Edited version of private advice

Authorisation Number: 1052166204279

Date of advice: 13 September 2023

Ruling

Subject: Assessable income

Issue 1 - Betting

Question

Are the net profit amounts derived from your betting activities, assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2 - Betting software

Question

Is your share of the net profit amounts from the betting software, assessable income in accordance with section 6-5 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Period ended 30 June 20XX

Period ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Betting activities

You provided us with details on when you opened your first betting account and your betting history and experience.

Prior to the betting software being implemented you placed your bets manually where you made a profit. You provide us with how much profit you made.

You did not subscribe to any tipping services.

You commenced using the betting software for your betting activities around a specified date, utilising the betting software for all of your betting activities. You placed bets on most races daily.

You did not spend any time placing bets as the software did it all for you.

You used Entity A to place your bets where you logged into your Entity A account and copied some details into the application. The betting software would then run autonomously placing bets according to your parameters.

You are able to adjust your risk preferences within the betting software.

You provided us with details on the amount of money that you invested in your betting activities.

You review the outcome of your betting activities every few weeks.

You provided us with details of the profit that you made from using the betting software during a 11 month period for your betting activities.

You provided us with details on your bets which included the numbers of bets you placed, the amount each bet was and the total amount of bets you placed.

You ceased your betting activities using the betting software from a specified date your account was losing money.

You occasionally place manual bets on various events for example: the election, NRL final, other horse races, dogs etc.

Betting software

You, Person A and Person B (the group) developed a betting software program for horse racing activities.

Development commenced on the betting software on or around a specified date.

The betting software was first available for use on a specified date.

No members of the group have previously developed any similar software.

Your betting software is not used for any other purposes.

The group commencing earning income from the betting software from around a specified date.

The group believe that the use of the betting software makes the prospect of success high, which has created the need to use other third-party people to assist in undertaking of the betting activities.

The group believes that the bookmaking company will terminate your individual betting accounts as it is well known in the industry that successful punters have their accounts terminated.

The use of third parties is to increase the value of the betting opportunities.

The third parties have set up their own individual betting accounts with the bookmaker.

The betting software is made available to third parties to utilise as they wish. The third parties are family and friends.

The group made the betting software available to family and friends due to your winnings as individual users using the betting software. The family and friends of the group members were interested in using the betting software themselves. The group gave them access to the betting software so that they could make similar winnings as you as an individual bettor.

The group does not have any intention to the make the betting software available outside of family and friends of the group members.

The group does not have a contract with friends and family for the use of the betting software.

The amount the family and friends of the group members bets and how often they bet using the betting software is at their discretion.

In the beginning the group would use Excel to assist the group in working out if the accounts made money. However, the group now relies on family and friends to tell the group how much money they have made in relation to the betting software.

The betting software does not generate any logging data in relation to the wins and losses from bets.

The group receives a percentage (currently 75%) of the profits made from the betting activities whilst utilising the betting software, with your individual percentage being 25%.

You provided us with details on the estimated winning from the software for the group.

You receive your share of the winnings via bank transfer. Depending on the profit of the users you may receive the transfer once a week or once a fortnight.

You provided us with details on the current number of active users along with the number of activities users of both financial years for the ruling period.

The number of active users of the betting software has decreased as users have either lost interest or were making less money.

Betting software maintenance

The group estimates that the following time was spent developing the betting software:

•                     Person C spent 40 hours developing the betting software; and

•                     You and Person B spent 20-30 hours testing the software, providing feedback and in some cases tweaking the betting software.

The group originally maintained the betting software on a weekly basis; however, it is now maintained every month or 2 months.

Person C makes any code changes that are needed for bugs or substantial changes.

All group members can tweak the config files used in the betting software to change the betting behaviour.

You provided us with details on the software development tools that were used to develop the betting software.

After a group member makes a change to the betting software all users are required to pull a refresh version from the development software.

The group did not use any other betting specific software/program for your betting software.

The bet types available through the betting software are thoroughbred (50%) and hardness racing (50%).

How the betting software works

The following parameters can be modified within the betting software:

•                     Minimum and maximum odd size

•                     Bet size

•                     Edge parameters; and

•                     Back off edge.

The betting software does not use a standard arbitrage where the opposite trade is made, which would eliminate the randomness of winning.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Issue 1 - Betting

Question

Are the net profit amounts derived from your betting activities, assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Subsection 6-1(1) of the ITAA 1997 states that assessable income is made up of both ordinary income and statutory income.

Ordinary income

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 3 categories, namely from rendering personal services, income from property and income from carrying on a business.

Carrying on a business

Following the respective Federal Court decisions in Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922 (the Evans case), Babka v. Federal Commissioner of Taxation (1989) 20 ATR 1251 (the Babka case), and Brajkovich v. Federal Commissioner of Taxation (1989) 20 ATR 1570 (the Brajkovich case), the Commissioner published his views in relation to whether a taxpayer is considered to be carrying on a business of betting or gambling: see Taxation Ruling IT 2655 Income tax: betting and gambling: whether taxpayer carrying on business of betting or gambling (IT 2655).

As highlighted in paragraph 7 of IT 2655, whether a taxpayer is considered to be carrying on a business or betting and gambling depends on the facts of each case.

Paragraph 8 of IT 2655 states that the criteria summarised in Brajkovich case (as well as the factors noted in the Babka and Evans cases) should be taken into account when determining whether a taxpayer is carrying on a business of betting or gambling.

The six (6) criteria include:

(a)          Whether the betting is conducted in a systematic, organised and businesslike way;

(b)          The scale of the betting activities;

(c)           Whether the betting is related to or part of other activities of a businesslike character;

(d)          Whether the betting activity is principally for profit or principally for pleasure;

(e)          Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance; and

(f)            Whether the betting activity is of a kind ordinarily thought of as a hobby or pastime.

At page 4966 of the Babka case, Hill J noted that 'no one factor ... is decisive of whether a particular activity constitutes a business, that conclusion will be derived from a consideration of all the relevant facts'.

Relevantly here, at page 4968 of the Babka case, Hill J also highlighted that '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 Commissioner has considered the application of these criteria below.

(a)           Whether the betting is conducted in a systematic, organised and businesslike way

The Commissioner considers that your activities are conducted in a systematic, organised and businesslike way. This is because:

•                     You have spent 20-30 hours testing the software, providing feedback in some cases tweaking the betting software.

•                     Your activities are predominately software-related activities focused on using the automated software which strategically places bets to reduce risk and maximise profits from your betting activities.

•                     You made successive gains from using the automated software for your betting-related activities. It can be inferred that by using the automated software it reduced the risks associated with your betting-related activities and the decisions were not made on impulse.

•                     The automated software that you use was not used for any other purpose.

•                     Although no formal account records were kept, your records were available through Entity A. You reviewed the outcome of your betting activities every couple of weeks.

(b)           The scale of the betting activities

The automated software you used allowed you to place bets on almost every Australian race per day, with their being 20-80 races per day.

The automated software allowed you to place large amounts of bets through your Entity A account. You were required to log in to your Entity A account and copy some details into the application which would then allow the automated software to run autonomously placing bets according to the parameters you had set within the automated software.

You made a total profit of a specified amount during a 11 month period using the automated software. During this period, you placed approximately a specified number of bets with a value of a specified amount.

The Commissioner is satisfied that your activities were significant and went beyond a mere pastime.

(c)           Whether the betting is related to or part of other activities of a businesslike character

Whilst you are not associated with any other related activities, such as horse breeding or training, the Commissioner recognises that your activities in relation to your betting income is software-related.

The Commissioner is satisfied that the betting is related to other activities of a businesslike character for the following reasons:

•                     You have spent 20-30 hours testing the software, providing feedback in some cases tweaking the betting software.

•                     Your activities are predominately software-related activities focused on using the automated software which strategically places bets to reduce risk and maximise profits from your betting activities.

•                     You made successive gains from using the automated software for your betting-related activities. It can be inferred that by using the automated software it reduced the risks associated with your betting-related activities and the decisions were not made on impulse.

•                     The automated software that you use was not used for any other purpose.

•                     Although no formal account records were kept, your records were available through Entity A. You reviewed the outcome of your betting activities every few weeks.

(d)           Whether the betting activity is principally for profit or principally for pleasure

The Commissioner considers that the betting activities are principally conducted for profit because:

•                     You spent more time on software-related activities than you did on your betting activities, which are primarily conducted by the automated software.

•                     All of your bets were placed using the automated software.

•                     You did not spend any time placing bets as the automated software did it all for you. You were only required to login to your Entity A account and copy some details into the application.

•                     The automated software used fuzzy match to line up races and participants on one market to races on another

•                     As a result of using the automated software your betting activities were consistently profitable. In fact, your profit in 3 months using the automated software exceeded your profit from your regular betting since late 2020 of betting manually.

(e)           Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance

Whilst betting activities are usually purely dependent on chance, the use of the automated software effectively reduced the element of chance and gave you a degree of control over the betting outcomes. This is primarily evidenced by the consistent gains made by you.

As a result, the Commissioner is of the view that although the element of chance may not be completely eliminated it was at least reduced to a level commensurate with that found in genuine business activity with the effect that your betting activities were more likely to reward skill and judgment.

(f)            Whether the betting activity is of a kind ordinarily through of as a hobby or pastime.

Generally betting is ordinarily considered a recreational activity.

However, the Commissioner considers that the betting activities here are done for profit and not as a mere hobby or pastime. This is evidenced by the following factors:

•                     You spent more time on software-related activities than you did on your betting activities, which are primarily conducted by the automated software.

•                     All of your bets were placed using the automated software.

•                     You did not spend any time placing bets as the automated software did it all for you. You were only required to login to your Entity A account and copy some details into the application.

•                     The automated software used fuzzy match to line up races and participants on one market to races on another

•                     As a result of using the automated software your betting activities were consistently profitable. In fact, your profit in 3 months using the automated software exceeded your profit from your regular betting since late 2020 of betting manually.

Conclusion

The Commissioner is satisfied that you were carrying on a business of gambling or betting, the use of the automated software to strategically place bets reduced your risk and maximised your profits from your betting and gambling activities.

Issue 2 - Betting software

Question

Is your share of the net profit amounts from the betting software, assessable income in accordance with section 6-5 of the ITAA 1997?

Detailed reasoning

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 lists the factors that are considered important in determining if a business activity is being carried on 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 of profit as well as a prospect of profit from the activity

•                     whether there is regularity and repetition of the activity

•                     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

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•                     the size, scale and permanency of the activity, and

•                     whether the activity is better described as a hobby, a form of recreation or sporting activity.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factors is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

This indicator required that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner.

The fact that you do not make the betting software available on a commercial level indicates that your activity lacks a commercial purpose.

Whether the taxpayer has more than just an intention to engage in business

The group created the betting software to apply their skills to the real world. The betting software was created for an automated betting process. The group did not create the betting software with the view to engage as a business as a software provider.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

Whether or not there is a prospect and purpose of profit is a key factor in determining the difference between a business and a hobby. In the situation of the group, whilst you make a profit from the betting software it is reliant upon the numbers of active users, the numbers of bets they make and if they make a profit or loss from their betting activities.

The main purpose of the betting software was for friends and family to earn a profit from betting like each individual group member had. Based on this, the activity does not have the prospect and purpose of profit.

Whether there is regularity and repetition of the activity

The regularity and repetition of the income from the betting software is based on when your friends and family members use the software and if they make a profit. Whilst there has been regularity and repetition this has significantly reduced due to the decreased in the number of active users of the betting software. Based on this information the income would be considered regular and repetitious.

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 betting software is made available to the friends and family or group members only. It is reasonable to assume that the group's activities they undertake are not in line of a business, a business would have the betting software available on a commercial level.

Whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

When the family and friends of the group members first commenced using the betting software, the group maintained records through Excel. This changed and the group does not maintain records anymore and the group is reliant upon the family and friends of group members disclosing how much profit they have derived from the use of the betting software.

It is not considered that this activity is planned, organised and carried on in a business-like manner such that is directed at making a profit.

The size, scale and permanency of the activity

It is common for the size, scale and permanency, and repetition and regularity indicators to be intricately linked. As the repetition of any activity increases so does the amount of work that is completed and subsequently the income that is received.

In the situation of the group, the betting software is not available to commercial clients you have made it available to the friends and family of the group members only. You do not have a contract with the friends and family and the income you receive is based on trust. The size, scale and permanency of the income from your betting software is reliant upon the number of users and them making a profit.

When factoring in the above, it is evident that size, scale and permanency is not present on a commercial scale.

Whether the activity is better described as a hobby, a form of recreation or sporting activity

Whilst the activity has the prospect to be a business in the case of the group it is better described as a hobby as it lacks a commercial purpose and is not planned or organised in a business-like manner.

In the case of the group:

•                     There are no commercial sales as the betting software is only available to friends and family.

•                     There are no plans for the betting software to be available to people outside of the friends and family or group members.

•                     The activity is not carried on in a business-like manner.

Conclusion

When considered against the factors outlined in TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) your activities are not consistent with someone expected to be carrying on a business of leasing your software. Consequently, your income is not considered assessable as ordinary income under section 6-5 of the ITAA 1997 and your deductions are not claimable under section 8-1 of the ITAA 1997.

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