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Edited version of private ruling

Authorisation Number: 1011607246150

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Subject: Am I in business - Gambling

1. Is the income you will receive from betting and gambling assessable?

No.

2. Can you claim deductions for expenses relating to your betting and gambling activities?

No.

3. Is the syndicate a partnership for tax purposes?

No.

4. Is the syndicate entitled to input tax credits in respect of betting and gambling acquisitions pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

No.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You and other members wish to commence a betting syndicate.

There is no formal agreement in place between syndicate members, nor is a formal agreement contemplated. No formal business plan, nor projected income, exists.

The syndicate intends to use a computer program to sort, compare and analyse the available data to gamble in an attempt to predict probable outcomes.

The primary focus of the syndicate will be betting and gambling on both local and overseas sporting events.

The syndicate intends to bet through totalisators and betting exchanges, although the use of traditional bookmakers may be considered in the future.

All funding, operational and administrative support will be provided by the members. The syndicate will have no employees, although it is expected to need to contract various people or companies for computer programming and operational resources on arm's length terms in the future, for example, internet provision and data providers.

The syndicate's betting and gambling activities will not be undertaken in association with any other related activities such as horse breeding or training.

The syndicate does not have access to insider information such as information from jockeys or trainers. Information will only be sourced from form guides, race results and other information which is available to the general public.

The syndicate intends to bet seven days a week. Several thousand individual bets may occur each week.

The syndicate will monitor progress via an internal program, which is being developed by its members as part of the overall system development. It is envisaged that these results would then be transferred to a generic accounting software package and used to consolidate the relevant information.

New members might be added to the betting syndicate should the syndicate continuously lose the available funding that has been allocated and provided for betting by members. The percentage new members receive will need to be agreed to by all members and must add up to 100%. This will not be formally documented but understood by all members.

Little research, advice and assistance has been conducted or sought prior to establishing the syndicate.

The syndicate will hold bank accounts to accommodate the betting transactions in syndicate members' personal names. The syndicate may also be required to hold accounts with overseas totalisator or betting exchanges in personal names.

The syndicate expects that several hundred thousand dollars may be required to fund the cash flow of its activities.

There is no intention to seek bank financing to fund the investment.

The software program will generate the recommended bets however, the syndicate members can manually vary the amounts bet on any particular transaction.

The computerised setup of the syndicate will be able to be accessed by any member from their own home computer via the internet.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Paragraph 118-37(1)(c).

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1936 Section 6(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(a).

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(b).

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Question 1, 2 and 3

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Betting and gambling wins are not assessable under section 6-5 of the ITAA 1997 and losses are not deductible under section 8-1 of the ITAA 1997, unless you are carrying on a business of betting or gambling.

Income Tax Ruling IT 2655 discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. This ruling states at paragraph 7:

Ultimately each case will depend on its own facts. There is no Australian case in which the winnings of a mere punter have been held to be assessable (or the losses deductible). As Hill J stated in Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (Babka's case), although mere punting may constitute a business, the intrusion of chance into the activity as a predominant ingredient will generally preclude such a finding. If a taxpayer is involved in other business activities in the racing industry, it will be more likely that betting activities are of a business nature.

The court in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich's case), identified the following criteria for determining whether or not a person is in the business of gambling. These criteria are:

1. Whether the betting is conducted in a systematic, organised and businesslike way

Courts have held that to determine this issue, it is necessary to examine the manner in which the gambling activities are conducted. For example, did the taxpayer rent an office, employ staff, use a database to calculate odds, take steps to lessen and exclude the element of chance and maintain adequate records?

You won't be renting an office or employ staff. You will use a computer programme to analyse data and you intend to keep results and relevant records using an accounting software package.

2. The scale of the gambling activities

The volume and size of bets are significant in most forms of gambling. However, the Court in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 (Evans case) found that scale itself is not determinative of the outcome.

The taxpayer in Brajkovich's case did not carry on a business of gambling. The taxpayer bet over $950,000 in three years and was involved in horse training.

3. Whether betting is related to or part of other activities of a businesslike character

Generally where a taxpayer is carrying on a business of betting or gambling, the betting transactions are connected with some other activity which itself constitutes a business carried on by the taxpayer, for example, breeding or training horses (Prince v. FC of T (1959) 12 ATD 45; (1959) 7 AITR 505). The taxpayer in that case conducted a business as a bookmaker and also had interests in a horse training businesses.

In your case, you won't have any other business activity related to your betting and gambling activity.

4. Whether the gambling activity is principally for profit or principally for pleasure?

Issues such as attending race meetings and having a passion for gambling need to be considered when considering if the activities are conducted for profit or pleasure.

In Brajkovich's case the Court said "the gambler who seeks to demonstrate that he is a businessman has more to show than those who engage in more conventionally 'commercial' activities".

5. Whether the form of betting chosen is likely to reward skill and judgement depends purely on chance

In Brajkovich's case the Court said:

In your case, the proposed computer software program will generate the recommended bets. However, the members can vary these recommendations. Although you hope the program will contain an element of objectivity into the betting activities, it is considered that the gambling and betting is based on chance rather than a specific skill.

6. Whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime

Betting on sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka's case it was held:

In Babka's case, the taxpayer's activities were not so considerable, systematic and organised that they could be said to exceed those of a keen follower of the turf and that the element of chance as a dominant ingredient will usually preclude such a finding.

We have determined in your circumstances that you will not be carrying on a business of gambling. Although the syndicate will have a computer program, there is still a high element of chance involved. By using your techniques to choose which horses and events to bet on, you may have reduced the odds on your gambling activities, however, your overall gains will be dependant on chance rather than skill.

The amount of future time and effort involved in your betting and gambling, do not turn your activities into a business. While your proposed activities will have some elements of being systematic and organised, mainly due to the software package you intend to use, the use of a software package alone does not lend itself to the existence of a business. As in Babka's case your activities can not be said to exceed that of a keen follower of sports.

As you will not be carrying on a business of betting or gambling, the winnings you will receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 and the expenses related to the activity will not deductible under section 8-1 of the ITAA 1997.

Paragraph 118-37(1)(c) of the ITAA 1997 provides that a capital gain or loss relating to gambling is disregarded.

According to section 995-1 of the ITAA 1997 a partnership means:

As the syndicate will not be carrying on a business and will not be in receipt of ordinary or statutory income, will not be a limited partnership, there will not be a partnership for tax purposes.

No other provision of the ITAA 1997 applies to your betting and gambling activities. As such your betting and gambling winnings will not be assessable and the associated losses will not be allowable deductions.

Question 4

Section 11-20 of the GST Act provides that an entity is entitled to input tax credits for any creditable acquisitions that it makes.

Under section 11-5 of the GST Act, an entity makes a creditable acquisition if:

All paragraphs of section 11-5 of the GST Act must be satisfied in an acquisition for it to be considered a creditable acquisition.

Subsection 11-15(1) of the GST Act provides that a thing is acquired for a creditable purpose to the extent that it is acquired in carrying on an enterprise.

The definition of the term enterprise is defined in section 9-20 of the GST Act and includes (amongst other things) an activity or series of activities, done:

However, paragraphs 9-20(2)(a) and 9-20(2)(b) of the GST Act exclude from an enterprise, among others:

The meaning of enterprise is also considered in:

Are the activities conducted by the syndicate in the form of a business?

Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The definition of 'business' in section 195-1 of the GST Act is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. Therefore, an entity that is carrying on a business for income tax purposes will be carrying an enterprise for GST purposes.

Income Taxation Ruling IT 2655 discusses the Commissioner's view on whether a taxpayer with no businesslike connection with the racing industry (for example, as a trainer or breeder of horses) was carrying on a business of betting and gambling on races.

The principal criteria for determining whether gambling constitutes a business include the following:

(i) Whether the gambling/betting is conducted in a systematic, organised and businesslike way

Courts have held that to determine this issue, it is necessary to examine the manner in which the gambling activities are conducted. For example, did the taxpayer rent an office, employ staff, use a database to calculate odds, take steps to lessen and exclude the element of chance and maintain adequate records?

In this case, the syndicate do not rent an office or employ staff. The syndicate uses a computer programme to analyse data and intend to keep results and relevant records using an accounting software package.

Although the syndicate have a computer program to analyse data, there is still a high element of chance involved. By using the syndicate's techniques to choose which horses and events to bet on, the syndicate may reduce the odds on their gambling activities, however, their overall gains are dependant on chance rather than skill.

The syndicate intends to keep results and relevant records using a standard software package and will invest significant time and money into their activities. However these factors do not amount to the carrying on a business.

While the syndicate's activities have some elements of being systematic and organised, mainly due to the software package they use, the use of a software package alone does not lend itself to the existence of a business.

(ii) The volume and size of the gambling activities

The volume and size of bets are significant in most forms of gambling. However, the Court in Evans case found that scale itself is not determinative of the outcome.

(iii) Whether the gambling/betting is related to or part of other activities of a businesslike character e.g. breeding horse

Generally, where a taxpayer is carrying on a business of betting or gambling, the betting transactions are connected with some other activity which itself constitutes a business carried on by the taxpayer, for example, breeding or training horses.

In this case, the syndicate has no other business activity related to their betting and gambling activity.

(iv) Whether the gambling/betting activity is principally for profit or principally for pleasure

Issues such as attending race meetings and having a passion for gambling need to be considered when considering if the activities are conducted for profit or pleasure.

In Brajkovich's case the Court said "the gambler who seeks to demonstrate that he is a businessman has more to show than those who engage in more conventionally 'commercial' activities".

(v) Whether the form of betting chosen is likely to reward skill and judgement or depends purely on chance

In Brajkovich's case the Court said:

In this case, the computer software program generates the recommended bets. However, the members can vary these recommendations. It is considered that the gambling and betting is based on chance rather than a specific skill.

(vi) Whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime

Betting on horseracing and other sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka's case it was held:

In Babka's case, the taxpayer's activities were not so considerable, systematic and organised that they could be said to exceed those of a keen follower of the turf and that the element of chance as a dominant ingredient will usually preclude such a finding.

On the basis of these factors taken in combination, we consider that the syndicate is not carrying on a business of betting or gambling. In consequence of this decision and as no other paragraphs within section 9-20(1) of the GST Act are satisfied, the syndicate's gambling and betting activities does not represent an enterprise being carried on, but represents a private recreational pursuit or hobby under subsection 9-20(2) of the GST Act.

Consequently, the syndicate will not be entitled to claim input tax credits for the gambling and betting activities as an entity must satisfy all the elements of section 11-5 for their creditable acquisitions.


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