Private ruling: Carrying on a business
Date of advice: 11 May 2016
Published: June 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: The scheme has commenced

Ruling: Q1: Is income derived from syndicate punting 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 syndicate punting activities an allowable deduction under section 8-1 of the ITAA 1997? Answer: No

Relevant facts and circumstances: The Taxpayer is part of a betting syndicate with another person. The syndicate has no official name. Members informally agree to share winnings or losses equally. There was no initial pooled capital investment; however the members have agreed to expend a limited amount each to test whether their punting system can be successful. Each member opened individual betting accounts with equal deposits. Further deposits or withdrawals are agreed to be made equally as required. The syndicate bets for excitement, amusement and to win money. The members research historical results and use computer programs to design betting strategies. Bets are placed by all individual members online with various bookmakers. The majority of the syndicate betting is pari-mutuel on particular sport although there are no restrictions on how, when or where bets are placed. The members spend their free time writing their own computer programs to perform some automated tasks and implement betting systems. These programs create suggested bets which the syndicate uses as the basis of their gambling. The members may apply their own judgement in choosing what bets to make. Members do ongoing research and development in order to improve the computer programs. No information is shared outside the syndicate. The members have no involvement in the bookmaking, racing or sports industries. The syndicate is informal and no official account records are kept. There is no syndicate business plan. The Taxpayer works full time as an employee in a non-related field. The members spend approximately several hours per week on syndicate activities and the Taxpayer does not intend the syndicate activities to become a full time occupation.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | 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. 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. Under these circumstances the Commissioner has determined that the Taxpayer is not carrying on a business of gambling. Although the syndicate will utilise computer software, there is still a high element of chance involved. By using these techniques to choose which horses and events to bet on, the Taxpayer may have reduced the odds on the gambling activities, however, the overall gains will be dependent on chance rather than skill. The amount of time and effort involved in betting and gambling does not turn the syndicate activities into a business. While the syndicate's proposed activities will have some elements of being systematic and organised, 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 will not be carrying on a business of betting or gambling, any winnings received 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.