Private ruling: Gambling Income -Racing
Date of advice: 15 November 2016
Published: March 2017
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ

Ruling: Q1: Is the income derived from gambling activities assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the expenses incurred in deriving income from gambling activities allowable deductions under section 8-1 of the ITAA 1997? | A2: No

Relevant facts and circumstances: The Taxpayer has had an interest in both computer programming and racing since a young age. The Taxpayer has made several short-lived attempts to develop a computer-based personal betting system (System). The Taxpayer has no business plan and is not involved in the racing or bookmaking industries. The Taxpayer has neither business premises nor any employees. The Taxpayer does not keep organised records of the gambling activities. The Taxpayer's current account balance with their betting agency is a significant amount. The current System requires a significant balance to be maintained to cover betting strategies. The Taxpayer's System places multiple bets on multiple runners in individual races. The System runs completely unattended by the Taxpayer apart from occasional modifications to bet or trial new strategies. The Taxpayer spends on average a few hours per week actively managing the System. The volume of bets fluctuates each month. Bet sizes are arbitrary. The Taxpayer does not receive any commissions or rebates from any betting agencies. However, the Taxpayer does receive a reduced betting fee from their betting agency based on the volume of their bets. This reduced betting fee facility is available to the general public. The Taxpayer states they have no justifiable expectation of making future profits from the gambling activities. They do not actively track their individual betting strategies and those strategies are based on the rider and valued assessments. The Taxpayer has no intention to undertake gambling activities as a full time occupation. They have no maximum amount of losses they would allow to accumulate before ceasing gambling activities. Prior to establishing his System the Taxpayer lost their entire account balance several times before reviewing their strategies and subsequently recommencing gambling activities each time. The Taxpayer does not have a separate bank account established for their gambling activities. The Taxpayer does not involve any other individuals or related entities in their gambling activities and has no intention of doing so in the future. The Taxpayer owns all the information technology used in their gambling activities, none of which is registered. The Taxpayer derives income from a significant personal investment portfolio which they manage.

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: Summary: 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. 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. In these circumstances the following factors support a businesslike approach: 1/ use of a computer System; 2/ placing multiple bets on multiple individual races; 3/ placing large volumes of bets involving a large turnover; 4/ the System operates without supervision; 5/ use of a betting strategy to take advantage of reduced betting agency fees; 6/ adopting dollar cost averaging and/or arbitrage type techniques; 7/ gradual increases in bet sizes as profits increase; 8/ computer driven strategies support a profit motive over a pleasure or hobby pursuit; and 9/ using personal research, skill and judgement to minimise risk. In these circumstances the following factors do not support a businesslike approach: 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/ racing, gambling and computer programming are the taxpayer's chosen pleasurable pursuits; 8/ the Taxpayer is employed in an unrelated field on a part time basis; 9/ the Taxpayer derives income through managing a significant personal investment portfolio; 10/ no intention to pursue gambling as a full time occupation; 11/ no intention to expand the gambling activities to include other individuals or related entities; 12/ minimal time spent on the gambling activities; and 13/ success in gambling is dependent on chance, notwithstanding use of a System to minimise the risks. We have determined in the Taxpayer's circumstances that they are not carrying on a business of gambling. Although the Taxpayer utilises computer software, there is still a high element of chance involved. By using certain techniques to choose which race and events to bet on, the Taxpayer may have reduced the odds on their gambling activities, however, the overall gains will be dependent on chance rather than skill. The amount of time and effort involved in the Taxpayer's gambling activities are not sufficient to turn their gambling activities into a business. While the activities have some elements of being systematic and organised, which are mainly due to the computer programs used, 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 would not be carrying on a business of betting or gambling, the winnings received in relation to the 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.