Edited version of private advice

Authorisation Number: 1051872644793

Date of advice: 30 August 2021

Ruling

Subject: CGT - assessable income

Question 1

Are the payments you receive from other game player/s assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Do you have a capital gains tax liability in respect of the payment you received from the other game player/s?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The game is an online XXX XXX game. Players are represented in the game with XXX XXXX. Players can choose to play the game in various ways. The game is interactive with other players where you can participate in XXX XXX, some of which are competitive or combative in nature.

Players in the game can build up game coins, which is used inside the game to buy items or to gamble. The game coins are 'pretend' money, that are only valuable to players who are playing the game, but they cannot be used as currency outside of the game.

You were an enthusiast of the game and played the game for a number of years. You started playing when you were in school but had a break from playing while in high school and restarted playing again towards the end of your first year of university.

You initially played the game generally, however once you became aware it was possible to play an event, you became hooked on the activity. You then spent most of your time in the game playing this event.

You describe this activity as;

In an event, you can wager cash and items on the outcome of the event. Before you begin you can see the items that you will win and the items you will lose should you be defeated. When both players are happy with the conditions and bet, they will be able to play the event.

You place bets within the game, with game coins on an event that has an equal chance of resulting in a win or loss. If you won, you receive the collaborated game coin winnings from the other participant on top of your original bet. If you lost the event, you received no game coins or winnings. You and your opposition had the option to increase the game coin bet.

You consider that the result of the event is due to luck, there is XXX skill involved, you could not advance XXX XXXX or upgrade your chance to win. You did not have to contribute any Australian Currency towards the game.

You consider that participation in the event is a form of gambling and can be addictive.

It was not uncommon for you to play the game for XX hours a day while you were at university and once you graduated you played up to XX hours a day. You kept playing the event because you found the activity addictive and thrilling.

You had no set schedule for when you would play, you would play each day for as long as you felt like.

From time to time you found that you had excess game coin. You sold your excess game coin to other players in exchange for Australian Currency outside of the game.

To do this you would transfer the game coin to the other players player account within the game. The other player would make a payment of Australian Currency to you in exchange for the game coin.

The game coin you earnt and then sold for Australian Currency was earnt by winning the event or by playing XXX XXX XXX to earn more game coin.

Gameplayers have no enforceable rights and therefore, you do not own or have the rights to the game coin. The game coin did not have any Australian Currency, money or monetary value that you could withdraw, refund or redeem. Any winnings you earnt, stayed within the gaming platform as a DEF Product.

You advise that DEF, the game maker/owner, apply the following terms and conditions to their products.

... XXXXX [In Summary] you agree that, you have no ownership rights to any part of the game XXXXX

... XXXXX [In Summary] the game owners may deactivate your account at any time XXXX

... XXXXX [In Summary] the game will not pay any cash or refunds as the game coin has no value outside the game, subsequently is not redeemable or refundable outside the game. XXXX

... XXXXX [In Summary] the game owners may decide to stop the game coin for any product XXXX

You did not use any specific equipment and have no proprietary interest in the game.

DEF, the game maker/owner's term and conditions explain that the game coins are not a right that can be enforced against a third party, they are not intended to have commercial value and are not sufficiently permanent or stable property. DEF state that they may at any time decide to end in part or entirety the ongoing supply of the game coins and that they may deactivate any account to which no entitlement of refund will be paid in connection with the account.

You did not keep any records of your activity. In particular;

•         You did not keep records or your wins or losses in the event

•         You did not keep records of your game coin account balance within the game

•         You did not keep track of the price that other player/s were willing to pay for game coin

•         You did not keep track of the payments you received from other player/s for the exchange of game coin

•         You did not write receipts or invoice to the other player/s.

While you did not keep specific records of your earnings, you estimate that you received the following in each income year from other player/s;

•         20XX income year: $XX,XXX

•         20XX income year: $ XX,XXX

•         20XX income year: $ XX,XXX

•         20XX income year: $ XXX,XXX

You had negligible expenses associated with playing the game. From 20XX to 20XX it did not cost you any real-world Australian Currency to play the game. You played the game for free.

You resided at XXX XXXX place for the entire time while playing the game and played from the computer in XXX XXXX.

You had XXX dependents and had negligible living expenses as a result of living XXXXX XXXX XXXXXX.

You XXX possess any particular qualifications or expertise in respect of playing the game or event. You XXX professional or expert advice or subscribe to any publications in relation to playing the game.

You XXXX have a plan or timeframe for when you would end playing the game. You decided to stop playing the game in late 20XX.

You do not have the intent to carry on a business from your activities.

You would play the game even if it was not possible to transfer the game coins to the other player/s in exchange for Australian Currency.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 328-180

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 part 3

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 subdivision 115-A

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Ordinary Income

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income is made up of both ordinary income and statutory income.

Under subsection 6-5(2) of the 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.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

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 Income tax: betting and gambling - whether taxpayer carrying on business of betting or gambling 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.

There have been numerous Federal Court cases relating to the issue of whether a taxpayer was carrying on a business of betting or gambling. However the criteria in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich) and the factors considered in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 (Evans' case), Babka v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Babka's case) and Prince v. FC of T (1959) 7 AITR 505; 12 ATD 45 (Prince's case), should be used to determine if a taxpayer is carrying on a business of gambling.

In 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.

The Macquarie Dictionary (2021) defines 'gambling' as:

1. to play at any game of chance for stakes and

2. to stake or risk money, or anything of value, on the outcome of something involving chance.

The expression, "legal or equitable right that is not property" is not defined in the Income Tax Assessment Act 1997. However, the explanatory memorandum to the Taxation Laws Amendment Bill (no 4) 1992 which introduced this expression into the tax legislation states:

Not all things...referred to as "rights" will be assets for CGT purposes. To be an asset, a right must be recognised and protected by law - a court of law or equity will assist in enforcing it.

The new section 160A(a) states that, for the purposes of the capital gains tax regime, an asset was to include "any ... right, whether legal or equitable and whether or not a form of property".

No one factor is decisive, and they must be considered in combination and as a whole.

Application to your circumstances

The game owner allows people to play the game with the terms and conditions set out that the DEF Products and any associated software are licensed to you, not sold. Your licence confers no title or ownership to the DEF Products or software and allows you to gamble within the game to accumulate game coins. You have taken the opportunity to sell the game coins for real-world Australian Currency due to having an excess. You derived a profit from selling the game coins and subsequently when you entered into an agreement to exchange the game coins to other players you create the legal right to receive real-world Australian Currency.

While you only gamble within the game, we consider that the game coins do not constitute a CGT asset and that you do not have the right to accumulate or hold these game coins. The activities that you undertake when playing the game and competing in the game do not constitute gambling as you have not provided any monetary value and/or consideration to undertake the activity. The game coins you use to play the game is not something you have the legal rights to.

Therefore, you are not considered to be carrying on a business and the payments you receive from other players are not assessable under section 6-5 of the ITAA 1997. Furthermore, the expenses related to the activity are not deductible under section 8-1 of the ITAA 1997.

Statutory income

Under section 108-5 of the ITAA 1997, a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. When you sell or otherwise dispose of an asset it's called a capital gains tax (CGT) event.

Subdivision 110-A of the ITAA 1997 details the general rules of the cost base of a CGT asset. The cost base consists of the following five elements. You will need to add together these elements to calculate the cost base. In brief, the five elements are:

1. Money paid or required to be paid for the asset,

2. Incidental costs of acquiring the asset,

3. Capital costs of ownership,

4. Capital expenditure you incur to increase the value of the asset and,

5. Capital expenditure you incur to preserve or defend your title or right to the asset.

CGT event D1 happens under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) 'if you create a contractual right or other legal or equitable right in another entity.' The time of the CGT event D1 will be when the right is created.

The 'CGT asset that is the subject of the event' is specified in the table provided in subsection 116-30(4) of the ITAA 1997. For CGT event D1, the CGT asset that is subject of the event is specified as 'the right you created'.

One exception is provided in paragraph 112-20(1)(a)(i) of the ITAA 1997, where CGT event D1 happens and you did not pay or give anything for the acquisition of the asset. Section 104-25 of the ITAA 1997 provides the circumstances in which a CGT event C2 happens. CGT event C2 happens if your ownership of an intangible asset ends by the asset being satisfied.

Section 108-20(2) states that a personal use asset is a CGT asset that is used or kept mainly for your personal use or enjoyment and is only relevant if the event is classified as a CGT asset.

Application to your circumstances

You created the right (CGT event D1) when you entered into an agreement to exchange the games coins for Australian Currency with the other player/s. We agree in your circumstances, that the game coins, is not in itself a CGT asset and you have no legal right to the game coins therefore personal use asset is not relevant to your circumstances, however when you entered into an agreement with the other player/s you create the right to receive the Australian Currency in exchange for performing the action of transferring the game coins in the game. As a result of this right, CGT event D1 happened.

Your right to receive Australian Currency from the sale of the game coins is a result of the CGT event D1 happening is your CGT asset under section 108-5 of the ITAA 1997. You are taken to have acquired this right on entering the agreement in accordance with subsection 109-5(2) of the ITAA 1997. You will make a capital gain as a result of a CGT event D1 happening if the capital proceeds from the ending are more than the asset's cost base.

Any capital gain or loss made from the CGT event D1 happening will need to be included in your assessable income for the respective income years ending 30 June 20XX, 30 June 20XX, 30 June 20XX and 30 June 20XX.

You received payments throughout the income years in satisfaction of your right to Australian Currency from other player/s. The CGT event C2 is taken to have happened when you received the Australian Currency in exchange of the game coins.