Private ruling: Am I in the business of gambling
Date of advice: 2 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you in the business of gambling (the activity)? | A1: No.

Relevant facts and circumstances: From a young age you have had an interest in racing and maths. You have recently joined a betting syndicate with some friends to pursue the activity. You bet on various sports, but mainly on racing. Some of your betting activities make heavy use of automation through programs and statistics. However you also use personal judgement and experience in the activity. You enjoy the mathematical challenge of trying to design a better betting system. You typically place thousands of bets in a week, and typically bet to win, place or some other traditional bet. You rarely make more exotic bets. The syndicate has pooled funds of around $100,000 to $150,000 from which the syndicate members carry out the betting. In a typical month you might make between $X,XXX and $X,XXX in winnings from the activity. The funds are not split equally between the syndicate members. The ratio varies depending on how much of the initial funds a member has contributed and how much of the betting and statistics they have done. You may increase the amount of capital you invest in the betting syndicate in the next few years. Your share of the winnings is deposited into your personal bank account from the personal account of whichever member is holding the syndicate's funds at the time. Whilst you enjoy the sports you bet on, you do not have any connection with the racing industry or any of the sporting industries that you bet on. At this point you don't intend on increasing the number of members in the syndicate. However you may pay someone to advise you on some technical aspects of the activity in the future. You do not have a business plan, and you do not rent an office or employ staff in relation to the activity. You undertake the activity for pleasure and believe the activity is a hobby.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Ordinary income Income is generally assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts. 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 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. 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's case ) 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. Of these cases, the circumstances in Brajkovich's case is most similar to yours. In Brajkovich's case , the taxpayer had amassed sufficient wealth to enable him to withdraw from his employment and devote himself to a business of gambling. The taxpayer commenced gambling on races and on games of cards in which he was playing. After suffering heavy losses from gambling, the taxpayer resolved to gamble only in a small way and for purely recreational purposes. The court identified the following criteria for determining whether or not a person is in the business of gambling. No one criteria is decisive, and they must be considered in combination and as a whole. 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, whether the taxpayer rents an office, employs staff, uses a database to calculate odds, takes steps to lessen and exclude the element of chance, maintains adequate records, and whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business. The scale of the gambling activities The volume and size of bets are significant in most forms of gambling. However, the Court in Evan's case 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 training. 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's case ). The taxpayer in that case conducted a business as a bookmaker and also had interests in a horse training businesses. Whether the gambling activity is principally for profit or principally for 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". A taxpayer does not need to have a profit making intention. Consideration is given to the time spent on racing and betting operations, the proportion of assets and income applied, and the systematic methods employed. The court in Babka's case proceeded on the assumption that a mere punter may be carrying on a business but found the taxpayer lacked the concept of conducting business in a systematic, organised and businesslike way because: n the taxpayer did not follow any betting system although he placed bets in accordance with several guiding principles n judgment and instinct which both played a part in the taxpayer's selection on which to bet as well as in his choice of the amount and type of bet placed was enough to negate the concepts of system and organisation, and n the intrusion of chance into the activity as a predominant ingredient will generally preclude finding mere punting to constitute a business. 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… Whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime Gambling is ordinarily thought of as a hobby or pastime rather than engaging in a business. In 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. Application to your circumstances Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes at this time. The activity could be better described as a hobby or past time which has arisen out of a keen interest in racing. Therefore any income you may receive in relation to the activity will not be assessable under subsection 6-5(1) of the ITAA 1997 as ordinary income. In addition, any expenses that may be incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.