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Ruling

Subject: Offsetting gambling loses against other income

Question 1

Are you in the business of gambling?

Answer

No.

Question 2

Can you offset the loss from your gambling activities against other income?

Answer

No.

This ruling applies for the following periods:

Yeah ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have been a social gambler at casinos and clubs since the 1980s.

You were casually employed, however you could only work a few hours per week due to ongoing health issues.

After a severe health incident you were hospitalised and underwent a lengthy exercise rehabilitation programme. After this incident you have had difficulty finding work.

After you could not find work you sold your place of residence and lived off the interest income.

Due to economic reasons and the fact that you could not find work, you decided to use the money from the sale of your house to gamble. You also withdrew funds from your credit card to use in your gambling activities.

Your general plan was to make a living from gambling by following a particular gambling method, who generally returned a profit from gambling.

The research you conducted shows that poker machines should have a better return than tables and the Australian Lotto, and that the state Government states that poker machines should return at least 20% to players. Therefore you restricted your gambling activities to poker machines and roulette tables.

During the financial year you lost a large amount of money while conducting your gambling activities.

Due to your losses and the fact that you were unable to find work, you are decreasing your gambling activity back to a social level.

You are a member of various casino's and clubs.

You believe that your gabling activities are a business.

You spend between 40 and 50 hours per week on your gambling activities.

You have kept records of bank statements which list withdrawal of funds used in your gambling activity, and have also kept receipts from gambling venues.

You do not employ staff or have a home office from which you conduct your gambling activities.

You do not participate in online gambling activities.

You do not participate in tournaments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5, and

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

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. The ruling states that ultimately each case will depend on its own facts. However there is no Australian case in which the winnings of a mere punter have been held to be assessable. Although mere punting may constitute a business, the intrusion of chance into the activity as a predominant ingredient will generally preclude such a finding.

There have been numerous Federal Court cases relating to the issue of whether a taxpayer was carrying on a business of betting or gambling. However the Court in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich's case), identified the principal criteria for determining whether or not a person is in the business of gambling. Although in this case the taxpayer was betting on horse races and games of cards, the principles established in the case can be applied to your circumstances.

The principal criteria for determining whether or not a person is in the business of gambling are:

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

· the scale of the gambling activities

· whether betting is related to or part of other activities of a businesslike character

· is the gambling activity 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, and

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

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, whether the taxpayer rents an office, employs staff, uses a database to calculate odds, takes steps to lessen and exclude the element of chance, maintains adequate records, and whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business.

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.

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.

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 v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (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, and

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

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…

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

Gambling 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 do not consider that your gambling activity is conducted in a systematic, organised and businesslike way.

You do not rent an office or employ staff in relation to this activity.

While you have a general plan to follow a particular gambling method, this factor alone does not indicate a systematic and organised activity that lends itself to the existence of a business.

You do not maintain adequate records and carry on your activity in a similar manner to that of ordinary trade in that line of business.

You do not take steps to lessen and exclude the element of chance, and ultimately your winnings or losses in your gambling activity are dependant on chance rather than a specific skill or judgement. This intrusion of chance as a predominant ingredient in your gambling activity generally precludes it from being considered a business.

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.

The type of gambling activity that participate in is ordinarily thought of as a hobby or pastime rather than engaging in a business, and does not turn into a business merely because you devote considerable time to it.

Therefore, we have determined that in your circumstances you are not in the business of gambling. As such the losses that you incur as a result of your gambling activities cannot be offset against other income. Conversely, income that you receive from your gambling activities is not assessable.

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