Private ruling: Income tax - assessable income - business vs hobby
Date of advice: 1 October 2020
Published: November 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2019

Ruling: Q1: Will receipts from your personal gambling activities be taxable income under section 6-5 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: You undertake gambling by placing bets on horse races overseas. It only took you a few days to set up the activity. No specific separate bank account has been set up to record the activity's transactions. You have a fast internet connection which facilitates the rapid updating of odds. You do not subscribe to tipping or other information services to facilitate the conduct of the activity. This gambling activity has been conducted for at least three years. You undertake the gambling activity on your own. All bets are made from your home using a laptop and the home's electrical and internet connection. You are not employed and do not conduct any other income earning activity. You do not have any licences, qualifications or memberships of organisations that are relevant to the conduct of the gambling activity. You have applied for registration as a Bookmaker but have not continued with that process and you are not currently operating as a Bookmaker. Your gambling activities happen on an account with the betting agency through a portal (Internet) which you log into and place bets. Australian based betting agencies refuse to take your patronage. You currently place bets with professional gambling operators. The main reason for betting with these bodies is that they accept the bets you wish to place. The technology employed by these betting entities is another significant but secondary driver for you to use their services. To facilitate the betting activity you opened accounts with the exchange, agency or operators on which all wins and losses are cleared. The betting exchange account you place bets on has a seven-day account settlement process within which any deficit on the account must be rectified and any disputes are resolved. The account history is erased after the seven-day settlement period. The betting exchange takes a commission from your betting. No commissions are received from the betting agencies. However, depending on the amount of a bet, the betting agency may provide better odds in terms of a discount on the commission that the exchanges take from the transaction. Discounts are considered in evaluating the odds for bets but are not an essential part of the activity. The betting agencies keep your winnings for further gambling until settlement date, but sometimes your winnings are rolled over until a further settlement date. You do not retain a history of bets; the betting agency does not produce historical data and no records of the betting are kept. You will place a variety of types of bets including a Quinella. You may make multiple bets in a race often with amounts of more than $100,000. Bets can total up to $2m for any individual horse race. You make high-value bets with an exchange. The exchange finds contradicting bets (people willing to take the opposite risk) and matches it. Since finding an exact dollar match is very unlikely, the exchange may split one bet of, e.g. $200,000 into 1,000 bets of $200. There are approximately ten races per day, two days per week, and the season runs for ten months. The racing sessions usually last for five hours, so there may be ten hours per week involved in conducting the actual betting activity. You do not conduct hedging, Matched betting, Dutching system or any other betting system. Data for your recent bets indicated that, over this specific racing period, you had both wins and losses. In this sample period the wins were greater than the losses, but the methodology applied on the betting pattern did not guarantee wins or prevent losses. You believe there is no possible way to reduce the risks associated with your betting methodology apart from evaluating the odds, studying the form, the speed of the horses and then applying your judgement and experience to determine the best betting pattern. You utilise a laptop computer and betting software in the form of an historical database which keeps a record of all horse runs, finishing positions, rider's performance. You review vision of races to time a horse's performance over the duration of the race. You use this information to estimate the odds for a bet you wish to place. An element of your methodology is to place bets on runners and combinations which offer higher odds for the bet than you have calculated should be applicable. No specific elaborate computer systems or algorithms are used to manipulate the results data for this gambling or to place bets. You also use information provided by betting agencies and historical data available on the internet. While computers are used to assist in evaluation of risks, you base your decisions predominantly on personal judgement. No books of account are kept for the activity. To determine if there is a profit or loss from the activity you review the money being placed with the betting agency and the money being returned. You do not prepare a Profit & Loss Statement. You only review the betting account to ensure all winnings are being recorded. There are no records kept that could be used for the calculation of the activity's turnover. You have winning and losing periods. At the beginning of this activity you were losing regularly and were close to abandoning the methodology. However, you then started winning and had significant success. You lost approximately $6,000,000 from your horse gambling activities for the 2018/2019 income year. Your betting is currently funded by your own capital, previous winnings and a home loan. You do not have any projections that show when the activity will become profitable.

Relevant legislative provisions: ITAA 1997 | Section 6-5 | Subsection 6-5(1) | Subsection 6-8(2) | Subsection 995-1(1)

Reasons for decision: Summary: Income derived from your gambling activities is not assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 995-1(1) of the ITAA 1997 defines ordinary income to have the meaning given by section 6-5 of the ITAA 1997. Subsection 6-5(1) defines ordinary income as income according to ordinary concepts. Amounts received as a result of carrying on a business, but not a pastime or hobby, are ordinary income. Under subsection 6-5(2), 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. The Commissioner has published his views in relation to whether a taxpayer is carrying on a business of gambling in Taxation Ruling IT 2655 Income Tax: Betting and Gambling - Whether Taxpayer Carrying on Business of Betting or Gambling. The six principal criteria for determining whether a person is in the business of betting are: 1. Whether the betting is conducted in a systematic, organised and businesslike way; 2. The scale of the betting activities; 3. Whether betting is related to or part of other activities of a businesslike character; 4. Whether the activity is 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; and 6. Whether the activity is of a kind ordinarily thought of as a hobby or pastime. In Babka , Hill J used the examples of the activities of bookmakers and futures traders. Although both bookmakers' and futures traders' activities involve a degree of chance, they are able to reduce the odds to the point where there is sufficient skill to see the activity as being directed to profit in a systematic and businesslike way; in particular, both bookmakers and futures traders have some impact on the profit to be derived. His Honour discussed the possibility of the existence of 'professional punters': In ordinary usage we recognise the possibility of mere punting being a business when we speak of the "professional punter" meaning thereby one 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. That being so, I propose to proceed on the assumption that mere punting may constitute a business although the intrusion of chance into the activity as a predominant ingredient at least in the outcome of the race itself does suggest to me that it will be a rare case where a court will conclude that the activity is a business. Application to your circumstances The facts applicable to your gambling activities are reviewed below by reference to the criteria identified in Brajkovich . (1) Whether the betting is conducted in a systematic, organised and businesslike way There is a basic system. The system relies on a high frequency of betting; often placing large bets on race participants using your judgement after studying the past performance of the race participants and considering the odds available for the race entrants. An off the shelf spreadsheet application is used to assist in determining the bets to place. You have won and lost significant amounts of money on the activity. You do not have a business plan. Your accounting record keeping is limited to verifying that the gambling accounts have had your wins recorded. You do not have any other occupation or business activities that are complementary to this activity though you have previously been a bookmaker for a limited time period. The activity is undertaken from your private home using a laptop computer rather than using a specific business premises. You do not have any relevant qualifications in mathematics and computer science which may assist in preparing algorithms or systems to mitigate losses. You do not receive rebates or commissions as a result of your betting activity but do benefit from discounted bets which only have value when further bets are placed. (2) The scale of the betting activities Your wagering is conducted over a ten month period on offshore races and is facilitated by betting exchanges. During this ten month period you spend a significant amount of time studying the runners, applying your methodology and placing bets. You rely on your own judgment and analysis. You place a variety of bets often in large volumes involving amounts up to $100,000 on a single bet and up to $2 million for a race. You conduct the activity yourself and the betting is conducted on 2 race meetings a week. (3) Whether betting is related to or part of other activities of a businesslike character You do not conduct any other business activities and are not employed. (4) Whether the activity is principally for profit or principally for pleasure | Detailed Reasoning - Indicators that the betting activities for profit:: The bets made by you are usually for large amounts and can be high frequency in nature. You use a computer spreadsheet and a laptop computer to assist with your gambling activity. Funding for the activity is partially sourced from a bank loan. You bet on horse races overseas to increase the possible returns on your wagers and to access a bigger population of gamblers. You have no other business or employment income and your intention is to win and make money. | Detailed Reasoning - Indicators that the betting activities are principally done for pleasure:: You are passionate and well informed about betting, horses and gambling on other activities. You have not prepared a business plan and maintain minimal records in relation to the activity. The activity is run from your home using minimal technical support and is essentially a single person operation albeit using an overseas agency to place the bets. You use overseas exchanges, agencies or operators. because they accept your bets and provide better technological support. No separate banking account for the gambling activities has been created. (5) Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance Your gambling methodology requires that you use your skill and judgement to determine the horses on which you place bets. Your methodology and the use of spreadsheets to record race outcomes assists you with deciding on which horses to place bets but does not obviate that the outcome is dependent on chance. There is no automatic or constant guaranteed return from the betting activities. While the element of chance may have been mitigated to some degree by the methodology you employ, the degree of chance, as described by Hill J in Babka , has not been reduced to the level that would be expected when conducting a business of gambling. (6) Whether the activity is of a kind ordinarily thought of as a hobby or pastime Betting on horse racing 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. Based on the circumstances of your gambling activities, for the period in question, whilst balancing the significant scale of the betting volumes with the small scale of the operational aspects of the betting activity, the Commissioner's view is that the betting or gambling activities in your case are indicative of a hobby or pastime. | Detailed Reasoning - Conclusion: Your gambling activities are of a significant scale and undertaken with considerable skill and judgement. You are passionate about betting but the lack of systemic businesslike organisation and/or syndicate like activity indicate that you have not eradicated the element of chance in placing your bets. Accordingly, your activities are not considered to constitute the carrying on of a business of betting or gambling. Any winnings received from your betting activities are therefore not assessable income under ordinary concepts (section 6-5 of the ITAA 1997).