Edited version of your private ruling

Authorisation Number: 1012331710864

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Ruling

Subject: Whether betting, gambling and bankrolling winnings are assessable income and the losses are deductible.

Issue 1

Question 1: Are any winnings that you will receive from your casino based gambling activity assessable?

Answer 1:

Question 2: Can you claim deductions for any losses from your casino based gambling activity?

Answer 2: No.

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011.

Issue 2

Question 3: Are any winnings that you will receive from your bankrolling activity, (money lending) assessable?

Answer 3: No.

Question 4: Can you claim deductions for any losses arising from your bankrolling activity, (money lending)?

Answer 4: No.

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You first developed an interest in playing blackjack at home as a child. You started taking an interest in playing blackjack in the casino about thirty years ago.

You started playing / gambling more regularly about twenty years ago.

You are a resident of Australia for tax purposes.

You have taken part in a number of gambling activities, primarily playing blackjack at casinos overseas. At the moment you do most of your playing at a number of casinos overseas. These casinos provide free accommodation, food and most often will pay for your flights to get to the casino from Australia.

You will typically spend 11 months of the year focusing on your career and approximately one month of the year on your gambling activities, In the month that you gamble at the casino you will generally play blackjack most days and on each day, you will play an average of 8 hours. You estimate that you will play around 100 hands of blackjack per hour.

Blackjack is predominantly your game of choice because it has the most potential to make money. Other games also have potential, but for various reasons are not as promising as blackjack. For example you state that it is harder to make money at baccarat partly because it is a very slow game.

You only play blackjack at the casino, you do not play on the internet.

You estimate the following in relation to the proportions of time, money and overall profits that you make in relation to each gambling activity.

You identify the following as skills you have and use in the playing of blackjack:

· Good logical skills;

· the ability to focus;

· people skills; and

· the ability to keep clearheaded under pressure.

You don't spend anytime practicing your blackjack skills outside of the play that you do in the casino for about one month each year. When you are in the casino you try to be focused and play as well as possible.

You have read books on blackjack and baccarat, however you don't read much anymore. You expect to read a bit about roulette in the near future. Aat this stage what you learn by reading does not contribute significantly to your knowledge of the game.

You state that the money that you make from gambling can fluctuate heavily and it is hard to predict what your earnings will be. You state that the industry that you work in, is a tough business and that you expect low earnings in the near future in Australia, therefore you hope that the money that you make from gambling will contribute significantly to your overall income. If this does not happen you will seek other part time contract work so that you can carry on your current work and gambling activities).

You usually fit your gambling in and around your work commitments.

In regard to whether you have ever been asked to stop playing blackjack at a casino, or asked to leave the casino you state that this has happened by way of your bet size being limited to the minimum only or you cannot play the game of blackjack, but can play other games.

Your family have accompanied you in the past on gambling trips, but mostly don't anymore.

You haven't had a vacation for a few years - your gambling is a break from your current work and you find it quite therapeutic to do something completely different, you suppose that your gambling is like a vacation for you. In previous years your vacations were usually a two week break over Christmas with your family.

You do not keep accurate records with respect to your gambling activities; however you believe that your gambling activities have been predominately profitable over the last five years; however losses were incurred in at least one of those years.

You expect to make money from your gambling for the next numerous subsequent income years ended 30 June 2012, 30 June 2013, 30 June 2014 and 30 June 2015 and hope that it will be more than in the past.

You plan to limit gambling to one month a year, because your career is more important to you; however it could happen that you will spend more time if a good opportunity comes along.

In relation to your gambling activities you did not rent or maintain an office or similar premises, you do not hold a separate bank account for your gambling activities; you have not created or maintained a business plan in relation to your gambling activities.

When you first commenced gambling you started out with a few thousand dollars and currently your total bankroll available for your own gambling and bankrolling others is substantial.

In addition to your gambling activities you bankroll individuals who play using your money and pay you back a portion of their winnings. You first became involved in bankrolling some years ago.

In these situations you will provide a sum of money to an individual, generally a friend or a friend of a friend, who will then use the money to play blackjack, baccarat, casino war or roulette. If the individual makes winnings they will generally provide 50% of their winnings to you. If the individual loses your initial funding (bankroll), they do not have to pay you back. You do not have written agreements with the people you bankroll and you rely on verbal agreements.

You believe that bankrolling is common amongst the blackjack players that you know or play alongside.

If you didn't play blackjack at casinos you would feel less comfortable letting someone else play because you would be less informed of the state of the game.

You bankroll in relation to blackjack and other games, but not poker.

You provide training, coaching and mentoring to the people that you bankroll. You speak to the people playing for about one hour per week. They telephone you when they have a losing run or need some advice. If you learn anything new, you pass it on to them.

No one bankrolls you because you have your own bankroll.

People approach you in relation to initating a bankroll. You will not bankroll someone you don't know.

The person seeking to be bankrolled has to demonstrate skills and meet criteria in order for you to provide this facility. You have to be convinced that they can play well enough to win and have the emotional fortitude to deal with difficult times.

You ultimately make a decision on whether to bankroll someone based on whether you think they can win and are trustworthy. You state that things have gone wrong in the past. So generally you are not that keen to bankroll people, it has to be what you consider to be a very special person.

You will refuse to bankroll or terminate bankrolling if you think a person can't win or are not 100% honest. You state that it has happened in the past that someone just keeps on losing and you have to stop bankrolling them.

If a person that you have bankrolled doesn't pay you the amount of profit owing to you either in full or in part, there is generally nothing that you can do, as you have verbal agreements only. That is why you have to be very careful when bankrolling someone.

You have a substantial amount of money available for bankrolling for your own play and for bankrolling others.

The amount that you generally bankroll people is in the thousands and the borrower will typically try to increase this amount to make larger bets with. On occasion when someone travels to a casino where you have a number of casino chips on hand, you will provide the associate directly with chips to gamble with. You may provide a substantial amount of casino chips.

You spend on average one hour per week in discussion or providing advice to the people that you bankroll on their gambling activities.

While you provide advice to the people that you bankroll, you ultimately have no control over whether these individuals follow your strategy when playing blackjack or to what extent they follow their own judgement as to how they wish to place bets.

Based on their obligation to pay you back a certain portion of their winnings, the people will generally keep records of their wins and losses so that they can keep track of how much they have won or lost overall.

At the moment you bankroll one person who plays on a full time basis and a small number of players who only go on small gambling trips throughout the year.

You state that approximately 50% of your winnings are from your own playing and about 50% from bankrolling.

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 and

Income Tax Assessment Act 1997 Section 118-137.

Reasons for decision

Issue 1

Question 1 and Question 2

Summary

We have determined that your participation in betting and gambling (mainly the playing of blackjack at casinos) is not considered to be carrying on a business. Therefore, the winnings you receive in relation to this activity will not be assessable and the expenses related to the activity will not be deductible.

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; or conducting a business from which gambling is seen to be an integral component. If there is not a business, then the activities giving rise to the winnings will be no more than the pursuit of a pastime, no matter how vigorous the pursuit. Furthermore, gambling winnings and losses are specifically excluded from the capital gains and capital losses provisions of Part 3-1 section 118-37 of ITAA 1997.

A licensed casino operator or bookmaker will be carrying on a business; the income of such a business is assessable and the losses and outgoings deductible on ordinary principles. Private punters, on the other hand, have usually been held not to be carrying on business, no matter how dedicated and systematic the pursuit of their gambling activities may be.

There are suggestions in early cases that a taxpayer who is associated or identified with, say, the horse-racing industry in some capacity such as breeder or trainer, and who also bets in a systematic way, may be found to be carrying on a business so that the taxpayer's winnings are assessable and the losses deductible. Refer to 7 CTBR (NS) Case 46; 7 CTBR (NS) Case 72 and 8 CTBR (NS) Case 134.

As to private gamblers, there is a suggestion in the judgment of Hill J of the Federal Court in Babka v FCT (1989) 20 ATR 1251 at 1257; 89 ATC 4963 at 4968 that it is possible to distinguish among different kinds of gambling on the basis of the degree to which pure chance affects the outcome of each wager, or whether the gambler's skill plays a significant part. On this basis, the skilful card player who plays every day and who can rely on his or her skill in, for example, memorising the cards played, is more likely to be found to be carrying on a business than a punter who concentrates on betting on horse and/or dog races, where he or she is in no position to affect the outcome.

The question of whether winnings are assessable and losses deductible therefore depends on the answer to the question, whether or not a business of gambling is being carried on.

Income Tax Ruling IT 2655 discusses the Commissioner's opinion on whether 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.'

The court in Brajkovich v. FC of T 89 ATC 5227;(1989) 20 ATR 1570 (Brajkovich), have identified 'principal criteria' for determining whether or not a person is in the business of gambling. Whilst these criteria generally relate to wagering activities in respect of horse racing they have general application to other forms of gambling.

These criteria include:

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 taxpayer conducted his gambling activities, i.e. did he rent an office, employ staff, did he take steps to lessen and exclude the element of chance, did he maintain adequate records in respect of his position from day to day and week to week.

While your activities have some elements of being systematic, organised and businesslike, it is unlikely that it could be said to have been organised in such a way so as to gain a more favourable advantage or have a level of sophistication that eliminates chance. Also you only gamble for one month in a year at random times that fit in and around your normal work. Your ability to possibly count cards, whilst skilful does not eliminate chance altogether.

2. The scale of the gambling activities, i.e., the size of wins and losses

It is not all together clear in terms of volume and size exactly what your wins and losses have, or will be for the private ruling period. However the impression gained is that your gambling activity is overall more often than not profitable. It appears that your gambling wins are significant and do contribute to your overall income. You do have an expectation that you will continue to make a profit or even have your profit improve.

One of the key factors as to why your gambling activity is not considered to be a business is the fact that you only gamble for one month a year, (the frequency of your gambling has been irregular). If you carried out the activity in the way that you describe for twelve months of the year rather than one, then the balance would lean more toward your activity being a business. That being said however, the court in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922, has said that scale of itself is not determinative of the outcome.

The Full Federal Court did not consider Brajkovich, who bet over $950,000 over three years and who was involved in horse training to be carrying on a business of gambling.  

3. Whether betting is related to or part of other activities of a businesslike character, e.g. breeding horses

In most cases where there is a finding that 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; 33 ALJR 172). In this case, the taxpayer conducted a business as a chiropractor and then mortgage broker.

In your case, you have stated you that you do conduct a related activity, your bankrolling activity however this factor alone does not point to the conclusion that you are carrying on a business of gambling.

4. Whether the punter appears to engage in his activity principally for profit or principally for pleasure.

The courts have found that such issues as attendance at race meetings, a passion for gambling, etc, need to be considered when concluding whether the activities are conducted for profit or pleasure.

In Brajkovich 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'.

You stated that you initially started playing blackjack as a child. You have stated that you see your gambling as a break from your normal career and that you find it quite therapeutic to do something completely different and that there is a supposition by you that it is like a vacation for you. You have stated that your intention is to limit your gambling to one month a year because your career is more important to you. However you have not ruled out that if a good opportunity arises that you may spend more time gambling. It does appear that you also play blackjack for profit and that your playing provides a dual purpose of both profit and pleasure, however on balance it would appear in favour of principally for pleasure. Again, given that the activity is only carried out for one month in a year this criterion indicates you were not carrying on a business, even though it is clearly preferable from your view that you make a profit from the activity.

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

In Brajkovich the court said, when addressing this issue on page 5233:

'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.'

The Commissioner is of the view that the successful playing of blackjack or poker is committed more to the skill of the player than may be the case of the person who is playing a roulette table. Nevertheless a blackjack or poker player is still subject to the whims of chance with respect to the cards dealt. By the application of skill, you may have reduced your chances of a loss, however, your overall gains are dependant on chance rather than skill.

In the matter as to the application of skill AAT Case 49/96 96 ATC 478 involved a taxpayer who claimed he was in the business of gambling. The gambling activities which he claimed to have undertaken related solely to the playing of the card game blackjack at one Queensland casino. For the three years of income ended 30 June 1993-95, he claimed deductions of $9,475, $6,069 and $8,703. Most of the losses claimed related directly to his gambling activities, but the taxpayer also claimed deductions for related expenses.

Until December 1994, the taxpayer was a Commonwealth public servant. He gave evidence that he became interested in blackjack in 1992 and studied a method of 'card counting' which he believed would increase his chances of winning. He claimed that he borrowed money to commence playing and that between February 1993 and June 1993 he played blackjack 30 hours a week (over three nights and one day), during which time he lost $8,770. He also claimed to have lost further amounts in similar fashion in the subsequent years of income in question.

The taxpayer said that he usually bet in amounts of $5 or $10 when the odds were not in his favour and in amounts of $100 or $200 when the odds were in his favour. He tendered a journal which he claimed recorded his wins and losses on a nightly basis.

A supervising inspector at the Casino where the taxpayer claimed to have gambled gave evidence that measures were taken to frustrate card counters.

The taxpayer sought a review of the Commissioner's decision to disallow the deductions claimed and it was subsequently held that the taxpayer was not carrying on a business activity.

Among other reasons it was held that it would be virtually impossible to carry on a business of gambling (in the sense used in taxation cases) at the Casino by the method of counting the cards at blackjack. It was simply not a business proposition. It was an amusement. It was entertainment.

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

The type of activity undertaken is ordinarily thought of as a hobby or pastime rather than engaging in a business.

Conclusion

In Babka 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;

The taxpayer's activities fell short of carrying on a business. They were not so considerable and systematic and organised that they could be said to exceed those of a keen follower of the turf; and

Although mere punting, especially with the aid of computers, can now be so systematic and dedicated to profit making that it may constitute a business, the intrusion of chance into the activity as a dominant ingredient will usually preclude such a finding.

On the basis of all the indicators above, and in light of the decision in Babka's case, it has been determined that you are not carrying on a business of gambling and, as such, your income from gambling gains is not 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.

Note: It is important to note that you may in the future gamble at a casino for more than one month in a year, if this increase in gambling time is significant then the activity may meet some or more of the established criteria. The activity may then subsequently possess a greater commercial flavour and be considered a business activity in later years.

Issue 2

Question 3 and Question 4

Summary

It is our view that your bankrolling activity is more akin to money lending, rather than a mere extension of your own gambling activities. However it is considered that your bankrolling is not the carrying on of a business of money lending, therefore any profits from this activity will not be assessable and the expenses related to the activity will be not deductible.

Detailed reasoning

Under subsection 6-5(2) of the 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.

'Business' is defined in section 995-1 of the ITAA 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Am I in business

The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922. (Evans case) stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter, however, Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470 provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

Carrying on a business

The indicators identified by the courts as relevant in determining whether an individual is carrying on a business are outlined in Taxation Ruling TR 97/11. It must be noted, however, that Evans case states that no one indicator will be decisive. Also, the weighting given to each indicator in each circumstance may differ. These indicators are: 

· whether the activity has a significant commercial purpose or character;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose to profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that is directed at making a profit; and

· the size, scale and permanency of the activity.

Carrying on a business as a money lender

Whether a taxpayer is carrying on a business of lending money is a question of fact.

The following passage of Bowen CJ in FC of T v Marshall and Brougham Pty Ltd 87 ATC 4522 provides some useful general guidelines on determining whether a taxpayer is a money-lender: 

'It is generally accepted that in order to be regarded as carrying on a business one must demonstrate continuity and system in ones dealings. In the case of money lending it has been said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness): see Litchfield v. Dreyfus [1906] 1 KB 584. It is not decisive whether the lender is a registered money-lender or not, although this will be a factor to take into account. It should be mentioned that it need not be the only business or the principal business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by looking at all the circumstances involved: see Newton v. Pyke (1908) 25 TLR 127.'

 The frequently quoted statement in Litchfield v. Dreyfus:

'Speaking generally, a man who carried on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible.'

should not restrict the meaning of money-lender for taxation purposes in light of the more recent Australian cases of Fairway Estates Pty Ltd v. FC of T 70 ATC 4061 and FC of T v Bivona Pty Ltd 90 ATC 4168.

These recent cases have highlighted the differences between the laws relating to the control of money-lenders and the laws relating to the taxing of money-lenders.

Accordingly, for the purposes of taxation law a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.

In Case B59, 70 ATC 277, the taxpayer was a practicing accountant who over a five year period loaned money to six different people. The taxpayer made many advances to one of these borrowers. It was held by the tribunal that the taxpayer was not carrying on a business of money lending.

In Case M74, 80 ATC 521, the taxpayer engaged in a small number of loan transactions each year. The minimum in any one year was one loan and the maximum was 12. Borrowers were selected on the basis of the quality of security offered and the rate of return. The tribunal held that the taxpayer was not carrying on a business of lending money.

Your circumstances

In view of the court cases above and the business indicators determined by previous court cases it is considered that you are not carrying on a business of money lending. The following observations are made about your bankrolling activity:

you have conducted your bankrolling over a number of years, in this respect your activity has elements of repetition and regularity;

the activity lacks a commercial feel because you only lend to friends or friends of friends;

the volume and frequency appears low because you are extremely selective about who you will bankroll, you only lend to one person on a full time basis and four other players (who go on small gambling trips throughout the year);

you do not carry on the activity in the manner that professional money lenders would carry on their businesses, (your activity does not exhibit the features that would normally be associated with a money lending business, such as a bank or other financial institution);

the number of loans you make is much less than that of a professional money lender.

although you do have a view to profit and you have received income from your bankrolling activity, your risk of loss is also high. The 50% profit/return you receive from any winnings of the gambler that you bankroll does compensate you for the risk involved, however the loans are not evidenced in writing and you rely on trust and good will for the success of your bankrolling rather than legally binding arrangements. You have no legal recourse if someone disappears with the amount that you have bankrolled to them. Profits are not from a discernible pattern of trading (lending); and

whilst you are selective about who you bankroll, it seems that your decision to proceed with a bankroll, is based on intuition and the personal attributes of a person, a personal judgement call by you, rather than any business credentials. This lacks a businesslike approach.

It is considered that you are not carrying on a business as a money lender. It is possible that your bankrolling activity is another form of gambling. Taking risks on whether or not you think another gambler can win. Either way any profits from this activity will not be assessable under section 6-5 of the ITAA 1997 and similarly any losses will not be deductible under section 8-1 of the ITAA 1997.

Note: Please note that if your circumstances materially change, your situation may need to be reassessed for taxation purposes.

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