Private ruling: Assessable income from a betting and gambling syndicate
Published: August 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the income you will receive from a betting and gambling syndicate assessable? | A1: No | Q2: Can you claim a deduction for expenses incurred which relate to the income you receive from the betting and gambling syndicate? | A2: No | Q3: Is the syndicate a partnership for tax purposes? | A3: No | Q4: Is the syndicate entitled to input tax credits in respect of betting and gambling acquisitions pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A4: No

Relevant facts and circumstances: You wish to commence a betting syndicate. There is no formal agreement in place between syndicate members, nor is a formal agreement contemplated. No formal business plan, nor projected income, exists. The syndicate intends to use a computer program to sort, compare and analyse the available data to gamble in an attempt to predict probable outcomes. The primary focus of the syndicate will be betting and gambling on both local and overseas sporting events. The syndicate intends to bet through totalisators and betting exchanges, although the use of traditional bookmakers may be considered in the future. All funding, operational and administrative support will be provided by the members. The syndicate will have no employees, although it is expected to need to contract various people or companies for computer programming and operational resources on arm's length terms in the future, for example, internet provision and data providers. The syndicate's betting and gambling activities will not be undertaken in association with any other related activities such as horse breeding or training. The syndicate does not have access to insider information such as information from jockeys or trainers. Information will only be sourced from form guides, race results and other information which is available to the general public. The syndicate intends to bet seven days a week. Several thousand individual bets may occur each week. The syndicate will monitor progress via an internal program. The program will be developed by the syndicate's members, who may use outsourced services, as part of the overall system development. It is envisaged that these results would then be transferred to a generic accounting software package and used to consolidate the relevant information. New members might be added to the betting syndicate should the syndicate continuously lose the available funding that has been allocated and provided for betting by members. The percentage new members receive will need to be agreed to by all members and must add up to 100%. This will not be formally documented but understood by all members. Little research, advice and assistance has been conducted or sought prior to establishing the syndicate. The syndicate will hold bank accounts to accommodate the betting transactions in syndicate members' personal names. The syndicate may also be required to hold accounts with overseas totalisator or betting exchanges in personal names. The syndicate expects that several hundred thousand dollars may be required to fund the cash flow of its activities. There is no intention to seek bank financing to fund the investment. The software program will generate the recommended bets however; the syndicate members can manually vary the amounts bet on any particular transaction. The computerised setup of the syndicate will be able to be accessed by any member from their own home computer via the internet.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1 | A New Tax System (Goods & Services) Act 1999 section 9-20 | A New Tax System (Goods & Services) Act 1999 subsection 9-20(1) | A New Tax System (Goods & Services) Act 1999 paragraph 9-20(2)(a) | A New Tax System (Goods & Services) Act 1999 paragraph 9-20(2)(b) | A New Tax System (Goods & Services) Act 1999 section 11-5 | A New Tax System (Goods & Services) Act 1999 subsection 11-15(1) | A New Tax System (Goods & Services) Act 1999 section 11-20 | A New Tax System (Goods & Services) Act 1999 section 195-1 ATO view documents | Taxation Ruling IT 2655 Income tax: betting and gambling - whether taxpayer carrying on business of betting or gambling

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, discusses the Commissioner's opinion on whether betting and gambling can be considered to be carrying on a business. This ruling states at paragraph 6: 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: | Detailed Reasoning - 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? You will use a computer program to analyse data and you intend to keep results and relevant records using an accounting software package. In this regard your proposed activities could be seen to be both systematic and organised. The software program will generate bets and the syndicate will have the ability to manually vary the amounts bet on a particular transaction. You won't be renting an office or employ staff, but you do believe it will be necessary to contract with various people or companies for computer programs and operational resources. Whilst contracts you entered with other companies and entities will be conducted at arms-length, it is possible to envisage a point where reliance on other companies and entities is such that their involvement becomes necessary for the syndicate to carry out its objective and at this point it may be that it is considered that the betting and gambling undertaken by the syndicate is conducted in a systematic, organised and businesslike way. | Detailed Reasoning - 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. In your case, you except that several thousand bets will be placed each week. Whilst the scale of gambling activities is not a decisive element, it is conceivable that the scale of the gambling activities may reach a level that when considered with respect to the other criteria outlined in Brajkovich's case, may indicate that an entity is carrying on a business of betting and gambling. Presently, you expect the syndicate will require several hundred thousand dollars to fund the syndicate's cash flow placing the size and scale of the operation in similar terms as the amount in Brajkovich's case. Therefore, in the short term and based on the facts available, we do not considered the size and scale of the proposed gambling activities to be at a level considered business like. | Detailed Reasoning - 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. In your case, you state you won't have any other business activity related to your betting and gambling activity. | Detailed Reasoning - 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 your case, although you provided information about how the syndicate will operate in practice, you are yet to begin any betting and gambling activities and therefore how the syndicate will operate is yet to be confirmed. At this stage, we accept that you are motivated principally for pleasure. However, we note for completeness that should the activities of the syndicate evolve to the point where there is limited involvement from its members and the betting and gambling activities are effectively being out-sourced to other entities, it would be difficult to sustain the view that the syndicate is still motivated by pleasure. In those circumstances, it is more likely to be viewed as being motivated for profit. | Detailed Reasoning - 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… 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. In determining whether the form of betting you undertake is likely to reward skill and judgement or depend purely by chance, consideration is given to the level of skill employed by you and the syndicate and the ability of the syndicate to reduce the outcome from a merely random outcome to one which is more certain by effectively reducing the element of chance. You will use a computer software program which will sort, compare and analyse the available data in an attempt to predict probable outcomes and your focus will be on both local and overseas sporting events which is more likely to provide reward for skill and knowledge in predicting outcomes unlike other games such as roulette or lottery where the results are (or should be) purely random. Where guiding principles inform the betting process as well as instinct and personal judgment, as was found in Babka's case, it is more likely that the outcome is closer to chance rather than a reward for skill and judgment. However, where the betting involves a sophisticated betting model and methods are employed to reduce the chance of a loss being incurred, for example where various bets are used which result in a break even outcome whilst simultaneously receiving a rebate from a betting agency, it is more likely that in circumstances such as this, the reward would be considered as a result of skill and judgement rather than chance. | Detailed Reasoning - 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'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. 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. In your case, your proposed activities differ somewhat from those in Babka's case . Whilst you have no business plan or projected income, your submission indicates a level of organisation absent from Babka's case . You will use technology to systematically reduce the element of chance and thereby securing a more favourable outcome. 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 You have indicated that you expect to use various companies for computer programing and operations resources and that you may use outsourced services, as part of the overall system development. As described previously, we consider that where a betting and gambling syndicate's activities involve a high degree of sophistication which requires other entitles to undertake integral parts of the betting and gambling activities, we may consider that a threshold is reached which would turn the activities into an enterprise more correctly characterised as a business rather than a hobby or pastime. 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. We consider that while your planned betting syndicate has some aspects of business as outlined above, it is more likely that you are not carrying on a business, at least for the years that are subject to the current private ruling. As you will not be carrying on a business of betting or gambling, the winnings you will receive 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. | Summary: The syndicate is not a partnership for tax purposes. | Detailed Reasoning - Detailed Reasoning: According to section 995-1 of the ITAA 1997 a partnership means: an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or a limited partnership. As the syndicate will not be carrying on a business and will not be in receipt of ordinary or statutory income, there is no partnership for tax purposes. | Summary: The syndicate is not entitled to input tax credits in respect of betting and gambling acquisitions pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). | Detailed Reasoning - Details Reasoning: Section 11-20 of the A New Tax System (Goods & Services) Act 1999 ( the GST Act ) provides that an entity is entitled to input tax credits for any creditable acquisitions that it makes. Under section 11-5 of the GST Act, an entity makes a creditable acquisition if: • the entity acquires anything solely or partly for a creditable purpose; and • the supply of the thing to the entity is a taxable supply; and • the entity provides or is liable to provide consideration for the supply; and • the entity is registered or required to be registered for GST. All paragraphs of section 11-5 of the GST Act must be satisfied in an acquisition for it to be considered a creditable acquisition. Subsection 11-15(1) of the GST Act provides that a thing is acquired for a creditable purpose to the extent that it is acquired in carrying on an enterprise. The definition of the term enterprise is defined in section 9-20 of the GST Act and includes (amongst other things) an activity or series of activities, done: • in the form of a business • in the form of an adventure or concern in the nature of trade However, paragraphs 9-20(2)(a) and 9-20(2)(b) of the GST Act exclude from an enterprise, among others: • recreational pursuits or hobbies; or • activities pursued without a reasonable expectation of profit, either by an individual or partnerships | Detailed Reasoning - Are the activities conducted by the syndicate in the form of a business?: Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The definition of 'business' in section 195-1 of the GST Act is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. Therefore, an entity that is carrying on a business for income tax purposes will be carrying an enterprise for GST purposes. As discussed previously, at this stage we do not consider that you are carrying on a business of betting and gambling. As a consequence of this decision and as no other paragraphs within subsection 9-20(1) of the GST Act are satisfied, the syndicate's gambling and betting activities does not represent an enterprise being carried on, but represents a private recreational pursuit or hobby under subsection 9-20(2) of the GST Act. Consequently, the syndicate will not be entitled to claim input tax credits for the gambling and betting activities as an entity must satisfy all the elements of section 11-5 of the GST Act for their creditable acquisitions.