Edited version of private ruling

Authorisation Number: 1011821938333

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Ruling

Subject: Am I in business

Questions

1. Are you carrying on a business of poker playing?

Answer: Yes.

2. Is the income you receive from your poker playing assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

3. Are expenses incurred in carrying on a business of poker playing deductible?

Answer: Yes, if they are not capital or private in nature.

This ruling applies for the following period:

Year ended 30 June 2011

Year ended 30 June 2010

Year ended 30 June 2009

Year ended 30 June 2008

Year ended 30 June 2007

Year ended 30 June 2006

The scheme commences on:

1 June 2005

Relevant facts and circumstances

You were employed in the corporate industry, however you left your employment as you disliked the industry.

You have been playing poker for approximately 15 years. You were playing socially until the popularity boom with poker approximately six to seven years ago.

You concentrated on playing poker after your employment ceased. You did not seek regular employment, as poker playing is a very time consuming activity.

You spend between 10 and 40 hours per week playing poker, and mainly play Texas Hold'em, Pot Limit Omaha, and 2 or 3 Card Manila poker.

You are a world ranked poker player and compete in national and international tournaments.

You compete in small online 'satellite' tournaments to win places in major international poker tournaments. You have travelled overseas to compete in major international poker tournaments numerous times. You hope to travel to other international locations to compete in tournaments.

Your tournament poker consists of pre-designated buy in amounts with a percentage of the entrants receiving a cash reward for outlasting other players. The closer you are to the last man standing, the bigger the payout.

You play in weekly tournaments at casinos. If you are eliminated early you will continue to play cash games with other eliminated participants until the early hours of the morning.

You compete in numerous major tournaments each year spread across numerous states in Australia.

The majority of the games played are high stakes, which makes the game more interesting and rewarding when you win.

You also play in weekly/bi-weekly cash poker games at friends' houses.

You occasionally play online poker on major poker sites. However you limit your online playing to large tournaments only. Established poker players do not generally play online, as there is a lot of collusion and cheating during regular online games. People work in teams and tell each other what hands they hold, which gives them great advantage over the players who are not a part of the group. There is little collusion/cheating with large online tournaments.

When you do play online, you use a computer system called Poker Edge, which tracks tendencies of an opponent by analysing the hands played, wins and losses, and provides you with this information in a statistical format on a heads up display while you are playing. This information changes the strategies you use when playing your opponents. You are charged a monthly fee of about $35 to use the system. You believe it greatly increased your chances of winning at online poker.

You believe that playing poker is more than just chance, although there is a lot of luck involved.

Good players play with a lot of skill by employing strategies, analysing and learning from opponent's hands, and playing to probability and mathematics, not just playing the cards held.

Your main motivation for playing is for the passion of the game and the challenge of outplaying and outlasting your opponents.

You believe that poker playing is your passion/hobby, and that you are not in a business of playing poker.

Earnings from poker are not constant. You may have a winning streak for six months and then you may loose for three months. Because of this you have a designated bank roll for gambling which you must manage well. The balance of the bank roll may increase or decrease depending on your success when playing poker, and at times you have needed to borrow funds from private sources to prop up your bank roll.

You have not kept complete records of your winnings.

You do not have an agent to manage your poker playing activities.

You do not maintain an office, a website or employ staff.

Your other passion is sports betting activities, from which you receive some income.

You have no formal employment income for the 2011 financial year. However you have received some income from your sports betting activities. You have received no other income from any other source.

You have no properties in your name. Your primary residence is in your spouse's name.

You have a spouse and children.

Your spouse is unemployed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for Decision

Summary

We consider that your poker playing activities have the necessary characteristics of a business for taxation purposes. Therefore, the income derived from this activity is assessable.

Further, expenses incurred in relation to your poker playing activities which are not capital or private in nature are deductible expenses.

Detailed reasoning

Assessable income

A taxpayer is liable for tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income.

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

Under section 6-5 of the ITAA 1997, assessable income is made up of ordinary income and statutory income.

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, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Deductibility of expenses

Under section 8-1 of the ITAA 1997, for an expense to be an allowable deduction it must, either, be incurred in gaining or producing assessable income, or be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

You cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature. You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the Act prevents you from claiming a deduction.

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 on whether a person is considered to be carrying on a business of gambling.

IT 2655 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.

Case law

Babka v. Federal Commissioner of Taxation

The question of whether card playing can constitute a business activity was affirmed in the Federal Court case of Babka v. Federal Commissioner of Taxation 89 ATC 4963 (Babka), where Hill J said at 89 ATC 4968:

…a person who played cards not for pleasure but with a view to profit might properly be said to carry on a business at least in cases where the game played depends to a substantial degree upon skill so that the player can, for example by using his ability to memorise cards, affect the outcome.

Here, at 89 ATC 4968, Hill J also distinguished a continuum or matrix comprised of factors such as control, skill and chance as follows:

A punter, particularly one betting upon the on-course totalizator or the TAB, cannot affect the outcome of the race nor can he dictate the odds which he will receive. While it is true that to some extent a trader in futures cannot affect the outcome which is related to the price of a particular commodity and which may be affected by matters totally outside the control of the trader, at least the trader in futures has some impact on the profit to be derived in the sense of the price upon which he enters into the contract.

The punter stands somewhere in between the skilled player of cards in a game not totally dependent upon chance and the person buying lottery tickets.

In favour of the activity being capable of being a business is that system, skill and organisation can all play a part in reducing although not eliminating the element of chance, especially where the punter bets with a bookmaker rather than on the on-course totalizator or TAB.

In favour of mere punting being inherently incapable of being a business, is, that at the end of the day no matter how informed a punter may be and no matter how systematic he may seek to make his endeavours, there are so many chance factors intervening over which he has no control, that chance probably remains the predominant factor in the outcome.

Where chance ultimately predominates there is something unusual about speaking of a profit motive yet it seems quite clear that the motive of making a profit generally forms an essential element in the factual matrix which leads to the conclusion that a particular activity is a business.

At 89 ATC 4969, Hill J also distinguished the case when an activity that is normally regarded as a hobby or a pastime can be viewed as a business:

…it is true, as counsel for the Commissioner submits, that there are many pastimes which can, dependent upon the circumstances, be viewed as business activities. For example, while to most, a game of football is a mere pastime, it is clearly not so in the case of the professional footballer.

That being so, I propose to proceed on the assumption that mere punting may constitute a business although the intrusion of chance into the activity as a predominant ingredient at least in the outcome of the race itself does suggest to me that it will be a rare case where a court will conclude that the activity is a business.

At 89 ATC 4969, Hill J also distinguished whether the activities held a primary role in income earning or whether they can simply be regarded as a pastime. Here, J Hill also took into account the domestic situation and lifestyle of the applicant as follows:

The third matter to which the Commissioner referred was that the applicant in the present case had no other activity, being retired, whereas Mr Evans was involved on a day to day basis with other activities in a laundromat and later as owner of a hotel. That is not an irrelevant matter. However, in the present case it would seem that the applicant retired from the Public Service having built up substantial assets upon which to live. In part it would seem that these assets came as a result of his lottery win and gambling wins as well, presumably, as from some savings. Being single with no dependants and not owning a motor car his needs were apparently relatively modest. It is however not quite correct to say that his gambling activities became a full-time vocation. He had, as he deposed, and as can be gleaned from his income tax returns, considerable investments both income-bearing and rental and he had to spend some of his time monitoring these investments which earned him quite a considerable income. Nevertheless it can be said that he did spend a considerable time on his betting activities and somewhat more, it would seem, than Mr Evans. But a pastime does not turn into a business merely because the person who engages in it has retired from a previous full-time profession. I am of the view that in the present case the activity remained a pastime, notwithstanding that it was a pastime to which the applicant devoted considerable attention.

Application of the case of Babka to your case

The principles established in Babka lend weight to the impression you have been carrying on a business of poker playing. Babka established a card player could carry on a business and, unlike punting, card playing was not totally dependent upon chance and did not have chance as the predominant factor. Card playing was placed on a continuum clearly distinguishable from punting. As stated, the court said:

The punter stands somewhere in between the skilled player of cards in a game not totally dependent upon chance and the person buying lottery tickets.

It was stated the existence of a substantial degree of skill by a player can affect the outcome. It was stated whilst card playing may be generally regarded as a hobby, this does not preclude the possibility of a business being carried on.

Of greater weighting, Babka examined the role and significance of the relevant activity as it related to the applicant's earning of income and financial status. In the case of Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922 (Evans), cited in Babka, Mr Evans was engaged in income earning activities discrete from his punting activities. Similarly, Mr Babka was a retiree, holding significant investments and not dependent on his punting for income. Further, Mr Babka did not have any dependants and had modest financial obligations.

Contrary to Evans and Babka, in your case, the strong impression gained is your poker playing became a substitute for your income earning and vocational activities. The impression gained is poker playing is your income earning activity or predominant occupation. In this regard, your case is strongly distinguished from that of Evans and Babka.

In your case, unlike those of Evans and Babka, you have a family with dependant children and your spouse is unemployed. You have advised that you have no other source of income apart from some sports betting, you do not own shares and you do not own rental properties. It follows that you personally have financial and debt servicing obligations and those financial obligations are being met through your poker playing, and to a degree, your sports betting.

Brajkovich v. Federal Commissioner of Taxation 89 ATC 5227

In Brajkovich v. Federal Commissioner of Taxation 89 ATC 5227 (Brajkovich), the court identified the following principal criteria for determining whether or not a person is in the business of gambling:

1. whether the betting is conducted in a systematic, organised and 'businesslike' way;

2. its scale: i.e. the size of the wins and losses;

3. whether the betting is related to, or part of, other activities of a businesslike character, e.g. breeding horses;

4. whether the bettor appears to engage in his activity principally for profit or principally for pleasure;

5. whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance;

6. whether the gambling activity in question is of a kind which is ordinarily thought of as a hobby or pastime.

Application of the case of Brajkovich to your case

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 taxpayer conducts their gambling activities. For example, did they rent an office, employ staff, use a database for form guides or to calculate the odds, did they take steps to lessen and exclude the element of chance, did they maintain adequate records or their position from day to day and week to week. The test presented here is one of degree.

You have elements of organisation. You have provided a report of some of your earnings from poker, and have advised that because of the inconsistencies in poker earnings you have a designated bank roll for gambling which you must manage well. The organised and businesslike management of your poker bank roll adds weight to an indication that you are carrying on a business.

When you play online, you use third party software which tracks tendencies of an opponent by analysing the hands played and performs statistical analysis on your opponents. The use of this software suggests an organised and businesslike approach and further indicates that your activity is being carried on in a business like manner. However, these factors alone are not sufficient in determining whether you are carrying on a business.

The fact that you do not maintain an office, a website or employ staff is not a determinative indicator in denying a business (although when in existence may be an affirmative indicator towards a business). For example, those held to be carrying on a business of share market trading often do not maintain an office, a website or employ staff. Their situation is similar to yours however they, without dispute, carry on a business. They carry on a business generally due to the repetition, regularity and volume in the trading of shares. The primary consideration is commerciality rather than the physical workplace. As in your case, convenient and portable computer technology can allow for the conduct of a business with minimal infrastructure. As was stated in Babka at 89 ATC 4969:

I am inclined, particularly with the growth of modern technology such as computers, to think that there may be cases today…where the activity of betting has become so organised, systematic and businesslike and is carried on with such dedication to potential profit that the man in the street would recognise that activity to be a business.

2. The scale of the gambling activities, that is, the size of wins and losses

The taxpayer's activities in terms of 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 said that scale of itself is not determinative of the outcome.

You have advised that you are not able to provide exact details of your gambling activity wins and losses. However the fact that you are the primary income earner for your family, and you have no other income source apart from some other non-assessable sports betting activities, adds to the significance of your poker playing activity.

3. Whether betting is related to or part of other activities of a businesslike character, such as breeding horses

In most cases where there is a finding that 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). In this case, the taxpayer conducted a business as a bookmaker and also had interests in horse training businesses.

You derive no earnings from any associated industry activity which itself constitutes a business. All earnings are from your card playing and some syndicate betting.

4. Whether the punter appears to engage in his activity principally for profit or principally for pleasure

The courts have found that such issues as attendance at race meeting, a passion for gambling and the like, need to be considered when concluding whether the activities are conducted for profit or pleasure. Further, Babka and Evans also examined the role and significance of the relevant activity as it related to the applicant's earning of income and financial status.

The courts have found that footballers may be carrying on a business (Spriggs v. Federal Commissioner of Taxation, Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148). However, many professional footballers state that they play for the love of the game and would still play even if they were not paid. It is considered that this alone, would not lead to a finding that a professional footballer was not carrying on a business.

We acknowledge that you have a passion of the game and enjoy the challenge of outplaying and outlasting your opponents. However, you also rely on your earnings from poker playing to meet your financial obligations. It is considered that the fact you have a passion for poker is not sufficient in itself to lead to a conclusion that you are not carrying on a business.

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

It is acknowledged that poker playing includes a degree of luck or chance, influenced by random factors such as the fall of the cards. In Brajkovich, the court addressed the factors of skill versus luck and the relevant weighting of each factor, where it was stated at 89 ATC 5233:

On the question of skill and chance, some comment should be made. 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 circumstances in which people in the latter category could be regarded as in a gambling business. Particularly is that so where the form of gambling chosen is such that 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. For these reasons, we are of opinion that the present appeal must inevitably fail with respect to the "two-up'' losses. On the evidence, the proprietor of the game took a substantial profit each night, so that there was a probability that on any single night most of the players would lose; there must have been close to a certainty that a person playing as many times as the appellant did would lose in the end. In those circumstances, the profit motive which is characteristic of a business was present only in a theoretical way; any such motive must have been based on mere self-delusion.

However, it cannot be denied poker playing has a level of skill that can set one player apart from another. The reference to the house in Brajkovich is in relation to roulette and two-up and the fact that it is a high probability that each player will lose in the long run does not necessarily apply to poker playing. Roulette and two-up are mere games of chance, with no or little skill.

As previously stated, in Babka the possibility was not ruled out of a business of card playing for money, where the game played depends to a substantial degree upon skill so that the player can affect the outcome.

Whilst poker playing includes a significant chance factor due to the random nature of the cards dealt, it also includes a very significant skill factor.

This is supported by your statement saying that playing poker is more than just chance, most players play with a lot of skill by employing strategies, analysing and learning from opponent's hands and playing to probability and mathematics, not just playing the cards held.

Whilst the courts have not ruled specifically on this matter, it is arguable poker playing is more likely to reward skill and judgement rather than being purely dependent on chance. It is arguable the skill factor predominates over the chance factor.

That the poker playing industry has people who are winners year after year and have made careers from poker playing demonstrates skill is the predominant factor. Your personal consistency in winning also demonstrates poker playing has a significant skill factor.

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

Money derived from the pursuit of a hobby is not regarded as income and is therefore, not assessable. If the activity is more properly described as the pursuit of a hobby, recreation or sport then it will not be regarded as a business even where the operation is substantial (Ferguson v. FC of T 79 ATC 4261; 9 ATR 873).

This is not to say that an activity characterised as a hobby can never become a business. The matter will always depend on the facts and a weighing of the indicators.

In Babka, it was stated that, while to most, a game of football is a mere pastime, it is clearly not so in the case of the professional footballer. Similarly, whilst card playing is ordinarily thought of as a hobby or pastime, to most, the notion of a professional poker player would exist.

An example is the television show, World Poker Tour. Its website provides profiles on players as though they are professionals and depicts poker playing as a sport.

Conclusion in your case

In weighing up the body of case law and the principal criteria, the impression gained is weighted towards your carrying on a business of poker playing.

When playing online poker you have a certain degree of sophistication using computer software, your winnings are significant in relation to your financial status and on a chance to skill matrix, successful poker playing may be seen to be dependent more on skill than on chance, which you and other noted players have demonstrated by consistently winning over many years.

However, the indicator contributing the most weight is your reliance on your earnings from poker playing to meet your financial obligations. You have a dependent family and you are the sole income earner. Your leaving your income earning activities and not obtaining regular employment after focussing on poker playing activities gives the impression poker playing is an income substitute for your primary income earning activity, rather than being a hobby or a pastime.

Instead of your playing for money being an irregular activity, including playing the occasional tournament, the impression gained is your poker playing is on a regular or daily basis, in a similar manner to an employee or businessperson who attends their employment or business on a regular or daily basis.

Therefore, your poker playing activities are considered to be a business and all income derived from the activity is assessable under section 6-5 of the ITAA 1997. Likewise, expenses relating to the activity may be deductible under section 8-1 of the ITAA 1997.