Private ruling: Whether carrying on a business- gambling and betting
Date of advice: 19 September 2019
Published: November 2019
Ruling period: Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the income derived by an individual from gambling activities assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: 1. The individual has had an interest in gambling for a number of years and has developed a private computer program which automatically bets on races and sports including horse racing, harness racing and greyhound racing and soccer. Bets are placed both in Australia and overseas. The computer program is written entirely by the individual and no off-the-shelf software has been used. 2. The individual currently works full time in an industry unrelated to gambling as an IT professional and has no future plans for undertaking gambling as a full time occupation. The individual has no intention to sell the computer program or commercialise the computer program for public use or as a business for private gain. The program is solely used by the individual for private use only and not available to the public. 3. The individual bets through one betting agency and uses funds from their personal bank account. 4. The individual is part of an informal gambling syndicate consisting of X close family members. Less than $50,000 has been contributed by the syndicate members for betting funds over Y years. To date, most of the winnings have been re-invested to increase bet size. No other funds are borrowed for the betting activities. 5. The individual creates and maintains the computer program and systems on behalf of the gambling syndicate. Other than contributing funds, the other syndicate members are passive and does not participate in the gambling via the computer program or otherwise. The gambling syndicate does not have employees. The computer program is operated on a laptop at the individual's residence. 6. The computer program will run 24 hours a day 7 days a week to essentially automate the decisions which need to be made on each race and each sporting event. The individual conducts nearly all their gambling activities via the computer program. Occasionally, they would place bets while watching sporting events but this is only less than 1% of their total gambling turnover. 99% of the individual's gambling turnover is conducted through the private computer program. The computer system is stopped when the individual goes on extended holidays as they cannot monitor its activities as effectively. 7. The computer program does not use artificial intelligence or machine learning in its programming. The computer program utilises the heuristic approach which is a rule based approach of "if this then do that". 8. The individual uses the computer program as a tool to apply the results of their data analysis. Without the computer program, the individual would be able to place bets using the results of their data analysis but the turnover of the betting activities and the resulted profits/losses would greatly reduce due to the lower number of bets being made. 9. Over the last few years, the individual has created multiple systems defined to collect information. A system is a defined set of coded rules that check the data for an upcoming race for each horse and if the criteria are met, it will place a wager on the race. Each system (or betting criteria) is developed by the individual over time by looking at the historical results of horses or sporting events. Some are currently being bet as they show the greatest profit with a good winning strike rate and a profitable edge. When a system is found that is profitable, the system will be added to the program to have automatic bets placed for it. 10. The computer program only implements the rules that the individual has prescribed in a 'system' using their own knowledge and judgement about betting. The betting amount is pre-determined by a formula based on the odds available (determined by the betting agency). The individual (not the computer program) determines the probability of winning a certain bet prior to the actual race or sports event based on the individual's data analysis when researching a system which will have a certain strike rate and profit amount. 11. If a set of betting criteria (system) is matched, it will signal that a bet should be taken. All systems are assessed before a bet is placed and the total is added together. Multiple bets on the same race can be made as determined by each individual system. The computer program will look at the total number of bets and each bet will be limited to the maximum risk size. 12. None of the bets are traded out of position. Each bet is placed and held until the end result. The computer program does not make 'hedging bets' to mitigate gambling risk. 13. The individual manually removes losing systems every 2 to 3 months. For example, systems were removed multiple times in the 2019 income year. In the past years, the computer system had been stopped completely on several occasions for making betting losses. 14. The individual adds new systems into the computer program regularly whenever they have a new idea. 15. The information which is fed into the computer program is freely available to the public e.g. odds available at the bookmakers, historical form of horses and various sets of ratings. 16. None of the members of the syndicate have involvement now or historically in the bookmaking, gambling, racing or sports industries. 17. For the 2019 income year, the turnover of the gambling activities has exceeded $50 million and approximately 1700 to 2000 bets are placed by the computer program each month. 18. The gambling syndicate had made annual net profits since 2014 from the use of the computer program of <$200,000. Approximately 17% of the days have a daily balance showing a loss. 19. The individual's betting agency, does not offer any rebates but they do offer a cheaper commission rate based on turnover. 20. The individual had initially started the gambling syndicate and computer program as a challenge and a bit of fun to beat the bookies i.e. to bet for both excitement, amusement and to win money. No information on the computing program or the gambling is formally shared outside the gambling syndicate. 21. No formal accounting records are kept and operations are not reported back to the other gambling syndicate members on a regular basis. The individual keeps a spreadsheet of the daily balance on their laptop. 22. The types of expenses the individual has incurred (to date) in relation to betting activities include home office expenses, equipment (laptop, internet, and phone) expenses, costs in attending sports events and industry events. However, the individual may consider using subscription services to data feeds in the future.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 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. It is well established that 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. Following on from the Federal Court decisions of Evans v. FC of T ( Evans ), Babka v. FC of T ( Babka ) and Brajkovich v. FC of T ( Brajkovich ), the Commissioner published his views in relation to whether a taxpayer is considered to be 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 or not 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. Again, 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. | Detailed Reasoning - Application to your circumstances: The facts applicable to the individual's membership of the gambling syndicate are reviewed below by reference to the criteria identified in Brajkovich . (1) Whether the betting is conducted in a systematic, organised and businesslike way · Use of a self-created automatically betting computer system (not available to public and no use of off-the-shelf software). · Computer system operates largely without supervision. · Gradual increases in bet sizes as profits increase. · Systems in the computer program are 'monitored' by the individual to ensure they remain profit making. Yes, the betting is conducted by the individual in a systematic, organised and businesslike way. (2) The scale of the betting activities · Placing large volumes of bets involving a large turnover i.e. approx. >$50m a year. · Computer system operates 24 hours a day, 7 days a week (except when the individual is on extended holidays). Yes, the scale of the betting activities is not small. (3) Whether betting is related to or part of other activities of a businesslike character · The individual and none of the other members of the syndicate have involvement now or historically in the bookmaking, gambling, racing or sports industries. · The individual is an IT professional and has used their 'trade' to develop this computer program for betting. However, their betting knowledge utilised to formulate the rules within the systems is unrelated to their main employment as an IT professional. They do not develop computer programs for sale as a business or other rewards. · The individual has a personal interest in gambling or betting in horses or sports. They do not plan to sell or commercialise this computer program but use it for their personal betting activities only. It has not been subject to copyright or any other intellectual property registration. No, the betting is not related to or part of other activities of a businesslike character. (4) Whether the activity is principally for profit or principally for pleasure | Detailed Reasoning - Indicators that the betting activities are for done for profit:: · The computer program is being run 24 hours a day 7 days a week to place a larger number of bets than manually possible and to maximise profits from the betting activities. · Horse racing, sports and gambling are the individual's chosen pleasurable pursuits. The individual does derive pleasure from betting via the computer program and watching some of the related races/events when they can. However, the majority of the bets made by the computer program relate to races/ sports events that the individual will not watch. Therefore, the individual has written code which is applied by the computer program to make bets and to mainly derive profits or winnings | Detailed Reasoning - Indicators that the betting activities are done for pleasure:: · No business plan, only minimal detailed and organised records are maintained, no business premises or employees. Computer program is conducted from a laptop at home. If the computer shuts down when the individual is not home, their spouse can turn the program up again if they notice. · No separate banking account for the gambling syndicate exists and only the individual's personal bank account is used for the betting activities. · The individual earns their income from working full time in an IT role in a non-gambling industry. They prioritised their full-time job over the operation of the betting activities of the syndicate. In 2017 and 2018, the individual asserted that the profits from the betting activities were lower because they were busy with their career and did not have the time to improve the computer program and its systems to be more profitable. · The computer program needs constant updating and correction of its systems to remain profitable. The individual only devotes up to 15 hours a week to doing this. The individual has no employees nor any plans to hire employees. In conclusion, on balance, there are more indicators supporting that the betting activities conducted by the individual are principally for their pleasure. (5) Whether the form of betting chosen is likely to reward skill and judgment or depends purely on chance · The individual inputs the coding systems and rules into the computer system and the computer then automatically bets based on these rules. The computer system effectively allows the individual to make more bets at a time and more bets frequently than they would be able to manually. - They work full time so during their office hours they would not be available to make bets. - They also sleep at night, eat and need rest whilst the computer can continue betting. - They need time to analyse the data if they want to make multiple combination bets in an individual race. The computer can do these quickly following coded instructions. In 2014 to 2016, the individual needed to put the computer program to a complete stop on occasions as the computer program generated losses beyond their tolerance levels. Automatic betting (done this way) is still largely dependent on chance. As demonstrated above, if a loss-making system was allowed to run unchecked, betting losses will be accelerated very quickly. The computer system does not negate gambling risk. The individual is using their skill and judgement to create a 'system' which is profit making. However, this 'edge' does not last and is not always consistent. The gambling outcome under the computing program is still largely dependent on chance. Other factors which indicate that the form of betting chosen depends purely on chance include: · The computer program is able to make multiple bets on multiple horses in individual races (either to win or lose) or multiple bets on the outcome of a sporting event. None of the bets are traded out of the position. · The computer program does not make 'hedging bets' to mitigate gambling risk. · If one system in the computer program recommends a horse to win and another system recommends the same horse to lose, the two bets will cancel each other out. · The individual does not receive any rebates from the betting agency due to their betting activities. There is no automatic or constant guaranteed revenue from the betting activities. All revenues must be derived from winning an actual bet. · Although the individual's chosen style of betting is 'laying a horse' or betting for it to lose a race, this style of betting does not in itself mitigate gambling risk. · Over the years, the individual has reduced their betting size to match the syndicate's gambling account size to reduce potential gambling losses. This is their personal choice and this will also reduce potential winnings as well. · The individual considers which 'systems' are profitable and only uses them in the computer program after thorough testing has been done. Despite this, the systems can become a 'losing system' over time due to reasons unknown. · The individual also learns from the 'feedback' from when the systems begin to make losses to improve future systems with the aim of allowing fewer losses to occur in the future. However, this is still mostly a manual and subjective process performed by the individual and not a guaranteed fix. · Despite net monthly losses being less frequent, daily betting losses on any day is still frequently occurring. The individual is still constantly manually removing losing systems to improve the computer program. Therefore, the computer program is not yet established i.e. only requiring maintenance from the individual. The computer program has derived the profits largely from chance rather than successfully mitigating gambling risk. (6) Whether the 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. Based on the particular circumstances, the Commissioner's view is that the betting activities in the individual's case are that of a hobby or pastime. | Detailed Reasoning - Conclusion: As a member of the gambling syndicate, the individual is not considered to be carrying on a business of betting. Any income received from the betting activity is therefore not their assessable income under ordinary concepts (section 6-5 of the ITAA 1997).