Edited version of private ruling

Authorisation Number: 1011762703132

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Ruling

Subject: Am I in business - gambling

Question 1

Is the income you receive from betting and gambling assessable?

Answer

No

Question 2

Can you claim a deduction for expenses relating to your betting and gambling activities?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You have enjoyed horse racing for some time and has been a pastime for many years developed through your family's pastime interest.

You are not currently employed. However you are involved in share trading through your company and family trust which consumes a significant proportion of your time.

Your spouse performs some consulting work but the majority of their time is consumed looking after your children.

You employ the same methods as in the past for your horse betting, that is studying live form or form video reviews and any other publicly available information.

You record this form on a computer for your own history.

You independently rate horse's chances of winning and determine likely bets based on your own ratings. These ratings are developed autonomously without assistance from other individuals.

When visiting race meetings, you make valued assessments of your personal rating of a horse based on the conditions of the horse, track, betting trends and any other information that may influence your betting. Your attendance to race meetings has reduced generally to social days.

You primarily place bets over the phone or internet, however you do use bookmakers or the TAB when in attendance.

Your bets are an average of $XX,000 to $XX,000 per week with an estimated return of 10% per annum.

You have a 100% interest in a number of broodmares and 50% interest in another broodmare with a number of unraced yearlings and foals from the broodmares. These are more for the development of your interest rather than profit making as you intend to race them with your family and friends as a hobby.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Paragraph 118-3(1)(c)

Reasons for decision

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 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.

Taxation 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 case), identified the principal criteria for determining whether or not a person is in the business of gambling. These criteria are:

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 have an office or employ staff, do not assess form or other conditions by using any method other than your own assessment of form and risk, and betting on intuition.

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

Though you have a considerable scale of activity and interest in the racing and breeding industry, the scale of your activities is not determinative of an outcome.

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 business.

Whilst you have interests in a number of horses and that you indicate these interests are for the development your own interests rather than a money making exercise, your activities are not related to or part of other businesslike activities.

Whether the gambling activity is principally for profit or principally for pleasure

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

In Brajokovich 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".

Your activity has been a family pastime for many years. You regard your activity as a hobby even though you endeavour to make a profit.

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

In Brajkovich 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 only judgement you demonstrate is what races and horses you gamble on and how much to wager. Your overall gains are largely dependent on chance rather than skill.

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

Betting on horseracing and other sporting events 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 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.

Although your activities may have an element of being systematic or organised, as in Babka's case your activities cannot be said to exceed that of a keen follower of racehorses.

Conclusion

We have determined in your circumstances that you are not carrying on a business of gambling.

Therefore, 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 income and the associated losses are not allowable deductions.