Private ruling: Tax treatment of gambling activities
Date of advice: 12 July 2019
Published: October 2019
Ruling period: Income year ended 30 June 2020 | Income year ended 30 June 2021
Date scheme commenced: The scheme had already commenced.

Ruling: Q1: Are any winnings from the gambling activities assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are any losses or any expenses incurred in relation to the gambling activities deductible under section 8-1 of ITAA 1997? | A2: No.

Relevant facts and circumstances: The taxpayer and two of their associates have had a passion for racing, sports and betting and gamble for pleasure, excitement and to win money. None of these individuals has any connection to the racing, sports or betting industries. The taxpayer and their associates have a statistics/mathematics background and have built computer programs to design betting systems. They are the only three (3) people currently participating in the betting arrangement. The taxpayer and their associates started betting in small amounts, and have grown their betting since then. When they started betting they committed to losing a maximum of several thousand dollars in total before giving up. All betting since then has been from the initial amount plus winnings. Wins and losses are shared in proportion to the contribution of each person, but there is no formal agreement governing the sharing of wins and losses. The taxpayer and their associates spend 10-15 hours per week updating or monitoring betting. This can vary depending on the number of racing events at a particular time. For example, more time is spent during significant racing events such as the Melbourne Cup. The taxpayer and their associates do not: · keep detailed records of profit and loss and just split winnings/losses as they arise; · project future profits and losses; they don't know how much they will be betting in the future; · share any of their research or betting systems with anyone else or intend on doing this in the future; · have any employees; nor is it intended that they will they hire any (however, they have paid for some IT support services in the past); and · currently pay for any tipping services, although they subscribe to a local betting information platform (dynamicodds.com.au). The taxpayer and their associates have not sought any expert or professional advice in setting up or conducting the betting. Rebates The taxpayer and their associates try to place a high volume of bets so that the pari-mutuel pool operators pay them a rebate. The current rebate provided by a racing betting tote is 3 percent of turnover subject to meeting an annual turnover threshold of $5,000,000. In order to receive the rebate the taxpayer and their associates need to meet certain turnovers levels that are agreed beforehand with the operator. The taxpayer also pointed out that rebates vary between tote operators. Tote operators always reserve the right to not pay rebates going forward or on particular races. The rebate will always be less than the takeout for all tote operators and bet types. How bets are placed The taxpayer and their associates place bets in their personal capacity with operators of pari-mutuel pools both within and outside Australia, and with betting exchanges. The taxpayer and their associates have developed a computer program that analyses a historical database of results and performances. They use this information, and intuition where information is not readily available, to predict the outcome of races and sports matches. They place bets on the outcome of racing and sports events and on lottery style jackpot bets. The programs they have written to facilitate betting are not registered or owned by any of the three participants as they have been built for the sole purpose of their own betting activities. The pari-mutuel pool operators occasionally provide estimates of the odds payable prior to the start of the race. These estimates may change after they place their bets and final odds are calculated after the pools are closed and no more bets are accepted. The taxpayer and their associates use these estimates as a first guess of what the final odds will be. They try to place bets where their estimate of the odds to be paid is better than their estimate of the fair odds. Most of the bet placement is done automatically by the computer program with their oversight. This is more efficient and quicker than a manual bet placement. Automated betting can be over-ridden manually, and some specific data for each day is entered manually. All betting is conducted with pari-mutuel pools and a small amount is placed into betting exchanges, not with traditional bookmakers. The taxpayer and their associates do not engage in arbitrage, they do not place bets with different bookmakers in order to cover the field of runners and to obtain different odds (such that no matter what the outcome a profit will result). Bets are placed only into pari-mutuel pools and on the betting exchange; mainly into the SP (Starting Price) product. The price of the bet is not known when placing the bet. Consequently for the majority of the bets placed, the odds at which each bet is placed is not known because it varies according to other bets placed into the pari-mutuel pool. The dividend is only known if it is a winning bet. Assumptions Future bets will be placed in accordance with the description in the ' Relevant facts and circumstances ' above. This includes, but is not limited to, the following: · The taxpayer and their associates will conduct their betting activities exclusively as follows: - the majority of bets will be placed in pari-mutuel pools; and - a small amount of bets may be placed into betting exchanges. In this regard, bets will be placed on the XYZ betting exchange; and mainly into the SP [Starting Price} product. The price is not known when placing the bet. · No part of the gambling activities or the system used in, or relating to, the gambling activities will be outsourced to third parties for any reason. · The taxpayer and their associates will not: - engage in arbitrage; or - place bets with different bookmakers in order to cover the field of runners and to obtain different odds (such that, no matter what the outcome, a profit will result). This means that, while pari-mutuel pool operators may occasionally provide estimates of the odds payable prior to the start of the race, the syndicate will not know the final odds at which each bet is placed, because it varies according to other bets ultimately placed into the pari-mutuel pool.

Relevant legislative provisions: Section 8-1 of Income Tax Assessment Act 1997 | Section 6-5 of Income Tax Assessment Act 1997

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, 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 (IT 2655), discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. IT 2655 at paragraph 6 states: The Commissioner accepts that it is possible for a mere punter to be carrying on a business of betting or gambling but considers that it will be rare for a taxpayer with no connection with racing other than betting to be carrying on a business of betting or gambling. 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: 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? The taxpayer and their associates use a computer program that analyses a historical database of results and performances. They use this information, and intuition where information is not readily available, to predict the outcome of races and sports matches. No detailed business records are kept or maintained by the taxpayer or his associates and there is no business plan or any attempt to project future profits or losses expected to be generated from the gambling activities. Any wins and losses are shared proportionately based on the contribution of each participating member of the syndicate. In addition, the taxpayer and their associates do not engage in arbitrage which would ordinarily mitigate risk by offsetting losses from unsuccessful bets being placed. The taxpayer and their associates have grown the turnover of the operation substantially since 2015 when the gambling operations first commenced. The taxpayer also pays very close attention to obtaining rebates from betting totes based on high volume annual betting thresholds being met. While most of the bet placement is done automatically by the computer program, the placement may be overridden manually and, in this regard, the taxpayer and their associates have an oversight as to how bets are placed with different totes by the betting software. The taxpayer can also manually place bets taking into account estimates of the odds given by pari-mutuel pool operators prior to the start of a race. As to the use of a computer program to assist in the gambling activities, Hill J in Babka's case recognised the role technology could play when he made the following remark: In ordinary usage we recognise the possibility of mere punting being a business when we speak of the "professional punter" meaning thereby on of whom it could be said that placing bets is his vocation and I am inclined, particularly with the growth of modern technology such as computers, to think that there may be cases today, even if there were not at the time when Rowlatt J decided Graham v Green, where the activity of betting has become so organised, systematic and businesslike and is carried on with such dedication to potential profit that the man in the street would recognise that activity to be a business The use of a computer program in this case might support a view of the operation as is businesslike and systematic. It is noted on the other hand that there are no employees and no separate office to conduct the gambling operations. In this regard we are cognisant of the comment from Hill J in Babka's case where his Honour differentiated between the occasion where a taxpayer undertook all activities themselves and the situation where other entities are utilised: For completeness it will be noted that neither in Evans nor in the present case did the taxpayer have business premises, employ staff to lay bets or agents to place them, attempt to hedge bets or use computers or similar equipment to calculate odds. Neither taxpayer subscribed to tipping services or had access to sources of information from racing circles. Where the betting and gambling activities involve a high degree of sophistication which requires other entitles to undertake integral parts of the betting and gambling activities, a threshold may be reached which would turn the activities into an enterprise more correctly characterised as a business rather than a hobby or pastime. However no employees have been engaged in this case. The scale of the gambling activities In 2015, the taxpayer and their associates were committed to losing a maximum of $25,000 in total before giving up. However, the gambling turnover increased substantially since 2015. In this regard it is noted that the taxpayer and their associates try to place a high volume of bets so that the pari-mutuel pool operators pay them a rebate; and that the current rebate provided by TabCorp and Centurion Solutions is 3 percent of turnover subject to meeting an annual turnover threshold of $5,000,000 However, the Court in Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 held that scale itself is not determinative of the question as to whether the taxpayer is carrying on a business. The court in Brajkovich's case found that the taxpayer in that case did not carry on a business of gambling; notwithstanding that the taxpayer bet over $950,000 in three years and was involved in horse training. While the relatively large scale of the gambling activities is a relevant factor in this determination, there are other counterbalancing considerations presented by the facts and circumstances in this case that will need to be taken into account. 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. In these circumstances the taxpayer and their associates have no involvement in activities relating to the gambling; for example, they have no involvement in racing, breeding or sports. 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 assessing if the activities are conducted for profit or pleasure. In Brajkovich's case, Pincus, French and Gummow JJ articulated that in seeking to justify a business of betting and gambling, the bar is higher than for those who undertake more conventional business activities: And more as a matter of usage than logic, it may be said that the gambler who seeks to demonstrate that he is thereby a businessman has more to show by way of system and profit motive than those who engage in more conventionally ''commercial'' activities. (89 ATC 5234) Their Honours found that the taxpayer in that case, "...had from his youth a simple passion for gambling on a large scale..." and that he was motivated for pleasure rather the profit. In these circumstances the Commissioner accepts that the taxpayer and their associates had always had a passion for racing and sports betting and that they gamble for pleasure, excitement and to win money; and that the current activities may currently - on the whole - be considered an extension of this passion. However this view is taken in light of the taxpayer's submissions in respect of the activities currently being conducted. The businesslike elements of the taxpayer's gambling activities, as considered above, may expand or evolve to the extent that the gambling activities may no longer be regarded as being principally for pleasure but for profit. However on the facts as currently provided to us, and taking into consideration the element of chance as discussed below, this has not yet clearly been established. 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 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... The distinction between the types of events which are the focus of betting and gambling activities was also enunciated in Babka v. FC of T 89 ATC 4963; (1989) 20 ATR 1251 ( Babka's case) when Hill J said: It would, for example, seem impossible to imagine a taxpayer carrying on a business of buying lottery tickets. That presumably is because no matter how systematic a purchaser of lottery tickets may seek to be, no matter how frequent his bets or how large the sum he gambles, the odds will always be such that the outcome will predominantly depend upon chance. Yet 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. The outcome of a bookmaker's business must depend to some degree on chance yet it has always been regarded as a business. Of the bookmaker's business it can be said that the bookmaker has, by laying off his bets and averaging them in his dealings with the public, by "balancing his book", been able to reduce his odds to the point where there is sufficient skill to see the activity as systematic and businesslike being directed to a profit which it is hoped will eventuate. The view taken in IT 2655 is that: As Hill J stated in Babka, 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. In determining whether the form of betting undertaken is likely to reward skill and judgement or depend purely by chance, consideration is given to the level of skill employed by the taxpayer and his associates and the ability to reduce the outcome from a merely random outcome to one which is more certain by effectively reducing the element of chance. As mentioned above, the taxpayer and their associates use a computer software program which analyses a historical database of results and performances. They use this information with some intuition to predict the outcomes of a match or race. On the facts of the present case, it is more likely that the betting results depend on chance rather than on skill and judgment, in light of the following: · All betting is conducted with pari-mutuel pools and a small amount is placed into betting exchanges, not with traditional bookmakers. · The taxpayer and their associates do not engage in arbitrage. · They do not place bets with different bookmakers in order to cover the field of runners and to obtain different odds, such that no matter what the outcome a profit will result. · Bets are placed only into pari-mutuel pools and on the XYZ betting exchange; mainly into the SP (Starting Price) product. The price of the bet is not known when placing the bet. · Consequently for the majority of the bets placed, the odds at which each bet is placed is not known because it varies according to other bets placed into the pari-mutuel pool. The dividend is only known if it is a winning bet. 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 addition, it is noted that in Babka's case Hill J 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. Taking in consideration the factors examined above, it is the Commissioner's view that the taxpayer is not carrying on a business of betting or gambling. In this regard, particular weight is given to the fact that the betting results in this case depend on chance rather than on skill and judgment. Consistent with the principle in IT 2655 that ' the intrusion of chance into the activity as a predominant ingredient' will generally preclude a finding that the gambling activities constitute a business, it is the Commissioner's view in this case that the predominant element of chance in the taxpayer's activities point away from the existence of a gambling or betting business. As the taxpayer will not be carrying on a business of betting or gambling, the winnings received in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 and the expenses/losses related to the activity will not deductible under section 8-1 of the ITAA 1997.