Edited version of private advice

Authorisation Number: 1052400505928

Date of advice: 27 May 2025

Ruling

Subject: Income tax - assessable income - business v hobby

Question 1

Are any proceeds received from the betting and gambling activities assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

This ruling applies for the following period:

Year Ended 30 June 20XX

Year Ended 30 June 20XX

Year Ending 30 June 20XX

The scheme commenced on:

July 20XX

Relevant facts and circumstances

The company facilitates gambling activities, where different bets are placed on sports games and horse races. The value of the bets varies.

The directors of the company are siblings. They commenced undertaking the gambling activities after recently completing their university studies. They each invested capital and are both involved in the gambling activities. There is no other employee; however, another sibling has received payments on rare occasions when one of the directors has been absent.

The directors operate the company out of a home office, using computers and phones as equipment. Typical expenses they incur are phone expenses, internet expenses and payments to the individuals' accounts.

There is no business plan. The directors started undertaking the gambling activities as they were passionate about betting. They started undertaking the activities spontaneously with no contemplation of the future. They intended to undertake these activities for a short-term period and to eventually return to their studies. They do not want to undertake these activities for a long-term period because of the volatility and randomness associated with gambling.

There is no bookkeeping involved. The directors occasionally check the account balances to determine the amounts they can bet; however, this has become difficult as there have been constant fluctuations in winnings and losses.

The company and the directors have no licenses, qualifications or memberships that are relevant. The directors rely on their experience, knowledge and research conducted, such as comments from others. They experiment new software when it becomes available.

The directors established the company as they were advised to do so from an accountant. They established the company purely for undertaking the gambling activities. The company is not involved in any other activities related to the sports and horse racing industries.

The gambling activities are undertaken via various online account setups with betting agencies and operators. From the directors' understanding, they are unable to open an account in the company's name, so they have opened accounts under individuals' names. This includes the names of the directors. They started using family members' names to open accounts and then expanded from there. There is no formal or written agreement between the relevant individuals and the company, besides an agreement the individuals receive a fixed amount for the use of their accounts.

The individuals were paid for the use of their name. The fee has been reduced due to the notable fluctuation of wins and losses. Some accounts resulted in negative cashflows due to there being no wins.

The winnings are deposited into the individuals' online accounts, part of which are retained for future betting. Any excess funds are transferred to the directors' personal bank accounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

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

Beneficial ownership

The concept of beneficial ownership is explained in Taxation Determination TD 2017/11 Income tax: who should be assessed to interest on bank accounts? (TD 2017/11). Although the ruling considers bank accounts specifically, the principles are equally applicable to money derived from other accounts. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from an asset. Beneficial ownership can be different to legal ownership.

The Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

Where it is asserted that the beneficial ownership and legal ownership are not the same, there must be evidence to show that the legal owner holds their interest on trust for the beneficial owner.

Carrying on a business

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) outlines the Commissioner's view as to whether a company is carrying on a business. TR 2019/1 provides that companies have an underlying commercial nature. Companies are typically formed for the purpose of carrying on a business and that where a company aims to make and has a prospect of profit, it is presumed that it intends to, and does in fact, carry on a business. Consequently, the activities carried on by a company are more likely to amount to the carrying on of a business than if the same activities were carried out by an individual or a trust.

Although not explicitly stated in TR 2019/1, the principle that income must be legally derived by the entity still applies. As concluded in Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314; (1965) 39 ALDJR 262; (1965) 14 ATD 98, income is not derived merely because it is received, it must be legally and beneficially earned. Furthermore, The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 (1938) established derivation depends on legal entitlement.

Application to your circumstances

The gambling accounts are not in the company's name rather they have been created under various individual's names. For the company to be considered as carrying on a business of gambling activities, the business activities, including bank accounts, gambling accounts, contracts, leases, insurance and billing must be conducted in the company's name.

The company has not created formal agreements with the individuals. Therefore, the Commissioner did not receive sufficient evidence to establish that the equitable interest is different to the legal interest. Consequently, the gambling account activities are deemed to belong to the individuals and the company is not carrying on a business of gambling. Any winnings received from the betting activities are not assessable income under ordinary concepts for the company.

Any transfer of funds to the company is a private arrangement and does not change the legal ownership of the income.

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