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Ruling

Subject: Am I in business - Gambling

Question 1

Are the proceeds you have received, and will receive, from betting and gambling assessable?

Answer

No.

Question 2

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

Answer

No.

Question 3

Is the syndicate a partnership for tax purposes?

Answer

No.

Question 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)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2008

Relevant facts and circumstances

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

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

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

The syndicate will monitor and summarise its progress via the use of commercially available spreadsheet software.

New members might be added to the betting syndicate.

There is no intention to seek bank financing to fund the investments of the syndicate.

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

Each syndicate member will spend on average less than 10 hours per week on the betting and gaming activities of the syndicate. This does not include time spent viewing via television or listening via radio to the events bet on.

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

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 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 Subsection 11-15(2).

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

Reasons for decision

Questions 1, 2 and 3

Summary

Having regard to the criteria for determining whether a person is carrying on a business of gambling, it is considered that you are not carrying on such a business. Therefore, any proceeds you receive from gambling through the syndicate are not considered assessable income and any expenses are not deductible.

Also, the syndicate does not meet the definition of a partnership for tax purposes.

Detailed reasoning

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, 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 employing 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 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.

You have stated that the syndicate intends on betting 7 days per week and there may be several thousand individual bets per week.

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.

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".

It is your intention to make a profit from your betting activities.

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…

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 horse racing and other sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (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.

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:

· an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

· a limited partnership.

As the syndicate will not be carrying on a business, will not be in receipt of ordinary or statutory income, and 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

Summary

The syndicate will not be entitled to input tax credits in respect of gambling acquisitions as it will not be carrying on an enterprise.

Detailed reasoning

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:

· the entity acquires anything solely or partly for a creditable purpose; and

· the supply of the thing to the entity is a taxable supply; and

· the entity provides or is liable to provide consideration for the supply, and

· the entity is registered or required to be registered for GST.

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:

· in the form of a business

· in the form of an adventure or concern in the nature of trade

The meaning of enterprise is considered in:

· Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1), and

· Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of entity and enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6).

Will the activities conducted by the syndicate be 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.

TAXATION RULING IT 2655 INCOME TAX: BETTING AND GAMBLING - WHETHER TAXPAYER CARRYING ON BUSINESS OF BETTING OR GAMBLING discusses the Commissioner's view on whether a taxpayer with no businesslike connection with the racing industry (e.g. 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:

· whether the gambling/betting is conducted in a systematic, organised and businesslike way;

· the volume and size of the gambling activities;

· whether the gambling/betting is related to or part of other activities of a businesslike character e.g. breeding horses;

· whether the gambling/betting activity is principally for profit or principally for pleasure;

· whether the form of betting chosen is likely to reward skill and judgement or depends purely on chance;

· whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime

(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 does not rent an office or employ staff.

Although the syndicate intends to use a computer program to sort, compare and analyse the available data to gamble in an attempt to predict favourable outcomes, there is still a high element of chance involved and the overall gains are dependant on chance.

While the syndicate's activities have some elements of being systematic and organised, mainly due to the computer program it will use, the use of a computer program alone will not mean that there is a business.

Additionally, the syndicate will not take the step of obtaining insider information, which would lessen the element of chance.

(ii) The volume and size of the gambling activities

The volume and size of bets are significant in most forms of gambling.

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

However, the Court in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 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 horses

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.

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

(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".

The syndicate is hopeful of achieving surpluses from betting.

(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:

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…

Although the syndicate intends to use a computer program to sort, compare and analyse the available data in an attempt to predict favourable outcomes, it is considered that the outcomes of the gambling will be based on chance rather than 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 v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (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.

On the basis of these factors taken in combination, we consider that the syndicate will not be carrying on an activity in the form of a business of betting or gambling. Hence, these activities will not be an enterprise under paragraph 9-20(1)(a) of the GST Act.

Will the activities conducted by the syndicate be an adventure or concern in the nature of trade?

Paragraph 234 of MT 2006/1 discusses the meaning of adventure or concern in the nature of trade. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

The activities of the syndicate will not be an isolated or one-off transaction. Additionally, these activities will not have the characteristics of a business deal. Therefore, the activities of the syndicate will not be an adventure or concern in the nature of trade. Hence, these activities will not be an enterprise under paragraph 9-20(1)(b) of the GST Act.

The activities of the syndicate will not be an enterprise under any other paragraph of subsection 9-20(1) of the GST Act. The syndicate's gambling and betting activities will be a private recreational pursuit or hobby.

Consequently, the syndicate will not make acquisitions in carrying on an enterprise. Hence, the syndicate will not make acquisitions for a creditable purpose, and therefore, the requirement of paragraph 11-5(a) of the GST Act will not be satisfied. Hence, the syndicate will not make creditable acquisitions as not all of the requirements of section 11-5 of the GST Act will be satisfied. Therefore, the syndicate will not be entitled to input tax credits in respect of betting and gambling acquisitions.

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