Edited version of your private ruling

Authorisation Number: 1012434248912

Ruling

Subject: Am I in business

Questions:

1. Is your activity a business for income tax purposes?

Answer:

No.

2. Are you entitled to claim a deduction for expenses associated with your activity?

Answer:

No.

3. Will the non-commercial loss provisions apply to any losses incurred from your activity?

Answer:

Not applicable.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 2012

Relevant facts

You have been assessing the probability of generating a profit from an activity.

You have enjoyed some success in the past and you believe, if refined and focused, will generate a sustainable profit, albeit with risk attached.

You first became interested in the activity a number of years ago.

You became aware of your capacity to earn a profit from the activity when reviewing an income year showed a surplus.

You don't consider it possible to generate a greater profit beyond the current level without automation.

You are aware of an early method of carrying on the activity which has undergone significant development and is now available.

You believe that by using this method and taking advantage of the range of support offered, you will be able to increase the scale of your activity and improve your activity to be profitable over time.

The method has offered a rebate provided your turnover exceeds $X per month and is an important factor in you generating a profit.

To mitigate risk and increase the probability of profit in the shortest possible period, you will adopt certain principles.

Other than being a member of an industry association, you have no other connections with the industry.

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

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.

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.

Associated wins from your activity 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 associated with this activity.

Income Tax Ruling IT 2655 discusses the Commissioner's opinion on whether this activity 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?

In Evans v. F.C. of T. 89 ATC 4540; (1989) 20 ATR 922, Hill J said:

In particular, …, the taxpayer's preference for betting with the TAB or on course totalizator, rather than with bookmakers, and his tendency to invest in quinellas, trifectas and other exotic kinds of bets seemed "inconsistent with the money-making, systematic, businesslike character which is an essential ingredient in the carrying on of a business". The taxpayer's winnings were therefore not assessable.

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.

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?

Issues such as attending race meetings and having a passion for gambling need to be considered when determining 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 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 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.

In your case, although you will develop a system, there is still a high element of chance involved. By using your techniques, you may have reduced the odds on your activities; however, your overall gains will be dependant on chance rather than skill.

We have determined in your circumstances that you will not be carrying on a business.

The amount of future time and effort involved do not turn your activities into a business. While your proposed activities will have some elements of being systematic and organised, mainly due to method you intend to use, its use 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, any winnings you receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 and any expenses incurred in relation to the activity will not deductible under section 8-1 of the ITAA 1997.

Non-commercial loss provisions

The non-commercial loss provisions are contained in Division 35 of the ITAA 1997. Subsection 35-5(2) states that this Division is not intended to apply to activities that do not constitute carrying on a business. As it has been determined that your betting activities do not constitute the carrying on of a business, the non-commercial loss provisions are not applicable in your case.

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