Edited version of private ruling

Authorisation Number: 1011718546736

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Ruling

Subject: Am I in business - gambling

Questions:

1. As a member of a betting syndicate, is the income you receive from betting assessable?

Answer: No.

2. Can you claim deductions for expenses relating to betting activities as a member of a syndicate?

Answer: No.

3. Are the commissions you receive from the betting syndicate assessable income?

Answer: Yes.

4. Can you claim deductions for a portion of the expenses relating to the services you provide to a betting syndicate?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You commenced betting a number of years ago.

Before commencing the proposed activity you worked in the betting industry. After leaving the betting industry you had undertaken betting activities on your own. You had referred to a number of publications and online websites to obtain statistical information in relation to the activity.

You and a number of people formed a syndicate and place bets on sporting events in Australia and around the world via a number of online betting companies.

You did not seek advice before starting this activity.

The members of the betting syndicate are made up of friends and the general public.

To be a member of the syndicate each member is required to purchases one unit or a number of units in the syndicate.

You have invested your own funds and expect the other members of the syndicate to contribute.

You carry on this activity at home in your study and use a computer to access online betting sites.

You do not hold any qualification in relation to this activity.

You do not have a business plan as you believe that using the results from your previous wagers over past years you can optimise the win rate over all sports.

You believe the activity should be profitable.

You do not use any systems or models when placing the bets for the syndicate.

You do not seek any advice before placing a bet.

Your decision to place bets for the syndicate is based on your own judgement and the odds in the market place.

You will place a large number of bets per year and the average amount for each bet is small.

The syndicate expects to win a small percentage of the turnover placed in bets.

You do not employ anybody in connection with this activity.

You have no business connection to any persons, sporting teams or entities involved in sport.

Currently, you do not advertise the syndicate activities.

You spend a large number of hours a week on this activity and do not undertake any other income earning activity.

You will keep a spread sheet of all betting transactions, bank statements of returns and commissions received and documentation in regards investment agreements with members of the syndicate.

You will undertake the following activities on behalf of the members of the syndicate:

· management and investment

· create a data base and record the required entries into the data base

· form analysis

· statistical analysis

· research online and other related reading

· placing bets.

The syndicate has agreed to pay you a commission based on the overall profit returned on the betting during a period of the income year.

No other fees or charges will be levied on the syndicate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

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

Reasons for decision

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.

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.

Taxation 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, 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.

Three federal court cases known as Brajkovich v. Federal Commissioner of Taxation 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich's case), Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922 (Evan's case) and Babka v. Federal Commissioner of Taxation 89 ATC 4963; (1989) 20 ATR 1251 (Babka's case) relate to the issue of whether a taxpayer was carrying on a business of betting or gambling

The court in 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?

2. The scale of the gambling activities

The volume and size of bets are significant in most forms of gambling. However, the Court in Evan's 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) 7 AITR 505; 12 ATD 45). The taxpayer in that case conducted a business as a bookmaker and also had interests in a horse training businesses.

4. Whether the gambling activity is principally for profit or principally for 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".

A taxpayer does not need to have a profit making intention. Consideration is given to the time spent on racing and betting operations, the proportion of assets and income applied, and the systematic methods employed.

The court in Babka's case proceeded on the assumption that a mere punter may be carrying on a business but found the taxpayer lacked the concept of conducting business in a systematic, organised and businesslike way because:

· the taxpayer did not follow any betting system although he placed bets in accordance with several guiding principles;

· judgment and instinct which both played a part in the taxpayer's selection of horses on which to bet as well as in his choice of the amount and type of bet placed was enough to negate the concepts of system and organisation;

· the intrusion of chance into the activity as a predominant ingredient will generally preclude finding mere punting to constitute a business.

5. 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:

Gambling which involves a significant element of skill, for example a professional golfer's betting on himself, is more likely to have tax consequences than gambling on merely random events. It is difficult to imagine how people in the latter category could be regarded as in a gambling business. Particularly this is so where the house takes a percentage, so that the overall result is necessarily a continual diminution of the collective funds of the customers. Although many roulette players sometimes earn substantial sums by their efforts, it is hard to see how one could characterise as a business playing a game in which the results are (or should be) purely random and in which there is a high probability that each player will lose in the long run…

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

Betting on horse racing 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:

A taxpayer who did no more than bet could never be regarded as carrying on a business, regardless of the frequency, scale or system-based nature of the betting. A pastime does not turn into a business merely because a person devotes considerable time to it and has retired from a previous full time profession.

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.

Applying the criteria to your circumstances

We have determined in your circumstances that you or the syndicate are not in the business of gambling. We have based our decision on the indicators from IT 2655 and the court cases noted above. Currently you do not rent an office or employ any staff in relation to this activity. While the syndicate's proposed activities will have some elements of being systematic and organised, mainly due to the keeping of records, using a data base, daily research and placing bets for the syndicate with online betting agencies, these factors alone do not lend itself to the existence of a business. As in Babka's case your or the syndicate activities can not be said to exceed that of a keen follower of sports.

The scale of your betting activity when compared to Brajkovich's case is considerable. However, as noted in Evan's case this is not determinative as to whether a business being carried on. You have not shown that your betting activity is related to or part of any other business activity.

You do not use any system or models or seek advice before placing a bet as you believe that your previous knowledge, research and consideration of the odds in the market place may have reduced the odds for the syndicate in relation to the betting activities. However, it does not allow you to have any control over the way that other gamblers place their bets in the market to form the odds or how team changes and other information may affect the market. Ultimately yours and the syndicates winnings or losses in placing any one bet on a sporting event are dependant on chance rather than a specific skill.

Therefore, any winnings you or the syndicate receive in relation to the betting activity are not assessable under section 6-5 of the ITAA 1997 and any expenses related to the activity will not be deductible under section 8-1 of the ITAA 1997.

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

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

Services provided to the syndicate

Based on the information you have provided in relation to the services and the amount of your future time and effort involved in providing those services to the syndicate, it is considered that any commissions received as a result of providing those services is assessable income under section 6-5 of the ITAA 1997. Therefore, the expenses related to providing those services to the syndicate will be deductible under section 8-1 of the ITAA 1997 subject to apportionment.

Apportionment of deductible expenses
You have two roles in relation to the betting activity, one as a member of the syndicate and the other of providing services to the syndicate. Any expenses in relation to the betting activity have to be apportioned into deductible and non-deductible parts. The inclusion of the words 'to the extent' in section 8-1 of the ITAA 1997 implies that the apportionment of expenses is contemplated. The general requirement when apportioning expenditure is to assign a percentage to represent the deductible part of a composite expenditure.

For example you cannot claim deductions for expenses to the extent to which they relate to winning from the syndicate as these are private in nature. However, the expenditure relating to the services provided to the syndicate are deductible.

There is no universally accepted formula that can be applied as long as apportionment is reasonable in the circumstances and there is some evidence of its determination.

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