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Ruling

Subject: Assessability of card game winnings

Questions

Is the prize money you receive from your overseas card game playing assessable in Australia, where you have already paid tax on those funds in the overseas country?

Where the prize money is assessable in Australia, are you entitled to a credit for the tax already paid overseas?

Answer

Yes.

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2010

Year ended 30 June 2009

Year ended 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You are in the business of playing card games.

You compete in national and international tournaments.

You have travelled to an overseas country to compete in high stakes tournaments. The tournaments are held in a public arena.

When competing in tournaments you have won money and paid tax on the winnings.

You did not play cash games after competing in the tournaments while overseas.

Assumptions

You have won prize money of more than $10,000 (in the relevant foreign currency) in tournaments in each of the years ruled on.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-70

Income Tax Assessment Act 1997 Section 770-75

Income Tax Assessment Act 1936 Subsection 160AF(1)

Income Tax Assessment Act 1936 Section 160AFE

Reasons for decision

You have previously been provided with private ruling stating that you are carrying on a business of playing professional card game. This ruling is provided on that basis.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In determining liability to Australian tax on foreign source income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement.

Double Tax Agreement between Australia and the overseas country

Australia has a Double Tax Agreement with the overseas country (the agreement).

Article 7 of the agreement deals with business profits. Paragraph 6 of Article 7 provides that where business profits include items of income which are dealt with separately in other Articles, then those Articles will have priority over Article 7. This priority rule does not govern the manner in which the income will be classified under Australian domestic taxation law (OECD Model Tax Convention - paragraph 74 of the Commentary on Article 7).

Article 17 of the agreement applies to income whether it is of a business or employment nature. In particular, Article 17(1) of the agreement applies to activities where an entertainment character is present. The Article applies where the amount of gross receipts from such activities exceeds $10,000 (or its equivalent in Australian dollars) for the year of income concerned.

The Commentary on Article 17 provides guidance on how this Article should be interpreted. Specifically, the Commentary provides a number of examples of activities which will be classified as having an 'entertainment character', including billiards, snooker, chess and bridge tournaments. The examples provided are all capable of being played in front of an audience and are forms of entertainment which require mental skill and exertion.

In your case the games were played in public casinos during large tournaments where members of the public were able to observe and can be classified as a form of entertainment or having an entertainment character. These activities require similar levels of mental skill and exertion as those activities mentioned above. It is therefore considered that Article 17 would apply in respect of the winnings derived from the overseas country tournaments, provided that the winnings from such activities exceed $10,000 or its equivalent in Australian dollars for the year of income concerned.

Article 17 provides that where an Australian resident derives income from entertainment activities in the overseas country of at least $10,000 for an income year, that income may be taxed in the overseas country. However, this is not an exclusive taxing right. That is, the Convention does not prevent Australia from taxing the income. Therefore, the prize money you receive from your playing in the overseas country is included in your assessable income in Australia under subsection 6-5(2) of the ITAA 1997.

However, to prevent double taxation, a credit/tax offset for foreign tax paid may be available. This is examined further below.

Foreign tax credits - 2008 and earlier financial years

For the 2008 and earlier financial years, subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

· the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or

· the amount of Australian tax payable in respect of the foreign income.

Where the foreign tax paid is greater than the Australian tax payable, a taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid.

However under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any tax payable on foreign income earned in the future.

Foreign income tax offset - from 1 July 2008

From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system.

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As the prize money received overseas is considered business income and is assessable to you in Australia, the tax you paid on this income while overseas is used in calculating your allowable foreign income tax offset in Australia.

The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997).

That is, when claiming a foreign income tax offset you need to calculate your foreign income tax offset limit. For information on this, please refer to the Guide to foreign income tax offset rules 2010-11 on the Australian Taxation Office website www.ato.gov.au. You can only claim an offset up to the amount of that cap. Any excess offset cannot be carried forward to a later income year.