Case K25

Judges: HP Stevens Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 31 May 1978.

C.F. Fairleigh Q.C. (Member): For each of the years ended 30 June 1967 to 1971 inclusive the Commissioner issued notices of amended assessments and for the year ended 30 June 1972 issued a notice of assessment adjusting the taxable income as previously assessed (1967 to 1971) or as returned (1972) by the addition of sums described as income from the taxpayer's betting activities, viz.: -

      Year ended 30 June 1967       $14,301

                         1968        24,787

                         1969        17,126

                         1970        25,111

                         1971        43,659

                         1972        27,587

2. The Commissioner also considered that the taxpayer had rendered himself liable to the additional tax imposed by sec. 226(2) and remitted part thereof under sec. 226(3) whereby the additional tax payable under the aforesaid assessments does not in any year exceed an amount calculated at the rate of 10% per annum upon the tax avoided (if those respective amounts as in para. 1 hereof are assessable income for each particular year).

3. The taxpayer objected to each of those assessments and the Commissioner decided to disallow the objections. Those decisions have been referred to a Board for review. The parties have had the references heard together; though, of course, there is not a consolidation and separate formal decisions should be given on each reference to preserve a separate right of appeal for each year in issue.

4. The Commissioner's counsel stated that the amounts as set out in para. 1 hereof are either included in their entirety or excluded in their entirety and added an explanation: -

``If they are included in their entirety it is because they themselves are net of all costs such as computer costs; in other words, if in a year he made $30,000 profit from gambling it is because he really made a profit of $40,000 out of which expenses such as the salaries of the girls and the office rent and the computer terminal have come, bringing him back to $30,000.''

Thereupon the taxpayer's counsel expressed a general agreement and added: -

``As we understand how the assessments have been compiled and those amounts returned it has been on an asset balance basis which of course reflects the movement in assets after all expenses have gone out. So we would not concede that the computer expenses and the office expenses were to be attributable specifically to the betting nor specifically to the shares or should be split in some way as between betting, as to shares and to other things... All that the calculations have done as a

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matter of arithmetic has been to work out what the total movement in assets has been, to then see what has been returned as income and attribute the balance to betting. So although we don't dispute the arithmetic on the other hand we do not concede that the computer expenses or office expenses are properly to be treated as expenses of betting activities.''

5. Therefore the issue before the Board for each year respectively is whether the taxpayer was engaged in gambling as a business, i.e., in jargon whether the taxpayer was a ``professional punter''. If the answer is in the affirmative for any of the years in issue then the parties agree that the assessment is to be confirmed for each such year.

6. The taxpayer was a full-time student at the university from 1957 to 1962 and studied various subjects notably mathematics in which he did well in his first year but not in the next. He joined the Commonwealth Public Service in 1963 and took leave without pay from August 1967 to attend to his father who was living on a farm and was gravely ill. When he resigned from his employment effective from January 1968 he was about 25 years of age. Thereafter he had no gainful employment, in the sense in which that expression is usually understood. Upon resigning from the Public Service he had some form of self-employment in mind. He said it was fairly vague but he was becoming interested in shares. He carried out some trading of no great significance in shares listed on the stock exchange.

7. For the year ended 30 June 1967 the source of income is shown in the return to be from employment as a Commonwealth public servant and from interest on deposits with banks and finance companies. For the year ended 30 June 1968 there is income from the same employment until 15 January 1968 and also from interest on deposits, dividends and rent from two flats. For the year ended 30 June 1969 the income is rent from one of those flats (the other being his residence) and interest on deposits. For the year ended 30 June 1970 the income is rent from the one flat, interest on deposits, dividends and from stock exchange transactions. For the year ended 30 June 1971 the income is rent from the one flat, interest on deposits and dividends. For the year ended 30 June 1972 the income is rent from the one flat, interest on deposits, dividends and from stock exchange transactions. His income as returned can be described as modest in all years; so also his assets, leaving aside those mentioned in para. 1 hereof. He has been a bachelor at all material times.

8. It was suggested to the taxpayer during cross-examination that he has a photographic memory. The compliment was rejected with a show of good humour. Whether his memory is or is not better than average, it was not apparent during his sojourn in the witness box.

9. The taxpayer says that he commenced betting in about 1960 or 1961 when he was attending trotting events and horse races. Attendances became more frequent from 1963/64. Attendances at the races on Saturday afternoon became customary before the period which now concerns the Board. Up to July 1966 his betting was mainly totalizator betting with ``some'' betting with bookmakers. He was not regularly attending trotting events or dog races prior to January 1968; and also to that time he infrequently placed bets with a T.A.B. agency. From January 1968 he was attending all or most mid-week races held in or near Sydney; and as well he attended Saturday race meetings in Sydney, and trotting events in Sydney. He did not go to many greyhound races until about 1969-1970.

10. In 1968 the taxpayer commenced betting with the T.A.B. agency on Thursday provincial meetings. He opened the first of several telephone betting accounts with the T.A.B. towards the end of 1968. He said that he used it ``fairly frequently'' for betting on provincial horse races held on Thursdays: not ``continuous betting'', ``just idle betting''. After he failed to use the telephone facility for a period said to be six months it became dormant and a new application was made to enable it to be used again. This was first said to have occurred towards the end of 1969 but the actual date of reopening was shown to be 23 February 1971. It was used only for ``minor betting'' until about September 1971 on provincial races.

11. Whilst he did not make race meetings a social occasion, no doubt he did enjoy attending race meetings and regarded T.A.B. premises as dreary and unexciting. Nonetheless he usually positioned himself between the totalizator and the bookmakers' stands whereby his attention was more easily focussed on movement of odds than on the horses or on the race itself. He had only the most casual interest in horses as creatures, and

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none at all in greyhounds except so far as they furthered his gambling activities.

12. His method of punting (his counsel's phrase, and it is innocuous) did not change at any time from 1966/67 to the end of June 1972 - the betting was of the same type. His bets on races were mainly with ATL on the on course tote. His dislike of betting with bookmakers was based on his experience (or so he told the Board) that ``they cut you - i.e., the quantum of the bet - in half all the time''; and he did not have a high opinion of the ``associates'' of bookmakers.

13. The first of four events of special significance is that in December 1970 the taxpayer became the tenant of office premises within a few miles to the east of the centre of the city and thereby about twice that distance from his residence. Despite a more modest arrangement as given in evidence in chief it appears that the office premises had three rooms and he had an inter-communication telephone system with two lines and with six hand sets installed in various rooms. Under cross-examination, he said that he was trying to remember the reason (apart from the girl employees talking a lot on the telephone) and then gave it as ``heavy betting''. His telephone account in a typical year (1972) was $500 or $600, maybe less. He employed two girls in that office from late January or early February 1971 until August 1971 and then one only. There was not enough work for two girls and they were ``really casual'' and ``once the original mess was cleaned up'' the one girl was doing two or three hours in the morning and then going home.

14. Throughout the year (and perhaps for a longer time) prior to opening his office the taxpayer had retained at his home newspapers containing the results of about 1,000 horse races with probably 12,000 horses participating; and the starting prices for the winners and place getters. He said that the newspapers were of special interest to him for the additional reason that he had in mind various proposals concerning stock exchange transactions. These newspapers were transported to his office soon after he obtained the tenancy.

15. The stated purpose in opening the office was this: -

``I'd made so many transactions and I was holding so many shares I think I made over 200 transactions that are listed. There are a lot listed here anyway - that everything was getting a bit out of hand. It was in a mess and I had failed to pay calls on shares. I had quite a few forfeited. In fact my whole dealings in this matter were pretty messy so I needed - I was operating from a suitcase. I needed to get everything in order... I didn't have an accountant.''

16. A second event of special significance is that on 17/18 December 1970 the taxpayer entered into an agreement with I.B.M. Australia Ltd. for the installation in his office of terminal equipment enabling I.B.M. to furnish computer services through the use of what is known as CALL/360 service. This became operational about the end of April 1971. He received monthly accounts in accordance with the use made by him of the computer. This continued throughout the whole of the balance of the period here in issue. For the period of 14 months May 1971 to June 1972 the taxpayer paid I.B.M. $21,742 for the rental and use which he made of the CALL/360 terminal. This terminal was operational in the taxpayer's office until September 1972 when he replaced it by leasing a Series 3 computer. He entered into the agreement for that computer on 3 March 1972 and the company's acceptance is 23 May 1972. It was installed for him in September 1972. That agreement provides for a monthly rent (total monthly availability charge) of $1,568.60. Later again, i.e., outside the years in issue, the taxpayer replaced the Series 3 with a terminal for an I.B.M. 370 computer service. In conjunction with the CALL/360 terminal the taxpayer leased a P.M.G. line to the computer.

17. The Series 360 terminal operates on higher level programming language which resembles everyday English. Nonetheless it appears (so far as the evidence deals with the subject) that the taxpayer was his own systems analyst to define problems; and also his own source programmer to work out in programming language all the steps needed to carry out the problem as analysed (cf. the appendices A and C to Case J36,
77 ATC 335 at pp. 346-348). Perhaps also the taxpayer had to translate the generalized programme language into the detailed machine code used by computers - this tedious operation is usually done automatically by a computer using a standard programme. He typed in the programmes himself. The evidence suggests that the taxpayer made the choice of the 360

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terminal (so also the Series 3 and later the 370 terminal) on his own independent assessment of his needs.

18. The cost of maintaining the computer service was obviously immaterial when compared with the advantage to the taxpayer of having the computerized information which on his evidence was very largely if not wholly related to gambling - vide the cross-examination thus: -

The taxpayer was not asked why the computer service was so important when his use of it (so far as was known) was either frivolous or had only a slight bearing on those activities which provided some part of his livelihood; nor was he asked why his activities should justify the outlay on such an expensive sophisticated piece of equipment if his purposes and use of it were as stated by him.

19. His counsel asked the taxpayer what led him to install the I.B.M. CALL/360 terminal and the answer was: -

``I'd been trying to get some sort of computer for years. I'm interested in that sort of thing. I have been interested in electronics all my life and eventually when this I.B.M. CALL/360 arrived it was a good way of getting hold of a - getting access to a computer...

I'd built small valve sets, crystal sets, digital volt meters lately. In 1969 I was making a series of logic circuits with P.M.G. relays... just for interest...''

and so on for his interest in magazines with computer sections for his expertise in radio technology, surveying and navigational problems.

20. In respect of share transactions and the like he said: -

``I was going to put in most of the ordinary indexes, or some of the other indexes, like the price of gold and - overseas the New York Dow Jones and the London index in and read past curves and predict future trends... But the share market hasn't been any good since 1969/70.''

21. The taxpayer further said that he contemplated putting various stocks and shares into the computer CALL/360: -

``I was interested in putting them in and interested in looking at the form of dogs and having a look at that but mainly it was just stocks and shares and all sorts of games you can play with a computer. In fact I've put various analyses of simple things like noughts and crosses and throwing pennies and doing standard deviations of random numbers with the machine.''

22. In August 1971 he tried ``running off this dog thing for a few years'': -

``I actually put some form in for the greyhounds and through some complicated - or I thought they were complicated programmes - tried to work out a method of betting on the doubles on the T.A.B....

I put the form in from Greyhound Recorder on the two legs of the doubles. In those days there was only one daily double at the dogs so I put the form of the eight dogs - or, if I did not know of the scratchings, nine, perhaps dogs in each leg in the machine built up a history of how they ran at various courses, because every course has got a different distance and

ATC 258

different surface so that you had to sort of say, right, if a dog can run 30.15 at Wentworth Park that is equivalent to 26.6. You'd have a sort of course ratio. And I built up a series of graphs of how a dog with that time would run from a box at that course and I multiplied - a complex system - multiplied the graphs through and got a set of odds for the dogs. It was quite an interesting exercise.''

23. His counsel asked him whether he used the computer in relation to the gallopers, i.e., race horses. The response was: -

``I didn't put any gallop form as such (emphasis added) but I did put a few prices of past results in it, in one file.... The price - one line each in the file would have the price of every horse that ran in a race in it and the first three prices would always be the first, second and third place-getters. From this you could just merely add up the number that had, say, run at six to one and see how many of them had won which was a statistical exercise that showed that they run according to the bookmakers' percentage, which was: the bookmaker takes about 10% off, the T.A.B. takes 17% off, and so, instead of six to one ending up winning one time in seven - which was its chance plus a stake - it would win about one time in eight....''

24. The taxpayer selected the results of one thousand horse races run during the course of of a year with about 12 horses in each race. He keyed into the computer the starting prices of some or all twelve thousand competitors and information as to place-getters. He said that this enabled him to ascertain that where a horse might be say eight to one the bookmaker would give only seven. Another of his examples is that if a horse on past performances should be at six to one the bookmaker would quote five to one. Yet he said that all this confirms that the bookmakers' percentage is ten. After the close of his re-examination and in answer to a question from the Chairman the taxpayer said: -

``A bet has to add up to 110%, you could say the horse is 10 to 1 against - when you take Luskin Star at say 6 to 4 - those horses could be 5's or something shorter, therefore they could be good bets. If one is in, the other is out. They all add up to 110%.''

25. A third event of special significance is that on 22 February 1971 the taxpayer opened a commission account with Automatic Totalisators Ltd., and deposited with the company a sum of $10,000. This account was used by the taxpayer for placing on-course bets at Sydney on horse races held interstate (usually in Melbourne and on occasions in Brisbane). The taxpayer whilst at N.S.W. racecourses frequently made bets on the Melbourne totalizator. It was only on rare occasions, e.g., on a Melbourne Cup day, that he attended horse races in Melbourne. By means of this account the taxpayer was able to place bets on the course totalizator without producing cash and by using a book of coupons somewhat similar to those used by customers of trading banks. Although the question was not put directly to the taxpayer, the implication throughout the evidence is that all bets recorded in his name were made solely on his behalf and not as ``turf commissioner'' for any other person or persons.

26. Cross-examination revealed that the taxpayer opened two telephone betting accounts (using different initials of his Christian names) with T.A.B. to suggest to them that the accounts were held by different persons and so avoid an amalgamation. When asked by cross-examining counsel why he needed to have two such accounts he said it was to handle the amount of money which he was betting. He deposited $2,000 for the first of the two Sydney T.A.B. telephone accounts - on stand-by for betting operations. Furthermore it came out during cross-examination that during 1971/72 he opened a T.A.B. telephone account in Canberra (with $1,300 available in it at one stage); and (possibly before 30 June 1972) he opened a T.A.B. telephone account in Melbourne. Thus at some time, and it may be during the period here in issue, the taxpayer had four telephone T.A.B. betting accounts. This series of telephone betting accounts I categorize as the fourth of the events of special significance.

27. Soon after opening his office the taxpayer was using his T.A.B. telephone account from there; earlier he had placed bets at the local T.A.B. agency. (He did not at that time have a telephone in his home.) The account had a credit of about $2,000 or $3,000 as at August 1971. He preferred not to use the T.A.B. telephone account for betting on horse races and did so only in a minor way.

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28. The taxpayer deposed that when he attended horse races in Sydney during the years in issue he would placed his bets without using any source of information and ``purely on (his) own volition''. He rarely bought any form guide or other publications which gave the form of horses. In deciding which horse to back he mainly ``would watch how they went in the betting: who was backed and who wasn't backed.'' He said that it depended whether he could get a good price from the bookmaker or if he could get a good price with the tote on the horse which he thought was likely to win the race; that he ``did not like making large bets with a bookmaker'' and stopped himself ``making a bet over $5,000 with a bookie'' - and because of past experience he was fearful that he would lose a winning ticket; that he did not keep records of past performances of horses and did not pay his winnings into any particular one of his several interest bearing bank savings accounts; simply using the one which happened to have the presently lowest credit; and also withdrawing from the one which had the presently highest credit. (A later change as to banking is of no importance.)

29. It was revealed during his cross-examination that for at least one year the taxpayer was regularly paying money to a firm which provided information by telephone for ``the price for the second leg of a double'' in greyhound races. For example to take the year 1971: 10 May $74; 10 June $77; 2 July $63. This apparently was the pattern.

30. In pursuing an analysis of the performance of those horses which he felt would be capable of winning a race he was never able to eliminate a horse - it was not as scientific as that, it was more intuitive. So far as favourites were concerned he was not looking to compare the displayed tote odds with those quoted by bookmakers. He said that if bookmakers were offering better odds than the tote and he thought that the horse was a fairly good thing, shorter than the odds ``required'' then he would try and take the bookmakers' odds - but he says that bookmakers were loath to accept the stake in full from him.

31. On several occasions during his evidence the taxpayer referred to random numbers. His counsel at one point of time asked him whether the standard variation of random numbers had any relevance to his betting activities and the answer was: -

``No, no, it is just to do a group sampling, that's all to give you an idea of variations if you take group samples.''

When the taxpayer sent a letter to COMSEC seeking statistical information intended by him to be keyed into the computer the letter set out that he had made a list of 40 stocks (16 mining, 12 industrial and 12 oil) chosen by him in a random manner. He had hoped to obtain printed graphs of share fluctuations and COMSEC tapes which he understood could be run into the CALL/360 terminal. His purpose was ``to see if he could work out anything from the share market''.

32. His practice in betting with bookmakers (and so far as practicable upon the totalizator) was to decide what sum he wanted to be paid to him including his stake. So that if he sought $500 and the odds were 4 to 1 he would place a bet of $100. He said that he generally ``bet around the same amount''. He made no decision before going to a race meeting how much he would outlay on each race and his bets were not influenced by the success or failure of bets made on earlier races. He would avoid backing horses that he thought would not win the race; or if he had had bad luck with them previously.

33. The taxpayer said that the form of horses in Melbourne was much clearer than the form of horses in Sydney; and there was a better quality horse running in the Melbourne metropolitan area than in Sydney. Yet he was more concerned with the movement in odds as ``no-one knows form anyway''. He says that at a Sydney racecourse he would back on the totalizator an unknown two-year-old horse in a Melbourne race ``influenced by the fact that it had no form'' and was being ``backed quite heavily in the ring''.

34. The taxpayer said that possibly he told the Department investigator that he was a numbers bettor rather than a form follower; and that he had told the I.B.M. representative that he wanted to put the prices of horses into the computer to see how they ran.

35. The taxpayer's procedure was to wait until the last five or ten minutes before he placed money on the tote, whilst he was on the racecourse. He indicated that he thereby excluded to some extent the not always avoidable reduction in odds available on the totalizator. He would only place a bet on the tote at an earlier point of time, say twenty

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minutes before the race was due to begin, if he thought that a particular horse was certain to win.

36. His preference was against placing bets with bookmakers notwithstanding his theory that they gave better odds than do the mechanical devices for betting on horse races. He stressed that his betting with bookmakers was minor especially when compared with his bets made through totalizator facilities.

37. He was asked under cross-examination to take a typical $10,000 to be bet by him on interstate races only and to say what percentage of that would be spent on the tote compared with the percentage bet with local bookmakers. The answer was - at least 80% was on the tote.

38. The taxpayer said that the volume of betting which he did upon racehorses was quite small compared with what he bet on greyhounds. The individual average bet he said was $70 for gallopers compared with $250-500) (at the end of June 1972) for dog races. This was qualified by his evidence that he was betting on perhaps three or four times as many horse races as on greyhound races.

39. He said that when he made on course bets on greyhounds at the metropolitan course he did not have regard to the computer information - just acted on his own information, whether he liked a dog or not, whether it was backed in the ring, price fluctuations and just general betting, ``the same way as he did everywhere else''. The one mode of betting was complementary to the other in his estimation. He said that in making cash bets on greyhounds at the local T.A.B. agency he used the computer material only to a small extent. The greater amount of betting was done by use of the tote coupons and on interstate races. Bets made on a Sydney racecourse with the totalizator on Sydney races were in cash. Bets with bookmakers on racecourses were always in cash. The taxpayer regarded the use of the totalizator as the easiest and his main mode of betting.

40. His counsel asked for an estimate ``in comparison with the amount of bets (he was) making in June 1972 on the telephone T.A.B. account which... is somewhere in the order of $5,000 a month what the extent of the volume of betting on the local T.A.B. agency was''. The answer is: ``It would have been less than $2,000 on the local T.A.B.'' The taxpayer was then referred to his betting with A.T.L. on interstate horse races (i.e., bets made on a Sydney racecourse upon horse races in Melbourne) for five meetings in June 1972 and he agreed that these bets came to over $32,000. Then his attention was drawn to his earlier evidence that the volume of betting with T.A.B. on greyhound races in which he used his computer method was perhaps one-third of the volume of his betting and he corrected the fraction and said it would be between a quarter and a fifth - less than $7,000 compared with $32,000. As was pointed out by the Chairman that was only so if June 1972 was a representative month. Thereupon the taxpayer said that it was typical.

41. Betting on trotting events in the year 1971/72 when he attended the course on Friday night, a regular occurrence, was mainly on the daily double and the quinella, apart from the odd win and place bet. He would have had less than $1,000 on the daily double and about $800 or so on the quinella. He put a fair average of his bets at Harold Park greyhound racecourse at $1,500 per meeting. Because the balance of money for his telephone account was low in September/October 1970 the amount which he bet on course in cash on greyhound events, not using his computer material, was larger than the amount which he bet per the telephone account - and he carried the period through to June 1972.

42. The taxpayer said that it took him a few weeks to learn basic computer language. No doubt considerable time was taken up in the early stages in ``playing'', i.e., practising with the computer. (The yes-no language of the binary system (one and two and the powers of two) which requires three to be represented by two vertical lines and seven by three vertical lines requires some application.) The writing of the programmes for the computer took him a day or so for each file, after the staff of two girls had typed out the information. It was not necessary to await the whole of the typing before commencing on the programmes. Some days were spent experimenting with a formula for a quinella but the results were inconclusive. His use of the computer to play card games, e.g., giving poker hands can be taken as being to gain proficiency in use, as the odds on obtaining any five cards from a shuffled pack (so also any thirteen) are readily available in books on such subjects.

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43. The taxpayer has given his use of the computer as ten programmes for the one thousand starting price horse races (i.e., 12,000 competing horses); and quinella; and six a day for the greyhound races; and ninety others to do with oil fluctuations (though these ninety or many of them it seems were left at the preparation stage and not put into the computer); plus learning programmes, sight reduction tables, and general interest programmes, e.g., plotting the position of a star in the sky.

44. The first major programme for the computer was the analysis of the performance results of gallopers. The second was data for the quinella. The third was for the greyhound form which he said led to the computer print-out giving an array of bets. By September 1971 the computer was producing recommended bets for the daily double at greyhound races; the taxpayer says that he ceased to use it for that purpose after the expiry of the period which is presently relevant. For the ``greyhound work'' he said that the computer would be turned on for less than half an hour.

45. The exercise in respect of the form of greyhounds occupied the taxpayer for something less than a fortnight in setting up the initial programming; and thereafter for about a quarter of an hour a day with six computer programmes, i.e., a test programme to check the data and a programme to run through and ``a final two'' off each. The typist was occupied on the computer work for about two hours each day, i.e., about half her working day. He accounts for the computer time (apart from aspects of gambling) as being various small programmes to do with stocks and shares and various random number programmes. The total number of programmes he prepared to June 1972 is given as over 100, viz., six used daily for the greyhounds, a few for quinella starting price and the thousand horse races, and over 90 other programmes which at best were exercises. These estimates of time can be contrasted with the progressive monthly charges of I.B.M. for rental and storage/retrieval use - for example the first six months of 1972 are $1,577, $1,949, $3,361, $2,473, $807 and $552. (N.B. For the last two months he was awaiting the installation of a new computer system where the data would be in a different format vide para. 16 to 18 hereof.)

46. The taxpayer said that the computer was in a winning situation for ``one glorious'' period about 1974. He was asked in cross-examination whether between September 1971 and early 1976 ( sic ) there were improvements in the ability of the computer to predict successful winners and the answer was ``At the end of this period it started losing quite heavily and I may have tried to refine it.'' He had deposed in chief that the computer way of betting on greyhounds had shown a profit for a period which is presently material; it was an on-going thing and as he put more form in, it became more accurate.

47. The summary of the taxpayer's transactions with Automatic Totalisators Ltd. for the six months ended 30 June 1972 is as follows: - 

                   Total No.             Average

Period   Meetings  of Horses    Amount   Investment    Dividends      Result

(1972)   Attended   Backed     Invested  Per Meeting   Received   Profit   Loss



January     6        150        31,040     5,173        38,858    7,818

February    4        106        20,230     5,056        15,450            4,780

March       5        129        23,060     4,612        14,930            8,130

April       7        178        29,230     4,175        27,520            1,710

May         4        119        19,650     4,912        23,064    3,414

June        5        166        32,910     6,582        32,598              312

           --        ---       -------                 -------   ------  ------

           31        848       156,120                 152,420   11,232  14,932

           --        ---       -------                 -------   ------  ------

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48. The Commissioner supplied a ``summary'' of the taxpayer's deposits with and withdrawals from A.T.L. for the six months 1 January 1972 to 30 June 1972 as follows: - 

1972                       Deposit             Withdrawal             Balance

                              $                     $                   $

 1 January                                                            10,120

 3 January                 2,000                                       7,762

 8 January                                        7,170               10,000

 4 March                   2,000                                       8,652

11 March                   5,000                                      10,902

25 March                   2,000                                      10,972

 1 April                   1,400                                      10,258

15 April                   2,000                                      10,212

22 April                   2,000                                      10,708

27 May                                            5,962               10,000

17 June                    2,200                                      10,012

24 June                    2,000                                       9,726

30 June                                                               13,888

49. There is considerable detail of the taxpayer's betting transactions on one T.A.B. telephone account from 2 February 1971 to 7 May 1971 (total bets $680, total returns $580) and from 1 August 1971 to 20 June 1972 (total bets $26,182, total returns $25,104). For the first of those periods there are 32 days when bets were made; for the second period the days are 177; the average monthly sum outlaid was $21 and $147 respectively. The particulars for the period available show vast differences in the number of betting days per month (1 to 22), in the average sum bet in the several months ($11.50 to $294.50), in the total bets in any month ($11.50 to $4,002), and in the total dividends paid, including refunds of stake, in any month (nil to $5,059).

50. For the period 23 February 1971 to 24 June 1972, when records are available for the A.T.L. commission account, it appears that there were days when (on that account) he made a profit of as much as $8,168 and on other days a loss of as much as $4,358. On approximately half of the days recorded the sum as wagered per day on that betting account exceeded $5,000 and wagers totalling in excess of $6,000 a day are common. There is no day on which the total wagered is less than $2,390; and the highest totals for any days as wagered by him per that account are $8,020 and $8,610 (twice).

51. There is a ``rough summary'' of the taxpayer's Automatic Totalisator results from February 1971 to June 1972:

1971: February + $2,078; March + $5,936; April + $1,350; May + $718; June + $4,938; July + $3,684; August - $2,558; September + $15,274; October - $1,416; November + $5,054; December + $2,198; and

1972: January + $8,504; February - $5,704; March - $8,662; April - $3,102; May + $6,134; June - $312 (a gain for the 11 months of the first year of $37,256; and a loss for the following half year of $3,142).

52. On one race day, dealt with in cross-examination and not suggested to be exceptional, the taxpayer placed bets on interstate races per the totalizator in respect of 3 out of 16 horses in the first race; 2 out of 15 in the second; 3 out of 11 in the third; 4 of 12 in the fourth; 3 out of 14 in the fifth; 4 out of 13 in the sixth (8 bets on 4 horses); 3 out of 14 in the seventh; 6 out of 15 in the last race (9 bets on 6 horses). The respective totals bet by him per race were $710, $210, $250, $510, $510, $1,220, $1,780 and $1,340. On three days mentioned by the taxpayer's counsel in his closing address the volume of betting was (8 January 1972) $12,428; (22 February 1972) $10,826; and (24 June 1972) $10,212.

53. The Commissioner's counsel requires the Board to double the outlay (para. 47 hereof) of $156,120 (notwithstanding that the result is a loss of $3,700) and by use of such other evidence as there is plus the taxpayer's guess at percentages of cash bets, etc., arrive at a totality of bets for the 1971/72 year of between $460,000 and $500,000, and then to apply that to every year in issue; though when taken up on this, counsel had some qualms in respect of the first and the second of the years here in issue. What counsel asked the Board to do is to speculate as to the volume of bets and there is a prohibition against any court or tribunal indulging in speculation as a step to a decision, as distinguished from drawing an inference (
Jones v. Dunkel (1958-1959) 101 C.L.R. 298 , at p. 304 ;
Caswell v. Powell Duffryn Associated Collieries Ltd. (1940) A.C. 152 , at p. 159 ). The Commissioner's Counsel proceeded in this way: -

``I take it that what the taxpayer is saying there is that if he was investing $156,000 in six months - as shown in the document I have handed up - on the Automatic Totalisator, one can safely add to that another $31,000 to represent cash betting on gallopers which brings us to $187,000.

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One can then add to that another $60,000 - or pardon me - another figure between $45,000 and $60,000 - being one-third or one-quarter of that total amount on gallopers to cover other forms of betting. If the three times or one-third was the relevant figure it would be a matter of adding on $60,000 odd which would mean investments were at the rate of $250,000 per six months. If it was four times then one would have to add on $45,000 and then get to the stage of $230,000 odd per six months.

What we do know from those parts of the evidence, Mr. Chairman, with respect, is that he was investing in the last six months at the rate of between $460,000 to $500,000 per annum.

If I could then come back to whether or not the situation was any different at any material time throughout the six-year period, we have various items of evidence....''

(Furthermore, apart from five race meetings attended by the taxpayer where particular are not known his outlay on bets for the half year ended 31 December 1971 per A.T.L. was $116,620 with a profit of $16,250.)

54. Counsel for the Commissioner put a certain proposition several times to the taxpayer presumably because the Commissioner regards it as important. The series of questions and answers is as follows: -

55. I find it necessary to say, with due respect to those who hold the contrary opinion, that I would apply the taxpayer's comment - ``it is too simplistic'' - to much of that line of cross-examination. It is to be noted that the discussion between counsel and the taxpayer was not centred on ``top chances'' which become available at unexpectedly long odds. The relevance of this matter is on the question of businesslike methods of procedure or nondescript/haphazard trusting to long odds being lucky in the long run. If a horse (or a cross country runner) has run in 24 races and been first past the post in races 6, 18 and 24 the horse (or the runner) cannot rationally be said by reason of those facts to have been due for a loss in race 19, etc., or to be due for a loss in races 25, 26, 27, 28 or to be due for a win in races 29, 30, etc.; nor do those facts alone give any indication of true odds for any of the past races or for any ensuing race. Yet, as with so much of what the taxpayer said, I get the impression that he is describing an image seen in a distortion mirror and, though he can observe the real shape of the object which is being reflected, the Board is left to correct the distortion before it can arrive at reality. ``Too simplistic'' also is the comment I would make to the taxpayer's example ``Or an even money horse which is one to one, its chance of actually winning the race if the odds were correct, would be one out of two, because it is even money. There is one chance that it will win, one chance that it will lose... It's got one chance in two of winning.''

56. The Commissioner's proposition has some distinguished adherents. Mr. Justice Eggleston in Seminars on Evidence at p. 61 said: -

``A combination of probabilities of less than 50% may product a probability greater than 50%. Thus evidence that a party backed a horse whose true chances (not bookmakers' odds) were nine to one against would not raise a probability that that party had won money, in the absence of knowledge of the result. But if he had backed seven such horses his chances of at least one win would be 53% (.97 =.47 approximately).''

57. There is a chasm between the chance of winning and winning. I can see no basis in the example given in the preceding paragraph for the conclusion that the chance of the punter having at least one win in the seven races is 53%. As a matter of mathematical principle the sample used has to be both random and large enough (and in that example it is neither) for the probabilities to be calculated. If the true prospect for a horse is nine to one against it winning then the selection of that horse at the same odds in seven races or of a group of seven such horses in several races is not likely to improve the gambler's fortunes. Such occurrences are different from pure chance (as well as from a random sample selected on established principles). The probability of a joint occurrence of two independent events equals the product of the probabilities of those events. The chance of turning up heads on any correct throw of a coin is one in two. The chance of turning up heads on any two consecutive throws is one in four. Yet if a coin in perfect balance has come up heads five times

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in succession the chance of it coming up heads on the sixth throw is one in two. The coin has no memory of the past and no plans for the future. The performances of trained animals in a particular race or in a particular series of races has no analogy with the behaviour of tossed coins or of marbles tumbled in a barrel. A prediction of performances of horses in a particular race cannot be made with the same confidence as with Olympic athletes in track or swimming events but there is a basis for an analogy. There are imponderables in horse racing which permit the application of the function of random numbers. However the paradoxical conclusion from incalculability to calculability is not achieved with a handful of ciphers. (It may be as well to mention, to avoid a possible misunderstanding, that I appreciate that in some circumstances the combined chances of either one or other of two possible occurrences coming to pass are equal to the sum of their separate chances minus the chance of both happening together. It is readily illustrated by the calculation of odds in the rolling of dice. This is hardly applicable for a particular series of horse races, because the exercise can only be carried out if the sum of the odds of all possibilities, e.g., of all contestants, is numeral one, and no handicapper can achieve perfection.)

58. The mathematics of probability do not deny the right to play a hunch or act on intuition, for such are isolated occurrences and these events only begin to act as laws when vast numbers of instances are involved. Furthermore the mathematics of probability do not preclude the possibility of a run of good luck or of bad luck. By the same token these laws give an individual only a remote possibility of being consistently lucky or unlucky when playing hunches or acting on intuition; that is to say, of consistently doing any better or worse than a probability prediction would warrant. Thus, if a question arises: What are the chances of success of a person who is determined to keep on tossing a coin at every available opportunity until it falls heads fifty times in succession? The mathematics of probability give the answer: None, no matter what the life span.

59. As the taxpayer studied mathematics at tertiary level he most likely would know that the theory of the mathematics of probability began in the middle of the 17th century in correspondence between two master mathematicians consequent upon inquiries by gamblers and so the two subjects are closely related. He has indicated his awareness that computers have extended the range of application for the mathematic apparatus of random functions. Random numbers as such have been readily available since 1947 in the Rand Corporation publication One Million Random Digits With One Hundred Thousand Normal Deviates , so this could hardly have been an exciting pursuit for the taxpayer; and he is not likely to forget that if there are ten horses in a race and four are regarded as ``nohopers'' the positions in which the remaining six can finish the race are factorial six, i.e., 720.

60. The mathematics of probability provide a way with the aid of a computer of calculating chances not with precision but with more sharpness than could be achieved by (i) the general body of punters who willy-nilly determine the pay-out by the totalizator; and (ii) those bookmakers who, in consequence of endeavouring to clear a designed percentage (and there is no reliable evidence that this is ten percentum) find that their odds as first quoted have to be adjusted because of the vagaries or sheer optimism of the general body of punters. The use made by the taxpayer of the computer in assessing the probable performances by greyhounds under various hypothetical conditions in indicative of what he could do (and says he did not do) in respect of race horses, and trotters as well. It is to be noted that the taxpayer was contemptuous of any popular horse which consistently was a place getter, unless it could be seen from his research to be a potential winner. He was not interested in the random occurrence of a 6 to 1 horse being a winner even when quoted at longer odds. By aid of the computer he was able in daily double events to make an informed selection of horses in one of the two races to tie in with a likely winner of the other race, and at the same time rigorously avoid those combinations where the percentage of profit would be smaller than he desired.

61. There is one further aspect of the proposition of the Commissioner's counsel as made in his final address which should be set out: -

``The taxpayer had a theory as to the performance of gallopers which was relevant to his betting operation. This of course was the theory that was established for him by means of a computer... namely that if you bet on every horse in a race for

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the whole of the year and you had outlaid $100,000, you would expect to get $90,000 paid out to you, because on an average bookmakers take 10% gross off the top of all the money they receive. That was a theory that was tested and it was illustrated by the taxpayer in saying that a horse that is starting at six to one which means $6 profit for $1 invested, i.e., a total payout of $7, a horse which is starting at six to one has a statistical chance of eight in one of winning the race. So that if the horse is quoted by the bookmaker at six to one and one bets on eight separate occasions on horses so quoted, statistically one of the eight occasions it will win and you will get paid out $7. But you will have invested eight so that the bookmaker will make $1 profit on the eight transactions.''

The core of the proposition is that if it be accepted that for the whole pool of bookmakers taken in respect of all their transactions over a year (seemingly about 1,000 races averaging 12 horses per race) the payout is in the ratio of 9 to 10 to the intake, then for the median (not average) punting upon all those 12,000 horses with all those bookmakers the take-home is in the ratio of 9 to 10 to the outlay. This is necessarily so as it is expressing the one premise in two ways. Yet neither the taxpayer nor any other racegoer (bookmaker or punter) is ever likely to have sufficient information to make a reliable estimate of the median, or, if it matters, of the average. The only person who will in the course of time have the bulk of the information or a satisfactory sample is the Commissioner of Stamp Duties.

62. I am far from satisfied that the taxpayer has made a full and true disclosure to the Board to enable it to assess the extent to which he engaged in betting and the degree of system and organization which was involved; and I find it impossible to reconcile the admitted profits from gambling with the established accretion of assets agreed to arise from gambling. However the Commissioner's counsel has made it clear that the references are to be decided on the basis that the taxpayer's credibility is not in issue. The issue for each year (in brief) is whether the taxpayer's gambling on horse races, trotting events and greyhound races (or on any of them) was so considerable, so systematic and so organized as to be out of all comparison with that of any ordinary punter and amounted to carrying on a business.

63. Speaking generally the phrase ``to carry on business'' means to conduct some form of commercial enterprise systematically and regularly with a view to profit, and implicit in this idea are the features of system as well as continuity (
Hyde v. Sullivan (1956) 73 W.N. (N.S.W.) 25 at p. 29 ). A bookmaker is conducting a commercial enterprise in that way; he goes about it artfully with a fund of knowledge organized and applied in a systematic way. Cases where the word ``business'' has been held not to import the concept of profit are not in pari materia (e.g.,
Rolls v. Miller (1884) 27 Ch. D. 71 ;
Town Investments Ltd. v. Department of the Environment (1976) 1 W.L.R. 1126 at p. 1144 ;
Griffiths v. J.P. Harrison (Watford) Ltd. (1963) A.C. 1 ;
I.R. Commrs. v. Incorporated Council of Law Reporting (1888) 22 Q.B.D. 279 ).

64. It seems to me, though the point has not been argued by counsel, that if a finding is anticipated that a taxpayer is engaged in a business of gambling, or, idiomatically, that he is a professional punter, it is still open to the taxpayer to show that during the relevant period he was at times engaged in betting transactions which are extraneous to the systemized betting and proof may be given that these are not part and parcel of a business of betting but simply ``taking a punt''
Helton v. F.C. of T. (1959) 12 A.T.D. 82 does not dispose of that question. Furthermore the taxpayer carries the onus of showing with a reasonable degree of accuracy the sum of money attributable to his nonbusiness side of gambling, if he alleges the same (cf.
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 at p. 93 per Latham C.J., and per Dixon J. (as he then was) and Evatt J. in their joint judgment at p. 111; so also Evatt J. in primary jurisdiction at p. 196 where he concludes by saying: -

``But the fact remains that the appellant failed to establish affirmatively what was the taxable or assessable income....''

65. It was recognized by the High Court in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at pp. 59-60 that the exigencies of administration may require the Commissioner to adopt a more or less arbitrary expedient; and the joint judgment by Latham C.J., Rich, Dixon, McTiernan and Webb JJ. then points out that it is scarcely possible for a Court to do so (and

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I would add for a Board of Review to do so as it is bound to act judicially in deciding matters inter partes ). Furthermore when an apportionment is called for it has to be one which the facts of the particular case make just.

66. I see no objection to the general proposition that gambling can be carried on as a business per se or as an incident of another business (cf.
Cooper v. Stubbs (1925) 2 K.B. 753 ). Wool futures and cattle futures provide a ready opportunity to carry on gambling as a business; and if a grazier is operating on the futures market as a hedge against losses on sales of his own wool or cattle, then his dealings in futures may be an incident of his business as a grazier. In the determination of the question ``business or not'' I would have regard to the presence or absence of the application of an organized system of knowledge, i.e., a scientific method. As to commercial transactions of a speculative nature see
Morley v. Richardson (1942) 65 C.L.R. 512 . I do not rule out the possibility of a business of card playing for money (poker, bridge, etc.) notwithstanding what was said by Rowlatt J. in
Graham v. Green (Inspector of Taxes) (1925) 2 K.B. 37 at p. 42 in a different connexion, i.e., the concept of trade; and what was said in the special circumstances of
Burdge v. Pyne (1969) 1 All E.R. 467 .

67. The standard which I apply to determine the issue of business or no business is the objective one (
I.R. Commrs. v. Livingston (1927) 11 T.C. 538 ;
J. & R. O'Kane v. I.R. Commrs. (1919-1922) 12 T.C. 303 ;
Thomas v. F.C. of T. 72 ATC 4094 ; (1972) 46 A.L.J.R. 397 ; though I do not disregard the subjective element of the taxpayer's stated purpose. In
Martin v. F.C. of T. (1952-1953) 90 C.L.R. 470 at p. 474 , Webb J. at first instance said that the test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them - a determination eventually based on the large or general impression gained. On appeal it was said in the joint judgment of Williams A.C.J., Kitto J. and Taylor J. that: -

``The onus, if the case is one in which onus assumes any importance, is on the appellant to satisfy the Court that the extent to which he indulged in betting and... was not so considerable and systematic and organized that it could be said to exceed the activities of a keen follower of the turf and amount to the carrying on of a business. But no question of onus appears to us really to arise. It is simply a question of the right conclusion to draw from the whole of the evidence.''

I take this to refer to such evidence as is before the tribunal (cf.
Briers v. Atlas Tiles Ltd. 78 ATC 4017 at p. 4031 ) subject to all the deficiencies, if there be any (as there are here in the evidence).

68. In deciding what is the right conclusion to draw from the whole of the evidence I apply
Briginshaw v. Briginshaw (1938) 60 C.L.R. 336 at pp. 360-361 for an issue in a civil matter, i.e., whether the evidence produces a mere preponderance of assent in favour of either proposition, business or no business.

69. The most recent Court decision relevant to the present issue is
Shepherd v. F.C. of T. 75 ATC 4244 . Rath J. analysed previous judgments and held that the question for decision is whether the extent to which the taxpayer is engaged in the activity or activities (here betting on race horses, trotters and greyhounds) is so ``considerable and systematic and organized'' that it can be said to exceed the activities of a person keenly pursuing a pastime and amount to the carrying on of a business. Rath J. held that the following factors will not of themselves lead to the conclusion of carrying on of a business, viz., (i) the considerable amount of time spent by him on racing and betting operations; (ii) the very large proportion of his assets and income applied by him for that purpose; (iii) the systematic methods employed by him if those methods are not an organization of his efforts in the same way as a bookmaker organizes his, and this imports far more than the collection and use of information as to the form of horses; (v) that betting is the source of his livelihood.

70. The gravamen of the decision in Shepherd is this: -

``The common reason why betting winnings were not regarded as `profit or gain' in Graham v. Green (supra) or `income' in Martin v. F.C. of T. (supra) is that in those cases there was no organization of the activity towards the end of making a profit. In that sense, such gains as arose in the course of the activity had a significant element of chance, and there was no system, or no sufficient system, in relation

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to the chances involved as to lead to the conclusion that a system for profit-making had been devised...; but skill which is displayed in a pastime... is not decisive of the question as to whether a business is being carried on, and may not in many cases be even relevant to that question.''

71. The essential feature in Shepherd is that there the taxpayer was ``not predominantly interested in gambling; that the gambling in other words (was) subsidiary to her love of horses.... The fact that she confined her betting primarily to her own horses is indicative not so much of a system for winning money as it is of pride and confidence in her skills''.

72. In
D.H. Prince v. F.C. of T. (1959) 12 A.T.D. 45 at p. 65 Menzies J. said that a certain person, a racehorse owner, was a gambler on racehorses in a big way, not because he loved horses, not because he enjoyed taking a chance, not because he was addicted to betting, but because as a matter of business he turned his knowledge, his experience and his ability to making his living out of horses and racing. The facts in Prince are very different from those in the instant case as Prince had been and was alleged to have continued to be a bookmaker as well as a punter and racehorse owner.

73. That punters may be able to organize their activities in a way analogous to that of a bookmaker is implicit in the judgment of Evatt J. in Trautwein v. F.C. of T. (1935-1936) 56 C.L.R. 196 at p. 207.

74. The Commissioner's counsel has set out a list of ``relevant questions'' to be answered in arriving at the decision whether the taxpayer was carrying on a business of gambling. The taxpayer's counsel says in effect, and rightly so in my opinion, that many of these questions are derived from observations made on facts occurring in special circumstances. Therefore I propose to be brief in my answers, though with an explanatory addendum for the first: -

75.(a) I would uphold the objection and reinstate the respective previous assessment in respect of each of the years ended 30 June 1967, 1968, 1969 and 1970.

(b) I would uphold the Commissioner's decision on the objection for the years ended 30 June 1971 and 1972 respectively, and I would confirm the amended assessment for the first of those years and the assessment for the second of those years.

Claims allowed in part

 

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