Edited version of private ruling

Authorisation Number: 1011598793915

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Ruling

Subject: Assessability of gambling income

1. Does the income from your betting activity have to be included in your assessable income?

No.

2. Are the expenses incurred in your betting activity allowable deductions?

No.

This ruling applies for the following period

For year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You have entered into an agreement, using the services of a company to provide betting services.

You have paid an upfront fee of approximately $10,000 for these services and pay an ongoing management fee on monthly profits. Approximately $2,000 of the upfront fee has been placed in your betting account.

The bets are placed through another betting agency, who are licensed to operate electronic gaming, racing and sporting events.

You have not developed any business plan. The company will make all the betting decisions. They advise you to have a maximum of $10,000 in your trading account. They can only wager 5% of the amount in the trading account.

You have placed further amounts into the trading account over a period of two months. There is no minimum amount required in the account. You have not withdrawn any monies from this account.

You have provided a betting account statement, showing bets to date. There are over one hundred bets for the two month period. The bets are in a range of $25 to $100.

You are not aware of any spread betting involvement in this system. You are not familiar with it or how it works.

You do not place any individual bets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 paragraph 118-37(1)(c)

Reasons for decision

Summary

You are not considered to be carrying on a business of gambling. Therefore, any income derived from this activity is not assessable, nor are expenses deductible.

Detailed reasoning

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 of the ITAA 1997, unless you are carrying on a business of betting or gambling.

Income Tax Ruling IT 2655 discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. This ruling states at paragraph 7:

Ultimately each case will depend on its own facts. There is no Australian case in which the winnings of a mere punter have been held to be assessable (or the losses deductible). As Hill J stated in Babka v FC of T 89 ATC 4963; (1989) 20 ATR 1251, although mere punting may constitute a business, the intrusion of chance into the activity as a predominant ingredient will generally preclude such a finding. If a taxpayer is involved in other business activities in the racing industry, it will be more likely that betting activities are of a business nature.

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:

1. 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?

You do not rent an office or employ staff. You have engaged a company to make all your betting decisions. You appear to keep very limited records yourself. The information you have provided is the account transactions from the betting agency.

You do not appear to keep any records from which you can analyse your performance, which may allow a change in methods to improve your chances of winning.

2. 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.

The scale of your activity is small with an amount of less than $3,000 being made available for betting and wages in the range of $25 to $100.

This is not indicative of a business being carried on.

3. 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 businesses.

There is no related business, all decisions are made by the company and you do not do any individual betting.

This is not indicative of a business being carried on.

4. Whether the gambling activity is principally for profit or principally for pleasure?

Issues such as attending casinos and having a passion for gambling need to be considered when considering if the activities are conducted for profit or pleasure.

In Brajkovich's case the Court said "the gambler who seeks to demonstrate that he is a businessman has more to show than those who engage in more conventionally 'commercial' activities".

The use of the systems provided to you by the company do not change the activity from being a game of chance. There are no other indicators of a business approach that may lead to a profit.

5. Whether the form of betting chosen is likely to reward skill and judgement or depends purely on chance

In Brajkovich's case the Court said:

Gambling which involves a significant element of skill, for example a professional golfer's betting on himself, is more likely to have tax consequences than gambling on merely random events. It is difficult to imagine how people in the latter category could be regarded as in a gambling business. Particularly this is so where the house takes a percentage, so that the overall result is necessarily a continual diminution of the collective funds of the customers. Although many roulette players sometimes earn substantial sums by their efforts, it is hard to see how one could characterise as a business playing a game in which the results are (or should be) purely random and in which there is a high probability that each player will lose in the long run…

The statement in this case is directly applicable to your activity. You cannot rely on systems to say that potentially you have developed skills that will reap you rewards. There are too many factors outside your control to be able to align this activity with a business where you can expect to derive a profit. It is considered that the gambling and betting is based on chance rather than a specific skill.

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

Gambling at casinos is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 (Babka's case) it was held:

A taxpayer who did no more than bet could never be regarded as carrying on a business, regardless of the frequency, scale or system-based nature of the betting. A pastime does not turn into a business merely because a person devotes considerable time to it and has retired from a previous full time profession.

In Babka's case, the taxpayer's activities were not so considerable, systematic and organised that they could be said to exceed those of a keen follower of the turf and that the element of chance as a dominant ingredient will usually preclude such a finding.

The general impression gained from applying the above factors to your circumstances is that you are not carrying on a business of gambling. There are no factors that indicate that the activity would be considered to be a business. The amount of time and effort involved in your gambling, do not turn your activities into a business.

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

Paragraph 118-37(1)(c) of the ITAA 1997 provides that a capital gain or loss relating to gambling is disregarded.

No other provision of the ITAA 1997 applies to your betting and gambling activities. As such, your betting and gambling winnings are not assessable and the associated losses are not allowable deductions.