Edited version of your written advice

Authorisation Number: 1013124758984

Date of advice: 21 December 2016

Ruling

Subject: Gambling income - Animal racing

Question 1

Is the income derived from syndicate punting activities assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2

Are the expenses incurred in deriving income from syndicate punting activities an allowable deduction under section 8-1 of the ITAA 1997?

Answer: No

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The Taxpayer has an interest in gambling in its various forms.

The Taxpayer, with family and friends, formed a punting club which predominantly bets on animal racing.

The Taxpayer tends to place bets with a very strong degree of unpredictability.

There is no formal documentation for the formation of the club and there are no terms or conditions associated with membership of the club.

There are no written agreements in place in relation to the entitlements or obligations. However each punting club member has a specific share percentage.

Distribution of profits is agreed to by a handshake agreement between the members.

The Taxpayer initially invested their own money to start the punting club.

The Taxpayer set up separate personal accounts with various betting agencies which are controlled by themselves and one other punting club member.

The punting club members place bets with the assistance of publicly available information and software, as well as personalised software.

The Taxpayer, along with two other punting club members, created the personalised software. The personalised software generates odds and betting options which are often, but not always, adopted.

The majority of bets are placed from the Taxpayer's residence on a computer purchased to conduct punting club activities.

A minority of bets are physically placed at betting agency outlets.

The bets are placed as often as possible but there is no set betting schedule.

The punting club does not have any guidelines or policies for betting.

The Taxpayer spends several hours per week on punting club activities placing bets over the internet from their private residence.

The Taxpayer does not spend a lot of time on studying the forms in relation to the betting activities.

Two additional members also place bets over the internet from that location.

A further two punting club member's place bets at betting agencies.

All winnings in the first year were retained in the betting pool and used to re-bet.

The punting club currently has a significant weekly turnover and has made a significant profit in the past year.

The current practice is to pay out winnings once a year according to the agreed punting club member share percentages.

The members are provided with summaries of winnings, adapted from spreadsheets that are provided by the betting agencies.

The punting club does not have a business plan or financial projections. It does not keep records apart from those provided by the betting agencies, with the exception of tracking rebates and rebate percentage returns.

There are no financial accounts or internal management accounts and it has minimal expenses.

The punting club does not have an office nor does it utilise any external consultants or service providers.

The punting club participates in standard rebate schemes available to all customers of their betting agencies. They have no signed agreement with betting agencies in relation to rebates. Access to the rebates is a factor in the punting club's profit strategy.

The Taxpayer is involved with a private company through which they earn annual wages. She / He spends a significant amount of time each week pursuing work for the private company.

The Taxpayer states the private company activities are completely separate to the punting club activities.

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.

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.

Income Tax Ruling IT 2655 Income tax: betting and gambling - whether taxpayer carrying on business of betting or gambling (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'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 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 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 businesses.

4. Whether the gambling activity is 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.

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 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'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.

The following factors support a businesslike approach to the Taxpayer's gambling activities:

1/ use of a computer system;

2/ placing large volumes of bets involving a large turnover;

3/ use of a betting strategy to take advantage of rebates;

4/ increasing bet sizes as profits increase; and

5/ computer driven strategies support a profit motive over a pleasure or hobby pursuit.

The following factors do not support a businesslike approach to the Taxpayer's gambling activities:

1/ no business plan;

2/ minimal detailed and organised records are maintained;

3/ no involvement in racing or bookmaking industries;

4/ no business premises;

5/ no employees;

6/ no separate bank account;

7/ gambling is one of the Taxpayer's chosen pleasurable pursuits;

8/ the Taxpayer derives income through the activities with a private company which occupies a large portion of time;

9/ the Taxpayer has no intention to pursue gambling as a full time occupation; and

10/ the Taxpayer spends minimal time on the gambling activities.

It has been determined in the Taxpayer's circumstances that the Taxpayer is not carrying on a business of gambling. Although the Taxpayer utilises computer software, there is still a high element of chance involved. By using the techniques to choose which animals to bet on, the Taxpayer may have reduced the odds on their gambling activities, however, the Taxpayer's overall gains will be dependent on chance rather than skill.

The amount of time and effort involved in the Taxpayer's gambling activities do not turn the Taxpayer's activities into a business. While the Taxpayer's activities have some elements of being systematic and organised, mainly due to the computer programs the Taxpayer use, the use of computer programs alone does not lend itself to the existence of a business. As in Babka's case the Taxpayer's activities cannot be said to exceed that of a keen follower of sports.

In conclusion, as the Taxpayer will not be carrying on a business of betting or gambling, the winnings the Taxpayer receives in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 and the expenses related to the activity will not deductible under section 8-1 of the ITAA 1997. Any losses will also not be deductible.