Edited version of your private ruling

Authorisation Number: 1012436623195

Ruling

Subject: Am I in business of gambling

Question

Are you in the business of gambling?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You operate a sole trader business.

You have always had a keen interest on a particular topic, and began gambling on the topic from a young age.

Over the years you have attempted to use knowledge gained from your employment to assist in your gambling activities. However you have had little success.

A number of years ago you tried a particular type of betting (betting system A), and early success was followed by losses. However a while later you started winning on a more regular basis, mostly from that type of betting on the topic of your interest.

You use betting system A while analysing other publicly available information in your betting processes.

You use special software and have a subscription for another system to assist in your betting. You have recently begun using the software in your gambling processes. However it is too early to tell whether long term winnings will be achieved.

Your gambling activity volume has increased substantially over previous years.

You gamble only a limited number of days per week.

You are not associated with any other related activities.

Bets are placed primarily over the internet at home using the above programs.

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

You do not have a business plan, and you do not rent an office or employ staff in relation to this activity.

You undertake this activity for pleasure and believe your gambling activity is a hobby.

You do not keep records of your gambling activities. However records can be obtained through the betting agencies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Ordinary income

Income is generally assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

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.

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 criteria in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich's case) and the factors considered in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 (Evans' case), Babka v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Babka's case) and Prince v. FC of T (1959) 7 AITR 505; 12 ATD 45 (Prince's case), should be used to determine if a taxpayer is carrying on a business of gambling.

Of these cases, the circumstances in Brajkovich's case is most similar to yours.

In Brajkovich's case, the taxpayer had amassed sufficient wealth to enable him to withdraw from his employment and devote himself to a business of gambling. The taxpayer commenced gambling on horse races and on games of cards in which he was playing. After suffering heavy losses from gambling, the taxpayer resolved to gamble only in a small way and for purely recreational purposes.

The court identified the following criteria for determining whether or not a person is in the business of gambling. No one criterion is decisive, and they must be considered in combination and as a whole.

These criteria are:

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 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.

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's case). 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'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.

Application to your circumstances

In your case, the information provided indicates the activity is not carried on in a systematic, organised and businesslike way. While your activities have some elements of being systematic and organised, due to the use of betting programs, the internet and research undertaken, these factors alone do not support the existence of a business. As in Babka's case your activities can not be said to exceed that of a keen follower.

You do not have a business plan, and you do not rent an office or employ staff in relation to this activity.

The fact that you used various methods/systems for betting and cease them when you amass losses indicates that you have undertaken this activity for the purpose of making a profit. However, there is no doubt that you also undertake the activity for pleasure, as this has been a passion of yours from a young age.

While you use your own judgement and carry out research, your overall gains are dependent on chance rather than skill.

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 is being carried on.

You have not shown that your betting activity is related to, or part of, any other business activity.

Your type of gambling activity 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 you are not considered to be carrying on a business, and the winnings you receive in relation to this activity are not assessable under section 6-5 of the ITAA 1997. Further the expenses related to the activity are not deductible under section 8-1 of the ITAA 1997.

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