Edited version of private ruling

Authorisation Number: 1011673982363

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Ruling

Subject: Am I in Business?

Question

Are you assessable on income received from gambling?

Answer:

No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are currently unemployed, and gamble.

You have been gambling in one form or another since leaving school. Initially most of your betting activities were related to horse racing.

You won over $100,000 in the income year in relation to your gambling activities. You estimate that you have won between $20,000 and $30,000 this income year.

Sometimes you do not play poker or visit the track or casino for weeks on end, other times you go two, three days in a row.

You do not consistently or regularly win.

You keep no records nor do you subscribe to any relevant publications.

The entry fees of poker tournaments vary; you have played tournaments with a $2 entry fee and some with entry fees of $200.

The largest sum you have won was between $20,000 and $25,000.

You do no research at all.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You are not considered to be carrying on a business as you do not conduct your business in a sophisticated manner. You keep no records, conduct no research and your prospect of winning is based mainly on the element of chance.

Detailed Reasoning

Ordinary income

Income is generally assessable as ordinary income under section 6-5 of the ITAA 1997.

Under subsection 6-5(1) of the ITAA 1997, ordinary income means income according to ordinary concepts. This phrase is not defined under the legislation. A large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Statutory income

Under section 6-10 of the ITAA 1997 assessable income also includes statutory income.

Statutory income includes amounts that are not ordinary income but are included as assessable income by provisions of the tax law.

Deductible expenses

Under section 8-1 of the ITAA 1997 you can claim deductions for expenses to the extent they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.

A deduction is also not allowed where a provision of the tax law prevents it.

Gambling Income

Betting and gambling losses are not deductible under section 8-1 of the ITAA 1997 unless you carry on a business of betting or gambling.

Income Tax Ruling IT 2655 discusses the Commissioner's opinion regarding carrying on a business of gambling.

Ultimately each case will depend on its own facts.

No decided Australian court case has found that the winnings of a mere punter are assessable (or that the losses are deductible).

Mere punting may constitute a business however, the element of chance as a predominant ingredient will generally preclude such a finding.

The Court in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich), identified the principal criteria for determining whether or not a person is in the business of gambling.

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

It is necessary to examine the manner in which the gambling activities are conducted.

Did the taxpayer rent an office, employ staff, use a database for form guides or to calculate odds, take steps to lessen and exclude the element of chance, maintain adequate records of their position from day to day and week to week?

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 does not solely determine the outcome.

The taxpayer in Brajkovich did not carry on a business of gambling. The taxpayer bet over $950,000 in three years and was involved in horse training.

Whether betting is related to or part of other activities of a businesslike character

Usually 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 horse training businesses.

Is the gambling activity principally for profit or principally for pleasure?

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

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

In Brajkovich 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

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

Betting on horseracing 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 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

Application to your circumstances

You do not conduct your activities in a regular systematic manner nor do you keep any records. The amounts you bet and the time you spend vary and you can go for weeks without participating in any gambling activities. You undertake no research and do not take steps to minimise the element of chance.

Your gambling involves playing poker, betting on horses and playing at the casino. Your overall gains are largely dependent on chance rather than skill.

Therefore, in accordance with the indicators discussed in IT 2655, you are not considered to be carrying on a business. Consequently, expenses incurred in relation to your gambling activities are not allowable deductions and your winnings are not considered assessable income.