Edited version of your written advice

Authorisation Number: 1013114971737

Date of advice: 7 February 2017

Ruling

Subject: Gambling income - Sporting activities

Question 1

Is income derived from the Taxpayer's gambling activities assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2

Are the expenses incurred in deriving income from the Taxpayer's gambling activities an allowable deduction under section 8-1 of the ITAA 1997?

Answer:

No

This ruling applies for the following periods:

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

The Taxpayer currently holds no formal employment position.

The Taxpayer is part of a punting group (Syndicate) with several members. There is no formal name for the Syndicate.

The Syndicate bets on various animal sports in Australia and overseas.

The Syndicate primarily uses arbitrage strategies with automated software. Automation will place thousands of bets a week on a betting exchange. Bets can be manually adjusted.

Automation accounts for the majority of bets placed. In relation to specific animal racing, multiple runners are usually bet on per race using both 'back' and 'lay' bets.

Very little money is placed on exotic bets such as quinellas, trifectas, first fours and quaddies.

The automated process places bets 24 hours a day, seven days a week.

The automated process is designed to emulate what the Syndicate members would do manually, however with greatly increased volumes of bets.

The Syndicate does not have a business plan.

The Syndicate does not maintain separate full and complete records of their activities. However, transactional records are available from the various betting agencies and financial institutions to track the Syndicate's performance.

There is no formal documentation in relation to Syndicate share percentages or profit distributions.

The Taxpayer along with a couple of other members share responsibility for the majority of the Syndicate wins/losses and betting strategies with the remainder shared among the other members dependent on their contribution to betting and involvement in the betting strategies.

Over the past few years the scale of Syndicate betting was significant and profits were distributed to the Taxpayer.

Members will contribute money, bet, open accounts, program and analyse data to various degrees.

The Taxpayer's bank account is the main one registered with betting agencies although other members have bank accounts registered with betting agencies.

A minimum level of funds is usually maintained in the accounts to cover automated betting.

The Taxpayer does not consider any of the members would have a legal claim on any of the Syndicate funds as the activities are conducted through an informal arrangement amongst friends and mutual agreement.

The Syndicate does not currently receive commissions or rebates as a result of their betting activities.

The Syndicate members are not associated with any other related activities such as breeding or training or bookmaking.

The Syndicate is renting an office space to store computers, place bets and do analysis. The current lease is for two years.

The Syndicate doesn't have any current employees nor do they engage contractors or tipster services.

In addition, the Taxpayer spends several hours each week carrying on a business of share trading.

The Taxpayer has a trading business plan for their share trading activities. They applies their own skills, conducts market research, subscribes to industry information services and has attended courses relevant to share trading activities.

The Taxpayer maintains detailed records of their trading activities in a spreadsheet and the current value of the Taxpayer's share portfolio is significant.

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 subsection 6-5(2)

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.

Betting and gambling wins are not assessable under section 6-5 of the ITAA 1997 and losses are not deductible under section 8-1, unless you are carrying on a business of betting or gambling.

Taxation Ruling IT 2655 Income tax: betting and gambling - whether taxpayer carrying on business of betting or gambling (IT 2655), discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. IT 2655 at paragraph 6 states:

The Commissioner accepts that it is possible for a mere punter to be carrying on a business of betting or gambling but considers that it will be rare for a taxpayer with no connection with racing other than betting to be carrying on a business of betting or gambling.

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:

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?

The Syndicate uses a computer program to analyse data and generate bets which members have the ability to vary manually. The Syndicate keeps track of results and distribution amounts paid to members. In this regard the Syndicate's activities could be seen to be both systematic and organised. The Syndicate currently rents an office. The Syndicate does not currently employ staff nor engage contractors or tipster services.

In these circumstances it is possible to envisage a point where the Syndicate's betting activities, including renting of office space and any involvement of employees, contractors and tipping services reaches a level where it is considered that the betting and gambling undertaken by the Syndicate is conducted in a systematic, organised and businesslike way.

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.

Whilst the scale of gambling activities is not a decisive element, it is conceivable that the scale of the gambling activities may reach a level that when considered with respect to the other criteria outlined in Brajkovich's case, may indicate that an entity is carrying on a business of betting and gambling.

Presently, the Syndicate utilises large sums of money to fund the Syndicate's cash flow placing the size and scale of the operation in similar terms as the amount in Brajkovich's case.

Therefore, in the short term and based on the facts available, the Commissioner does not consider the size and scale of the gambling activities are at a level to constitute a business.

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 business.

In these circumstances no Syndicate member has any involvement in businesses related to betting, gambling, racing, breeding or sports.

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 assessing if the activities are conducted for profit or pleasure.

In Brajkovich's case, Pincus, French and Gummow JJ articulated that in seeking to justify a business of betting and gambling, the bar is higher than for those who undertake more conventional business activities:

And more as a matter of usage than logic, it may be said that the gambler who seeks to demonstrate that he is thereby a businessman has more to show by way of system and profit motive than those who engage in more conventionally ``commercial'' activities. (89 ATC 5234)

Their Honours found that the taxpayer in that case, “…had from his youth a simple passion for gambling on a large scale…” and that he was motivated for pleasure rather the profit.

In these circumstances the Commissioner accepts that the Taxpayer's initial motivation for taking part in the Syndicate was gambling for pleasure (and profit) with friends. However, with regard to the scale of automated betting processes compared with individual involvement and participation in betting activities, there is a point where it may reasonably be considered that the principal motivation of the Syndicate members is predominantly for profit making over the pleasure ordinarily derived by a keen betting enthusiast of sports or racing.

In addition, we note for completeness that should the activities of the Syndicate evolve to the point where there is limited involvement from its members and the betting and gambling activities are effectively being out-sourced to other people or entities, it would be difficult to sustain the view that the Syndicate is still motivated by pleasure. In those circumstances, it is more likely to be viewed as being motivated for profit.

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 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 distinction between the types of events which are the focus of betting and gambling activities was also enunciated in Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (Babka's case) when Hill J said:

It would, for example, seem impossible to imagine a taxpayer carrying on a business of buying lottery tickets. That presumably is because no matter how systematic a purchaser of lottery tickets may seek to be, no matter how frequent his bets or how large the sum he gambles, the odds will always be such that the outcome will predominantly depend upon chance. Yet the mere fact that the outcome of a particular activity may be dependent at least in part on chance will not negate a business activity being carried on. The outcome of a bookmaker's business must depend to some degree on chance yet it has always been regarded as a business. Of the bookmaker's business it can be said that the bookmaker has, by laying off his bets and averaging them in his dealings with the public, by "balancing his book", been able to reduce his odds to the point where there is sufficient skill to see the activity as systematic and businesslike being directed to a profit which it is hoped will eventuate.

In determining whether the form of betting the Taxpayer undertakes is likely to reward skill and judgement or depend purely by chance, consideration is given to the level of skill employed by the Taxpayer and the Syndicate and the ability of the Syndicate to reduce the outcome from a merely random outcome to one which is more certain by effectively reducing the element of chance.

The Syndicate uses a computer software program which sorts, compares and analyses the available data in an attempt to predict probable outcomes. The Syndicate's focus is on animal and sporting events which is more likely to provide reward for skill and knowledge in predicting outcomes unlike other games such as roulette, or lottery where the results are (or should be) purely random.

Where guiding principles inform the betting process as well as instinct and personal judgment, as was found in Babka's case, it is more likely that the outcome is closer to chance rather than a reward for skill and judgment. However, where the betting involves a sophisticated betting model and methods are employed to reduce the chance of a loss being incurred, for example where various bets are used which result in a break even outcome whilst simultaneously receiving a rebate from a betting agency, it is more likely that in circumstances such as this, the reward would be considered as a result of skill and judgement rather than chance.

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

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

In Babka's case Hill J 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 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 these circumstances the Syndicate's activities differ somewhat from those in Babka's case. Whilst the Syndicate has no business plan or projected income, there is a level of organisation absent from Babka's case. The Syndicate uses technology to systematically reduce the element of chance and thereby securing a more favourable outcome. Hill J in Babka's case recognised the role technology could play when he made the following remark:

In ordinary usage we recognise the possibility of mere punting being a business when we speak of the "professional punter" meaning thereby on of whom it could be said that placing bets is his vocation and I am inclined, particularly with the growth of modern technology such as computers, to think that there may be cases today, even if there were not at the time when Rowlatt J decided Graham v Green, where the activity of betting has become so organised, systematic and businesslike and is carried on with such dedication to potential profit that the man in the street would recognise that activity to be a business

As described previously, the Commissioner considers that where a betting and gambling syndicate's activities involve a high degree of sophistication which requires other entities to undertake integral parts of the betting and gambling activities, we may consider that a threshold is reached which would turn the activities into an enterprise more correctly characterised as a business rather than a hobby or pastime.

In this regard we are cognisant of the comment from Hill J in Babka's case where his Honour differentiated between the occasion where a taxpayer undertook all activities themselves and the situation where other entities are utilised:

For completeness it will be noted that neither in Evans nor in the present case did the taxpayer have business premises, employ staff to lay bets or agents to place them, attempt to hedge bets or use computers or similar equipment to calculate odds. Neither taxpayer subscribed to tipping services or had access to sources of information from racing circles.

The Commissioner considers that while the Syndicate's betting activities have some aspects of a business as outlined above, it is more likely that the Taxpayer's involvement in the Syndicate's activities does not amount to carrying on a business, at least for the years that are subject to the current private ruling.

As the Taxpayer will not be carrying on a business of betting or gambling, the winnings the Taxpayer will receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 and the expenses/losses related to the activity will not deductible under section 8-1 of the ITAA 1997.

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