Edited version of private advice

Authorisation Number: 1051649153049

Date of advice: 2 April 2020

Ruling

Subject: Income tax - assessable income - business vs hobby

Question 1

Is the profit or loss from the Group's activities included in your assessable income?

Answer

No

Question 2

Are the expenses incurred in the Group's activities allowable deductions?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    You are an Australian resident for Australian taxation purposes.

2.    Until XX Month 20XX, you were employed by Company A.

3.    You are not formally employed, but are currently carrying on a business as a sole trader. You also engage in other activities which are outlined below.

Activities as a sole trader

4.    You spend approximately 35 hours per week trading shares and conducting other share-related activities.

5.    You use brokerage facilities and have approximately $XXX,000 invested as part of your share trading activities. You also have approximately $XXX,000 in positions and shares that you can leverage 'when the opportunity presents'.

6.    You have a business plan for your share trading activities.

7.    For the:

(a)  20XX financial year, you made XX buy and sell transactions.

(b)  20XX financial year, you made XX buy and sell transactions.

(c)  20XX financial year, you made XX buy and sell transactions.

(d)  20XX financial year, you made XXX buy and sell transactions.

(e)  20XX financial year, you made XXX buy and sell transactions.

(f)   20XX financial year, you made XXX buy and sell transactions.

Activities in the Group

Overview

8.    You also engage in other activities (programming and software-related activities as well as betting) as part of a group, which does not have a formal name but will be referred to as 'the Group'.

9.    Activities undertaken by members of the Group will be referred to as 'Group activities'.

10.  The Group currently consists of four members, including:

(a)  You

(b)  Individual A

(c)  Individual B

(d)  Individual C

11.  Initially, you and other members contributed the same amount of money into the Group and evenly paid for all expenses. Members also contribute varying amounts to the Group to open accounts or bet, as well as providing programming services or analysing data for the Group.

12.  There are no set agreements or procedures for individuals seeking to join or depart the Group, and the Group does not have a business plan for their activities. However, the Group uses project management software to record their software-related activities.

13.  Generally, the exchanges are aware that you and other members undertake activities as a group. Bets placed with bookmakers are placed by individual members and may not be aware that you are undertaking activities as part of a group.

14.  Due to the amounts bet on Exchange A, the Group receives a discount on the commission they have to pay under Exchange A's standard rules.

15.  The Group is not associated with any other related activities, such as horse breeding or training or bookmaking.

16.  You spend between 0 to 20 hours per week on Group activities. You do not intend to conduct Group activities full-time.

17.  Other members spend between 0 to 30 hours a week on Group activities, however you noted that members do not monitor the precise number of hours spent.

Software-related activities

18.  For Month 20XX, these software-related activities included cleaning up databases, investigating malfunctioning data tables, developing arbitraging strategies, as well as a number of activities related to making plans or timelines for various projects.

19.  The Group develops and uses their own in-house software (the automated software) in addition to publicly available software to conduct betting activities, generate income and divide amongst members of the Group.

20.  The automated software can collect data from a number of sources (exchanges, bookmakers and odds aggregators), run various calculations, place bets, change bets, cancel bets, and input data into a database. You programmed it to place the same kinds of bets that you would otherwise place.

Betting-related activities

21.  You bet on horse racing, greyhound racing, sports and other events, in Australia and overseas. The approximate ratio of bets placed on horse racing, greyhound racing and sports betting is 40:20:40, respectively.

22.  These bets consist of approximately:

(a)  XX% win bets,

(b)  XX% place bets, and

(c)  X% forecast bets.

23.  Members may place bets on multiple runners in the same race.

24.  Bets are placed in person, online, and using automated software. You have a bet on an exchanged based on what you think the selection's chances are of winning. Ideally, there are a few bets, backing and laying, to try to get a better price.

25.  In terms of volume, most of the bets are automated, but these bets can be adjusted. A member may bet manually if they have a strong opinion or are 'testing something'.

26.  Automated betting occurs almost 24 hours a day, seven days a week. It also allows you to bet on different markets.

27.  If the Group wins on a bet, the money is paid into the bank account of a member. In some instances, this is your bank account. Any money paid into an account of a member is then distributed to the remaining members, with a residual amount kept in that bank account (representing that member's share). Conversely, if the Group loses on a bet, each member contributes more money.

28.  You settle the accounts every couple of weeks by seeing the difference between wins and losses, as well as the amounts members have spent.

29.  Each member of the Group orally agrees on the amount each member will receive for that period. For example, if someone goes travelling, they may have a lesser share.

30.  Members use personal bank accounts to deposit money or receive distributions as part of betting activities conducted by the Group.

31.  Members can access any of the betting accounts, but can only access their own bank accounts.

32.  The Group currently has approximately $XXX,000 in various exchanges and bookmakers.

33.  For the:

(a)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(b)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(c)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(d)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(e)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

34.  The profits made on share trading may be used to cover gambling shortfalls, and gambling wins may be used as capital for your share trading activities.

Relevant legislative provisions

Income Tax Assessment Act 1936, section 90

Income Tax Assessment Act 1936, section 92

Income Tax Assessment Act 1997, subsection 6-5(1)

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

Income Tax Assessment Act 1997, subsection 6-10(1)

Income Tax Assessment Act 1997, subsection 6-10(4)

Income Tax Assessment Act 1997, subsection 8-1(1)

Income Tax Assessment Act 1997, subsection 8-1(2)

Income Tax Assessment Act 1997, subsection 8-5(1)

Income Tax Assessment Act 1997, subsection 995-1(1)

Reasons for decision

Question 1

Is the profit or loss from the Group's activities included in your assessable income?

Summary

No. The gross profits or loss from the Group's activities are not included in your assessable income. However, the Commissioner is satisfied that the Group is carrying on a business using a partnership structure. As a result, your individual interest in the net income of the partnership must be included in your assessable income pursuant to section 92 of the ITAA 1936.

Detailed reasoning

Overview

2.    Subsections 6-5(1) and (2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that:

(1)  Your assessable income includes income according to ordinary concepts, which is called ordinary income.

(2)  If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

3.    Subsections 6-10(1) and (4) of the ITAA 1997 also provide that:

(1)  Your assessable income also includes some amounts that are not ordinary income [i.e. statutory income].

(4) If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Income as a partner in a partnership

4.    Paragraph 92(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) relevantly provides that:

The assessable income of a partner in a partnership shall include... so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period where the partner was a resident.

5.    Therefore, it must be determined whether you were a partner of a partnership.

Did a partnership exist?

6.    Subsection 995-1(1) of the ITAA 1997 defines a 'partnership' as meaning an 'association of persons (other than a company or a limited partnership)' that:

(a)  Carries on a business as partners, or

(b)  Receives ordinary income or statutory income jointly.

7.    The term 'association' is not defined in the ITAA 1936 or ITAA 1997. As a result, the term will take its ordinary meaning in the context of the provision.

8.    Mandie J in Kibby v. Registrar of Titles [1999] 1 VR 861 relevantly stated that:

...the essence of an 'association' may be described as some form of combination of persons (with a common interest or purpose) with a degree of organisation and continuity at least sufficient to distinguish the combination from an amorphous or fluctuating group of individuals and with some clear criteria or method for the identification of its members.

9.    Relevantly here:

(a)  The members of the Group had a common interest (i.e. developing the automated software and engaging in betting and gambling). From the information you provided, it is clear that the software-related activities furthered the Group's interest in profiting from betting strategies.

(b)  Generally, exchanges were aware that you and the other members were undertaking activities as part of a group. Bookmakers may not have been aware.

(c)  The information you provided also highlights that the Group has some degree of organisation and continuity sufficient to distinguish which individuals form part of the Group. For example, screenshots of project management software highlights the allocation of tasks to specific Group members. The distribution spreadsheet also provides a detailed breakdown of each Group member's entitlement to the profits or losses of the Group.

10.  As a result, the Commissioner considers that the Group is an association of persons.

Are you carrying on a business?

Overview

11.  Following the respective Federal Court decisions in Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922 (the Evans case), Babka v. Federal Commissioner of Taxation (1989) 20 ATR 1251 (the Babka case), and Brajkovich v. Federal Commissioner of Taxation (1989) 20 ATR 1570 (the Brajkovich case), the Commissioner published his views in relation to whether a taxpayer is considered to be carrying on a business of betting or gambling: see Taxation Ruling IT 2655 Income tax: betting and gambling: whether taxpayer carrying on business of betting or gambling (IT 2655).

12.  As highlighted in paragraph 7 of IT 2655, whether a taxpayer is considered to be carrying on a business of betting or gambling depends on the facts of each case.

13.  Paragraph 8 of IT 2655 states that the criteria summarised in Brajkovich case (as well as the factors noted in the Babka and Evans cases) should be taken into account when determining whether a taxpayer is carrying on a business of betting or gambling.

14.  The six (6) criteria include:

(a)  Whether the betting is conducted in a systematic, organised and businesslike way;

(b)  The scale of the betting activities;

(c)  Whether the betting is related to or part of other activities of a businesslike character;

(d)  Whether the betting activity is principally for profit or principally for pleasure;

(e)  Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance; and,

(f)   Whether the betting activity is of a kind ordinarily thought of as a hobby or pastime.

15.  At page 4966 of the Babka case, Hill J noted that 'no one factor...is decisive of whether a particular activity constitutes a business, that conclusion will be derived from a consideration of all of the relevant facts'.

16.  Relevantly here, at page 4968 of the Babka case, Hill J also highlighted that 'the mere fact that the outcome of a particular activity may be dependent at least in part on chance will not negate a business activity being carried on'.

17.  The Commissioner has considered the application of these criteria below.

(a)  Whether betting is conducted in a systematic, organised and businesslike way:

18.  The Commissioner considers that the Group's activities are conducted in a systematic, organised and businesslike way.

(b)  Scale of the betting activities:

19.  The automated software used by the Group allowed them to place bets on a variety of racing and sporting events in domestic and international markets. This program, along with publicly available software, allowed the Group to place large amounts of bets through betting accounts with various operators, such as betting exchanges and bookmakers.

20.  For the:

(a)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(b)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(c)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(d)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

(e)  20XX year, the Group made approximately $XXX,000, with distributions to members of $XXX,XXX. Your share of the distributions was $XXX,XXX.

21.  The Commissioner is satisfied that the Group's activities were significant and went beyond a mere pastime.

(c)  Whether betting is related to or part of other activities of a businesslike character:

22.  While the Group is not associated with other activities such as horse breeding or training, the Commissioner recognises that the predominant activities undertaken by the Group are software-related activities (including programming, data entry and data maintenance).

23.  The Commissioner is satisfied that the betting is related to other activities of a businesslike character.

(d)  Whether the betting activity is principally for profit or principally for pleasure:

24.  The Commissioner considers that the betting activities are principally conducted for profit.

(e)  Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance:

25.  The Commissioner is of the view that although the element of chance may not be completely eliminated it was at least reduced to a level commensurate with that found in genuine business activity with the effect that the betting activities of the Group were more likely to reward skill and judgment.

(f)    Whether betting activity is of a kind ordinarily thought of as a hobby or pastime:

26.  The bets placed by the Group are ordinarily considered a recreational activity.

27.  However, the Commissioner considers that the betting activities here are not a hobby or pastime because the following factors objectively indicate the Group's intention to carry on a business:

(a)  Each member of the Group is involved in developing, maintaining or exploiting the automated software or aspects relating to its operation.

(b)  Based on the information you provided, the members of the Group spend a significant amount of time on software-related activities rather than betting activities (as these are primarily conducted by the automated software).

(c)  The automated software collates information from a range of sources, including exchanges, bookmakers and odds aggregators.

(d)  Some of the strategies involved include backing and laying in order to get 'better prices'.

(e)  The majority of bets were placed using the automated software.

(f)   You previously utilised arbitraging strategies and are investigating reusing these strategies in the future.

(g)  As a result of these coordinated efforts, the Group proved to be consistently profitable (as outlined above). In fact, your distributions from the Group's activities exceed the amounts made as a result of your share trading activities.

Conclusion

28.  The Commissioner is satisfied that the Group was carrying on a business of developing, maintaining and exploiting automated software to strategically place bets to reduce risk and maximise profits from betting activities.

Are you carrying on a business as partners?

29.  Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8) outlines the factors that the Commissioner considers in deciding whether persons are carrying on a business as partners for income tax purposes.

30.  As highlighted in paragraphs 9 and 10 of TR 94/8, whether a partnership exists is a question of fact, with the essential element for a partnership to exist being the existence of a genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties.

31.  Relevantly here, the Commissioner considers that the Group are carrying on a business as partners because:

(a)  The members of the Group intended to act as partners. While there are no written agreements on how members join or depart the Group, there is a general understanding that you and other members contribute the same amounts of money into the Group (see paragraphs 23 and 24 of TR 94/8) and evenly pay for all expenses (see paragraphs 13 and 14 of TR 94/8).

(b)  As highlighted above, members jointly shared the assets of the Group as well as the liability for any losses (see paragraph 16 of TR 94/8).

(c)  While the Group did not have a registered business name, exchanges were aware that the members bet as part of a Group. Under paragraph 17 of TR 94/8, this can signify the existence of a partnership to third parties.

(d)  Members also contribute varying amounts to the Group to open accounts or bet, as well as providing programming services or analysing data for the Group. Members of the Group can also access any of the betting accounts held by the Group and distribute any profits accordingly. Under paragraph 18 of TR 94/8, this factor can be afforded greater weight due to the fact that all parties have the power to operate these accounts.

(e)  From the information you provided, members of the Group were regularly involved in the conduct of the Group's activities (see paragraphs 20 to 21 of TR 94/8).

(f)   As highlighted above, the members of the Group shared between them the net profits and losses of the Group's activities (see paragraph 25 of TR 94/8).

(g)  While the Group did not maintain meticulous records on their activities, they did keep separate and distinct records in relation to their software-related activities, as well as the decisions to share the net profit or loss of the Group (see paragraphs 26 and 27 of TR 94/8).

Are you in receipt of ordinary income or statutory income jointly?

32.  In the alternative, the Commissioner also considers that the members of the Group were in receipt of ordinary income jointly.

33.  As highlighted above, 'ordinary income' includes income according to ordinary concepts: see subsection 6-5(1) of the ITAA 1997.

34.  Relevantly here, Jordan CJ stated in Scott v. Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 that:

The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.

35.  It is well established that amounts received as a result of carrying on a business (but not a pastime or hobby) are ordinary income.

36.  For the reasons highlighted above in paragraphs 11 to 28, the Commissioner considers that you were in receipt of ordinary income jointly.

Conclusion

37.  As a result, the Commissioner has formed the view that the Group is a partnership for the purposes of subsection 995-1(1) of the ITAA 1997 and section 92 of the ITAA 1936.

38.  Therefore, your assessable income includes so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period where the partner was a resident: pursuant to sections 6-10 of the ITAA 1997 and 92 of the ITAA 1936.

Question 2

Are the expenses incurred in the Group's activities allowable deductions?

Summary

No. You cannot deduct from your assessable income the expenses incurred by the Group in conducting its betting activities. However, as highlighted above, the Commissioner is satisfied that the Group is carrying on a business using a partnership structure. As a result, the expenses incurred by the partnership (if allowable under section 8-1 and 8-5 of the ITAA 1997) can be deducted from the partnership's assessable income when determining its 'net income' under section 90 of the ITAA 1936.

Detailed reasoning

39.  As highlighted above, the Commissioner is satisfied that the Group is carrying on a business using a partnership structure. Your individual interest in the 'net income' of the partnership will be included in your assessable income.

40.  The 'net income' in relation to a partnership is defined in section 90 of the ITAA 1936 as meaning:

...the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions except deductions allowable under section 290-150 or Division 36 of the Income Tax Assessment Act 1997. [emphasis added]

41.  As a result, the expenses incurred by partners of the partnership in the course of the Group's activities will not be available to you to deduct from your assessable income. This is because the partnership is treated as having incurred the expense.