicant without regard to his gambling winnings. In 1981 these assessments were amended and the assessment for the 1982 year issued on the basis that the assessable income included gambling wins net of gambling losses each year. These assessments took no account of the incidental expenses incurred by the applicant. However, following objections lodged, the Commissioner allowed amounts for incidental expenditure so that no issue arose before me as to the deductibility of that expenditure nor as to the quantum of the amounts included in assessable income.

The assessments presently in dispute imposed quite considerable additional tax under sec. 226(2) of the Income Tax Assessment Act and in respect of those penalties the applicant seeks judicial review. The following table sets out in respect of each year in dispute the amounts said to be betting income (i.e. successful bets less betting losses), the expenses allowed under sec. 51(1) of the Act for incidental expenditure, the net amount in dispute, the tax in dispute and the penalty imposed:

            Betting      Sec. 51(1)      Net betting    Tax in
  Year      income       expenses          income       dispute      Penalty
               $             $                $            $             $
  1972      57,859         5,000           52,859       36,371        22,933
  1973      86,133         3,665           82,468       54,487        34,378
  1974     213,716         3,335          210,381      141,284        88,526
  1975      78,029         4,265           73,764       49,422        31,393
  1977     247,287         4,340          242,947      157,916        99,638
  1978     271,455         3,860          267,595      168,357


             Betting      Sec. 51(1)      Net betting    Tax in
   Year      income       expenses          income      dispute      Penalty
               $             $                $            $             $
   1979      88,891         3,425           85,466       52,562        33,164
   1980     276,205         3,830          272,375      166,339        99,165
   1981     116,828         2,725          114,103       68,462        33,968
   1982      25,282         2,605           22,677       13,606         2,721
   Tot   $1,461,685       $37,050       $1,424,635     $908,806      $552,112

The applicant in the 1976 year made a loss of $47,050 from his gambling activities which amount was allowed by the Commissioner as a deduction against his other income of that year. Apparently, although it is not a year before me, the 1983 year produced what the applicant referred to in evidence as a ``disastrous result''.

The evidence was not really in dispute. The applicant was born in Czechoslovakia in 1926 and came to Australia at the age of seven. He was employed in the State Public Service from 1944 until his retirement in 1977 at age 51. By this time he had accumulated assets of approximately $300,000 which enabled him to maintain his standard of living while furthering his gambling activities. He was never married and never owned a car.

The applicant had his first introduction to gambling in his last year of high school and thereafter gambled on horses, the occasional card and two-up game, as well as occasionally in casinos and on lotteries. In 1955 he had won £2,400 in a lottery which he used to place further bets and which enabled him to become reasonably self-supporting.

In the years prior to those in dispute he experienced, so he said, some heavy losses for which no deduction was apparently claimed. From about 1965 he started to become reasonably successful in his gambling which after 1969 was oriented towards horse and greyhound racing. After his retirement he devoted approximately half his time to his gambling activities although, as he said in cross-examination, the amount of time varied from week to week being anything between 12 hours in some weeks to 40 hours in a week in which he had no personal commitments such as the Melbourne Cup week.

In 1983 the applicant suffered a heart attack brought on, he says, by the stress associated with gambling as well as smoking, wrong diet and insufficient exercise. On medical advice he has not thereafter regularly gone to race meetings. Immediately prior to suffering the heart attack he was incurring heavy losses. The applicant at no time owned a race horse, nor was a member of any racing syndicate, nor did he employ anyone to assist him in his betting activities. He had no business premises, used no computer to analyse results, subscribed to no betting information service, used no agents to place bets and almost all of his bets were placed with the on-course totalizator or the TAB. He did not bet on credit with any bookmaker or betting facility and when he bet with a bookmaker, it was not with any particular bookmaker. He deposed that he found the gambling activities pleasurable, that pleasure coming from his own efforts in seeing whether what he predicted would become successful. He kept, as I have already indicated, no record of the incidental expenses he incurred, being interested in how much he won or lost in a particular race rather than, by inference, his overall profit or loss from the activity. He kept no cash books, journals or other accounting records of his gambling activities save for the notebooks to which I will now refer.

The applicant kept notebooks of large pocket size, one notebook covering a period from one to two months. The night before or the morning of the race the applicant would, from the fields published in the newspaper, write, generally on a separate page of the notebook, for each race on which he intended to bet the names of each horse and their numbers. At the top of the page was written the date, the time of the race and initials such as ``S7'' or ``M7'' indicating the race to be the seventh race on the Sydney or Melbourne card respectively. In red ink he recorded the odds of the horses taken from various newspapers, especially the evening newspaper or the morning newspaper of the day of the race or both, and if a variance between the figures was apparent each of the figures was

ATC 4966

noted. The applicant recorded the bookmakers' odds on course and the win tote odds. The page showed as well the bets actually placed by him by amount and type of bet, e.g. for a win, a place, a double, a quinella, a trifecta etc. as well as the ultimate result of his betting and for the races of the day a cumulative plus or minus result.

By way of example on 9 December 1972 the applicant placed bets on 15 races, often making five or more bets on a race. On some races the applicant lost amounts of over $1,000 and in others won amounts. By the second last race of the day he was still down $936 but on the last race after a number of bets were made by him including a quinella, he ended up on the day $394 in front.

The applicant was questioned as to the system which he followed in the period in question. He said that he placed bets in accordance with a number of ``guiding principles'' which he designated as criteria developed by him over the years. First, he had regard to whether a horse had over its previous three runs been a ``shortener'', that is to say whether the odds had over the three preceding races shortened in respect of the horse. Another was whether the horse was a ``course shortener'', that is to say whether the odds were shorter with bookmakers than the average newspaper prices noted in his notebook. A third criterion was to ensure that if bets were placed on more than one horse a profit would be returned if any bet came home. A fourth was to bet on a favourite that had been beaten in its last three runs. The applicant would not bet on unimportant races, such as maiden races, where he could not get much assistance from a form guide.

However, while these principles were the guiding criteria, the decision what horse to back, how many horses to back and the quantum of bets was a matter of judgment and instinct. As the applicant said and this was not challenged:

``It is all haphazard. I mean there is no - I did not follow any real system, any hard and fast rules.''

It is on the basis of these facts that I am called upon to decide whether the net gambling wins of the applicant in the years in question are assessable income. That question, it is agreed depends upon the resolution of the question whether the applicant was in the relevant years carrying on a business of punting or gambling on races.

The parties were agreed that, but for one matter, my decision in
Evans v. F.C. of T. 89 ATC 4540 correctly states the applicable law, although counsel for the Commissioner sought to distinguish the present case from the facts of that case. I am therefore spared the task of setting out the principles which I consider to be applicable in resolving issues of the present kind. It suffices here to say that in my view each case must be decided by reference to its own facts and that there is no one factor decisive of whether a particular activity constitutes a business, that conclusion will be derived from a consideration of all of the relevant facts.

The one matter in respect of which both parties disagreed with the decision of Evans involved the contentious issue whether what I there referred to as ``mere punting'' is of its nature capable of being characterised as a business activity. In Evans I was prepared to assume that mere punting could constitute a business and decided that on the facts of that case the taxpayer was not carrying on a business. In reaching this conclusion I referred to a number of matters, none of which itself was determinative of the outcome but which collectively brought me to the conclusion that the applicant was not carrying on a business of punting.

Counsel for the applicant submitted that a punter who did no more than bet, no matter how often and no matter how much he bet and no matter whether he adopted a ``system'' and no matter how organised he was, could nevertheless never be found to be carrying on a business. He referred me to J.P. Hannan's A Treatise on the Principles of Income Taxation (Law Book Company) 1946 in which the learned author, after referring to a number of cases where bets were made by persons who in other capacities were actively identified with horse racing and where the amounts involved were held to be income, continued:

``In the case of a man who does not own or lease or train a racehorse and who is not a bookmaker, any gains made by betting are not considered to be assessable income even though the transactions are numerous and carried on over lengthy periods.''

ATC 4967

For this proposition the author cited
Graham v. Green (1925) 2 K.B. 37 where Rowlatt J. referred to a bet as involving a mere irrational agreement. His Lordship after dealing with the position of a bookmaker, the fruit of whose business is clearly assessable income went on to say at p. 42:

``Now we come to... the man who bets with the bookmaker... I do not think he could be said to organise his effort in the same way as a bookmaker organises his, for I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays today, and he plays tomorrow, and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But it does not seem that one can find, in that case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man, in the fair use of the English language, is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting.''

It was this passage, as I pointed out in Evans, which caused Mr O'Neill in Case K25,
78 ATC 243 to comment that Graham v. Green had decided that mere punting by its very nature could not amount to a business.

Counsel for the Commissioner submitted that the reference by Rowlatt J. to ``vocation'' made it clear that his Lordship was approaching the issue having in mind the concepts of Sch. D of the Income Tax Act 1918 (U.K.) rather than the more general question of whether the activity involved carrying on a business.

It is no doubt true that the issue that falls to be decided under Sch. D can colour the result of a particular case. The issue under Sch. D(1) of the Act of 1918 which arose in Graham v. Green was whether the betting wins were within the following words:

``(a) The annual profits or gains arising or accruing...

  • (ii) from any trade, profession, employment, or vocation, and

(b)... other annual profits or gains...''

As Bowen C.J. said in
F.C. of T. v. Harris 80 ATC 4238 at p. 4242 when considering an issue arising under sec. 25 and 26(e) of the Australian Act:

``The English cases, while containing observations which are useful on the nature of income generally, have to be used with caution because they depend in the main upon applying particular provisions of the English legislation which do not find a place in the Australian legislation.''

To accept the submission, is however, not to deny the usefulness of the United Kingdom cases as a guide to the general question of what is income, particularly when it is understood that Sch. D has been held to be confined to amounts that are income in ordinary concepts. However, it must clearly be accepted that Graham v. Green provides no binding authority and that it is more instructive to give closer attention to the decisions of the High Court particularly the decision of the Full High Court in
Martin v. F.C. of T. (1952-1953) 90 C.L.R. 470. In that case it was held that the taxpayer who in the period in question carried out both racing and betting transactions was not carrying on a business. The Full Court, Williams A.C.J., Kitto and Taylor JJ. clearly saw the matter argued before them as but one of fact. Their Honours said at p. 479:

``The onus, if the case is one in which onus assumes any importance, is on the appellant to satisfy the Court that the extent to which he indulged in betting and racing and breeding race horses was not so considerable and systematic and organised that it could be said to exceed the activities of a keen follower of the turf and amount to the carrying on of a business. But no question of onus appears to us really to arise. It is simply a question of the right conclusion to draw from the whole of the evidence... Webb J. held that the taxpayer was carrying on a business of racing and betting because of (1) the considerable amount of time spent by him in racing and betting operations; (2) the very large proportion of his assets and income applied by him for that purpose; and (3) the systematic methods employed by him which were, his Honour thought, really directed more to making profit than pursuing

ATC 4968

pleasure. With all respect to his Honour the evidence does not appear to us to justify these conclusions. In fact, the taxpayer frequented one racecourse and then only on ordinary racing days. If the number of bets he made appears at first sight to have been large, they do not seem to add up to more than about one bet on each race and therefore not to point to more than a normal propensity of racegoers who bet as a pastime.''

At p. 481 of the report, their Honours made reference to Graham v. Green in terms which suggest not that they regarded that case as deciding an issue of law, but rather that they saw it as deciding but an issue of fact. Their Honours said:

``In our opinion the present facts fall short of the facts which were insufficient to persuade Rowlatt J. in Graham v. Green that the taxpayer there was carrying on a vocation of betting. His Lordship said: `I think all you can say of that man, in the fair use of the English language, is that he is addicted to betting'.''

The report of the argument in Martin's case does not suggest that the question of whether mere gambling was capable of being income was ever argued. No doubt this was at least in part because the taxpayer in Martin also engaged in racing activities having his own horses. Further, as counsel for the applicant here submits, the earlier passages to which I referred in the judgment in Martin are directed not to the case of a mere punter but rather to the case of a person who bets, races and breeds racehorses. But while the passages which I have quoted can hardly stand as authority for any proposition concerning whether a mere punter can carry on a business they are nevertheless persuasive authority suggesting that it may indeed be possible.

If it be the case that gambling wins alone in the absence of any other activity to which those wins are incidental such as bookmaking, racing, training, stable ownership, etc. cannot be assessable income, it seems to me that that conclusion can be derived only from the nature of the activity itself rather than from any other matter.

It would, for example, seem impossible to imagine a taxpayer carrying on a business of buying lottery tickets. That persumably is because no matter how systematic a purchaser of lottery tickets may seek to be, no matter how frequent his bets or how large the sum he gambles, the odds will always be such that the outcome will predominantly depend upon chance. Yet the mere fact that the outcome of a particular activity may be dependent at least in part on chance will not negate a business activity being carried on. The outcome of a bookmaker's business must depend to some degree on chance yet it has always been regarded as a business. Of the bookmaker's business it can be said that the bookmaker has, by laying off his bets and averaging them in his dealings with the public, by ``balancing his book'', been able to reduce his odds to the point where there is sufficient skill to see the activity as systematic and businesslike being directed to a profit which it is hoped will eventuate.

The futures trader was also the subject of consideration by Rowlatt J. in Graham v. Green, where his Lordship at p. 41 said:

``The trade or vocation which has to do with difference in prices may be popularly spoken of as gambling, because there is no intention to accept or deliver the thing bought and sold. But the operations in those cases are operations in relation to the difference of prices of commodities, and there is an element of fecundity in them, and indeed those operations form the subject matter of a great deal of trade.''

See too
Cooper v. Stubbs (1925) 2 K.B. 753 and
Townsend v. Grundy (1933) 18 T.C. 140 as to the assessability of income from futures trading.

Notwithstanding what was said by Rowlatt J. as to the card player, it seems to me with respect that a person who played cards not for pleasure but with a view to profit might properly be said to carry on a business at least in cases where the game played depends to a substantial degree upon skill so that the player can, for example by using his ability to memorise cards, affect the outcome. A punter, particularly one betting upon the on-course totalizator or the TAB cannot affect the outcome of the race nor can he dictate the odds which he will receive. While it is true that to some extent a trader in futures cannot affect the outcome which is related to the price of a particular commodity and which may be

ATC 4969

affected by matters totally outside the control of the trader, at least the trader in futures has some impact on the profit to be derived in the sense of the price upon which he enters into the contract.

The punter stands somewhere in between the skilled player of cards in a game not totally dependent upon chance and the person buying lottery tickets. In favour of the activity being capable of being a business is that system, skill and organisation can all play a part in reducing although not eliminating the element of chance, especially where the punter bets with a bookmaker rather than on the on-course totalizator or TAB. In favour of mere punting being inherently incapable of being a business, is, that at the end of the day no matter how informed a punter may be and no matter how systematic he may seek to make his endeavours, there are so many chance factors intervening over which he has no control, that chance probably remains the predominant factor in the outcome. Where chance ultimately predominates there is something unusual about speaking of a profit motive yet it seems quite clear that the motive of making a profit generally forms an essential element in the factual matrix which leads to the conclusion that a particular activity is a business. This is not to suggest that a punter does not hope to win, clearly he does but one more readily refers to the punter's motive as ``to be to win'' rather than to make a profit.

Another factor which tends to work against seeing punting as a business is that it is an activity which in the main it is normal to regard as a hobby or a pastime. However, it is true, as counsel for the Commissioner submits, that there are many pastimes which can, dependent upon the circumstances, be viewed as business activities. For example, while to most, a game of football is a mere pastime, it is clearly not so in the case of the professional footballer.

In ordinary usage we recognise the possibility of mere punting being a business when we speak of the ``professional punter'' meaning thereby one of whom it could be said that placing bets is his vocation and I am inclined, particularly with the growth of modern technology such as computers, to think that there may be cases today, even if there were not at the time when Rowlatt J. decided Graham v. Green, where the activity of betting has become so organised, systematic and businesslike and is carried on with such dedication to potential profit that the man in the street would recognise that activity to be a business. That being so, I propose to proceed on the assumption that mere punting may constitute a business although the intrusion of chance into the activity as a predominant ingredient at least in the outcome of the race itself does suggest to me that it will be a rare case where a court will conclude that the activity is a business. However, it is not necessary for me in the present case to reach a final conclusion on the matter any more than it was in Evans, for in my opinion even if the activities of betting are inherently capable in some circumstances of constituting a business, the facts of the present case do not reveal the applicant to be carrying on any business at all.

The present case is not identical to Evans; there are a number of factual differences and a number of factual similarities.

In Evans, as in the present case, there was a large volume of bets made regularly over a considerable number of years and very heavy winnings resulting from them. The same is true of the present case. Those factors alone, however, do not of themselves require the conclusion that the taxpayer is carrying on business. As I said in Evans at p. 4557:

``Volume of punting and size of bets of themselves are not, in my view, determinative of the outcome although neither can be said to be irrelevant.''

In Evans, as in the present case, the taxpayer had no allocated fund of capital with which to bet; in Evans, as here, the gambling wins substantially financed the lifestyle of the taxpayer although it must be conceded that Mr Evans had other business interests which occupied a substantial part of his time whereas the applicant in the present case was retired. A not insignificant matter is that in both cases the betting was substantially through the totalizator rather than with bookmakers. While a punter betting on the on-course totalizator can in the period leading up to the close of betting see the trend of the odds on a particular horse, the precise dividend to be paid is never known until it is announced after the race is concluded. That dividend is dependent upon the total of the bets placed on the race (``the pool'') less the share which the State Government appropriates to itself. It seems to me that a professional punter

ATC 4970

if such a person can exist, will place his bets in such a way that he knows or can at least in part influence the odds he can get. That cannot be said of a person betting on the TAB or on-course totalizator.

Both Mr Evans and the present applicant pursued the path of betting on doubles, trifectas and quinellas where the rewards may be higher, the odds greater and the chances correspondingly worse. I should say however, that in the present case the evidence suggested that the trifecta and quinella bets were so placed that a number of different combinations of bets were made. I do not think however that this circumstance of itself stamps bets of this kind placed through the on-course totalizator with the systematic businesslike character which in my view is an essential ingredient in the carrying on of a business.

For completeness it will be noted that neither in Evans nor in the present case did the taxpayer have business premises, employ staff to lay bets or agents to place them, attempt to hedge bets or use computers or similar equipment to calculate odds. Neither taxpayer subscribed to tipping services or had access to sources of information from racing circles.

The differences upon which the Commissioner seized must now be considered. While it is the cumulative effect of all the facts that matters rather than the impact of any particular circumstance in determining whether an activity amounts to a business, it is nevertheless useful to comment individually on the matters raised.

First it was submitted that in the present case the taxpayer had a ``system'' whereas in Evans there was lacking the system and organisation essential to characterise an activity as a business. While the criteria adopted by the applicant in the present case had some logical basis (for example if the odds shortened it may well be that those ``in the know'' have put money on the particular horse) the evidence of the applicant which I accept is that his activity was in truth haphazard and that he in fact followed no real system nor any hard and fast rules. I accept at the end of the day that judgement and instinct both played a part in the applicant's selection of horses on which to bet as well as in the amount and type of bet that he placed. The acceptance of that evidence itself is sufficient to negate the concept of system and organisation which is the hallmark of a business.

I should however point out that merely because a taxpayer follows a betting system will not require the conclusion that his activity constitutes a business. In Martin the Full Court said at p. 481:

``So it appears that the taxpayer, like many other persons who find pleasure in betting and even more pleasure in winning, used a system which he believed would bring him out on the credit side in the long run, that he sometimes got a friend who accompanied him to the races to lay his bets for him when he was himself occupied in the saddling paddock, and that he engaged trainers from time to time to train his racehorses. But we do not consider this evidence to be symptomatic of a business of betting or racing. It illustrates the normal and usual activities and nothing more of persons who derive pleasure from betting on the racecourse and racing under their own colours.''

The second matter of distinction submitted by the Commissioner was the fact that the taxpayer kept books which detailed his betting activities. At first blush this is a matter which could point to the activity being a business. It is however necessary to look at the use to which the taxpayer put the books to determine the purpose for which he kept them. The evidence of the applicant was that he had initially used lists of horses published in the newspaper on which to make notation of odds, bets and the like but found that the notebooks provided greater space. The field as published in the newspaper was, he said, very closely typed and the applicant found himself making mistakes through that. Hence he commenced to write down his own list of horses in the notebooks. Nevertheless, over the years, as the applicant agreed, the notebooks did provide somewhat of an encyclopaedia of racing results in Sydney and other courses, in respect of the races on which the applicant bet so that he was able to avail himself of his own records concerning previous runs, and look up variations of odds in cases where the form guides in the newspaper did not publish this information. However, this was not the purpose of the applicant in keeping the records nor did the applicant record information on the notebooks or keep the notebooks to enable him to have a yearly record

ATC 4971

of the net outcome of his betting activity. It is certainly true that the books enabled the calculation of net winnings and losses over the period but the applicant apparently made no attempt to do more than calculate the outcome of a particular day. Nor in keeping the records did he make a note of the incidental expenditure such as fares, meals, entrance charges and the like with the result of course, that that was a matter in which initially he was in dispute with the Commissioner. I find that the purpose for which the taxpayer kept the books was not to provide a financial record of his activity and so finding, do not place a great deal of weight upon the keeping of them.

The third matter to which the Commissioner referred was that the applicant in the present case had no other activity, being retired, whereas Mr Evans was involved on a day to day basis with other activities in a laundromat and later as owner of a hotel. That is not an irrelevant matter. However, in the present case it would seem that the applicant retired from the Public Service having built up substantial assets upon which to live. In part it would seem that these assets came as a result of his lottery win and gambling wins as well, presumably, as from some savings. Being single with no dependants and not owning a motor car his needs were apparently relatively modest. It is however not quite correct to say that his gambling activities became a full-time vocation. He had, as he deposed, and as can be gleaned from his income tax returns, considerable investments both income-bearing and rental and he had to spend some of his time monitoring these investments which earned him quite a considerable income. Nevertheless it can be said that he did spend a considerable time on his betting activities and somewhat more, it would seem, than Mr Evans. But a pastime does not turn into a business merely because the person who engages in it has retired from a previous full-time profession. I am of the view that in the present case the activity remained a pastime, notwithstanding that it was a pastime to which the applicant devoted considerable attention.

The final matter of distinction was said to be the fact that the applicant in the present case wrote down the names of the horses in advance of the race meetings, calculating the odds and formulating a plan upon which horse he was to bet. This may well be but another way of suggesting that the applicant in the present case had a system. Not all of what was submitted can be conceded as a matter of fact. As I have already pointed out the decision on which horse to bet was one that was made haphazardly and with regard to no hard and fast rules. A bet placed may have been no more than the result of an impulse at the moment. In the circumstances of the present case, I am of the view that the activity of the applicant was a pastime in which he found pleasure in winning and that the way in which he went about the activity was one which he believed would bring him out on the credit side, but that at the end of the day the way in which he went about his activity was not greatly different from the way other persons who bet at the racecourse for pleasure go about it.

When all the facts are examined therefore it seems to me that they fall short of showing that the taxpayer carried on a business. While the applicant clearly bet much and often, to borrow from the language of the High Court in Martin his activities were not so considerable and systematic and organised that they could be said to exceed those of a keen follower of the turf.

It follows that I would allow the applicant's appeals in all years.

Having regard to my decision it is strictly unnecessary for me to consider whether the Commissioner erred in law in the way in which the additional tax under sec. 226 was imposed. I should however mention that it appeared from the evidence of Mr Flynn, now Assistant Deputy Commissioner at the Chatswood Office but at the time at which the decision to remit penalties under sec. 226 was made, Director of Compliance at the Sydney Office, that he placed considerable reliance upon Taxation Ruling IT 2012 which was tendered in evidence before me. In that Ruling there is set out guidelines for the exercise of the discretion under sec. 226(3) to remit the statutory penalty imposed by sec. 226(2). It was not suggested that it was inappropriate for Mr Flynn to have regard to this Ruling.

The Ruling suggests two principal components for the ultimate penalty to be calculated, these being a component which in effect takes into account the time in which the Commissioner has been out of pocket by virtue of the fact that the correct amount of tax was

ATC 4972

not paid and a culpability factor reflecting the degree of seriousness of the offence and to a lesser extent the degree of co-operation with departmental enquiries. The Ruling suggests that where there has been previous tax evasion the penalty for culpability should in effect be increased. The Ruling makes the following comment (in note 7):

``For example, a situation where substantial omissions, considered deliberate, are established and the taxpayer has been the subject of two previous investigations within the past 10 years, substantial understatements having been found in all years examined, would obviously attract a penalty in the upper end of the 10 percent to 50 percent range. A husband/wife check case detected and penalised for the second time would also warrant additional penalty under this heading but possibly in the middle range of this category.''

It appears that the applicant had not for some period of years lodged returns. The failure to lodge returns on time was apparently discovered as a result of an interest check audit. Returns were in due course lodged and assessments made but at the time the circumstances were seen such as not to warrant the imposition of any additional tax under sec. 226(2). These facts however Mr Flynn apparently saw as involving evasion by the applicant and as warranting the imposition of an additional 5% penalty.

It seems to me, and it was virtually conceded by counsel for the Commissioner, that Mr Flynn had mistakenly formed the view that there was in respect of the imposition of the additional 5% penalty an error in that the circumstances did not give rise to any previous tax evasion of the kind referred to in the Ruling. This error having been exposed it is obvious that the imposition of additional tax could not have stood and that the assessment would have needed to be remitted to the Commissioner to give proper consideration to the question of remission.

The quantum of penalties in the circumstances of the present case might also well be seen to have been so unreasonable as necessarily to have involved an error of law requiring the question of remission of penalties to be reconsidered. There seems no doubt that Mr Flynn in making the decision to remit realised that the question of the assessability of gambling wins was a matter of considerable controversy. Indeed in the submission relating to remission reference was made to the ``contentious nature of the adjustments''.

The fact of the matter is that the state of the law at the time the remission of additional tax was considered was such that no court in Australia had ever held that the proceeds of punting activities without more constituted assessable income. In such circumstances it is hard to see how Mr Flynn could properly have regarded the failure to include the amounts in the return as involving any significant element of culpability at all. However, ultimately it is unnecessary to explore that matter further, for once the amounts in question are excluded from assessable income there can then have been no relevant omission from the return of any assessable income so that the whole of the penalty imposed under sec. 226(2) will have been wrongly imposed. Accordingly the appeals will be allowed and the Commissioner must pay the applicant's cost of them.

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