Edited version of your private ruling

Authorisation Number: 1012136484792

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Subject: Am I in Business-gambling?

Question:

Is the income you receive from your on-line sports trading activity assessable income?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· information in response to a request for information for the Australian Taxation Office

· a trading account statement

· summary of purchases and sales document

· trading transactions statements.

You have been engaged in online sports trading for a few years.

You commenced this activity for the purpose of making a profit.

You purchase odds at a certain rate and aim to sell the odds at a higher rate.

You have chosen to purchase and sell odds relating to horse, trotting and greyhound racing.

You use a sports trading business exchange to buy and sell money on races.

You use the races as a means to buy and sell odds.

You use a trading formula and hedging technique to undertake this activity.

You believe that the difference between betting and trading is this hedging technique which requires no outcome of the event. Profits/loss has been determined before the event has started.

If a trader does not hedge their bets before the event is run, the determination of any profit or loss is based on chance, that is, whether this horse is to win/lose.

You spend a number of hours a day on the online sports trading activity making a small number of trades per day. For each trade you place an amount of money and expected to receive a small percentage in return for each trade. The amount of each trade is determined by the liquidity of the market and the amount of cash you have available.

Your trading turnover per day is small.

In determining which trades to make, you use historical charts which show the movement of the odds just before an event.

You have no interest in the outcome of the race.

You have no knowledge of the horses, trainers or jockey's win /loss ratios.

You commenced the activity with a small amount of your savings.

You purchased a computer and use software program to assist you.

The software has the ability to sell and purchase, put in place stop loss measures and place stock and kill orders.

You undertake this activity at your main residence.

You keep a basic profit and loss statement and records of expenses.

You do not have a separate bank account for this activity.

You transfer money to your personal bank account.

You have researched this activity through the internet and have joined on-line communities for advice and education.

Each day you research market histories and use the software for a number of hours before the markets open.

You visit various websites to learn more about trading in the markets and strategies which can be implemented.

You are currently unemployed and have no other forms of income.

You pay an administration fee for any winning trade.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

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 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.

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.

Three federal court cases known as Brajkovich v. Federal Commissioner of Taxation 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich's case), Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922 (Evan's case) and Babka v. Federal Commissioner of Taxation 89 ATC 4963; (1989) 20 ATR 1251 (Babka's case) relate to the issue of whether a taxpayer was carrying on a business of betting or gambling

The court in 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?

2. The scale of the gambling activities

The volume and size of bets are significant in most forms of gambling. However, the Court in Evan's case 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.

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 business.

4. Whether the gambling activity is principally for profit or principally for 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".

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…

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

Betting on horse racing and other sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In 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.

Applying the criteria to your circumstances

We have determined in your circumstances that you are not in the business of sport trading. We have based our decision on the indicators from IT 2655 and the court cases noted above.

You have described your activity as a trading system and not gambling. This is because you believe that the nature of your activity has similarities to a person involved in share trading on the foreign exchange and stock markets.

The buying and selling of shares or trading in a foreign exchange market is covered by Commonwealth legislation such as Corporation Act 2001 which indicates Parliament intention that these types of activities are true commercial activities as opposed to the state legislation which covers gaming and gambling activities.

In your case, the nature of the activity carried on by the sport trading business relies on participants backing or laying the runners or participants in an event at certain odds. While the sport trading business may provide a trading market for participants to buy and sell bets on-line there is no true commercial activities being undertaken which relate to the financial markets as provided by the various stock exchanges and currency markets. The activity provided by the sport trading business is a gaming or a gambling activity.

In undertaking this activity you make a bet that a particular horse will either win or lose a race and you rely on someone else to take an opposing position. When those odds move in you then make an opposing bet. That is, if the original bet was the horse would win, you would then make a bet that the horse will lose. Therefore hedging any losses that can be made, whilst this strategy minimises your risk, it does not allow you to have any control over the way that other gamblers place their bets in the market to form the odds.

In addition, you do not rent an office or employ any staff in relation to this activity. While you use a computer program to analyse historical data, keep records for this activity and place a number of bets a day through the sport trading business and spend a number of hours a day undertaking this activity, these factors do not negate the premise that the activity is gambling.

The scale of your gambling activities is relatively small when compared to the taxpayer in Brajkovich's case and the volume of the betting is considerable as you place a large number of bets per week. However, as noted in Evan's case this is not determinative as to whether a business is being carried on.

While you argue that it is the hedging technique that distinguishes the sport trader from the gambler the Commissioner consider it would be rare for a taxpayer with no connection to any other business or racing or sporting activities to be carrying on a business of betting or gambling.

Therefore, any income you receive in relation to this activity is not assessable under section 6-5 of the ITAA 1997 and any expenses related to the activity will not be deductible under section 8-1 of the ITAA 1997.