Edited version of private advice

Authorisation Number: 1051610137068

Date of advice: 25 November 2019

Ruling

Subject: Betting and gambling

Question 1

Are the gambling winnings of C assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are the gambling losses of C deductible under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2019

Income year ending 30 June 2020

The scheme commenced on:

The scheme has commenced.

Relevant facts and circumstances

1. Background

A, B and C became friends.

A, B and C are the main members of a gambling syndicate (Syndicate).

2. Consulting Business and Product Development Business

A, B and C work together in P business and Q business.

These businesses are unrelated to their gambling activities.

(A) P Business

The company P Pty Limited was incorporated by A.

P Pty Limited carries on the P business. B and C joined the P business.

Another individual, D, was employed by P Pty Limited.

A, B and C are employed full-time by the P business.

D worked full time for the P business.

The current activities of P Pty Limited are carried out pursuant to an arrangement that it has entered into with Q business (also conducted by A).

The P business does not presently provide any products or services to businesses connected with the gambling industry. The P business does not and has never involved the placing of bets.

However, D and E as friends of A, B and C placed bets on behalf of the Syndicate.

(B) Q Business

A, B and C started a business called "Q".

The only employees of the Q business are A, B and C.

The company Q Pty Limited was incorporated by A.

E is paid by Q Pty Limited as a consultant.

3, Syndicate

(A) Formation and membership

For X years, separate from the P business and the Q business referred to above, A, B and C have engaged in gambling activities. Presently they bet on animal racing. Over the years their ability to pick winners has improved.

A, B and C are driven by the element of sport, excitement and amusement. It is a manner in which they engage socially with each other. Further, they have a passion for gambling that they have indulged since they first became friends.

A, B and C along with friends and family formed the Syndicate. The Syndicate is an informal club. There is no formal documentation around membership and no terms or conditions associated with membership. There was no specific formation date. There are no written agreements in place in relation to entitlements or obligations of Syndicate members.

A, B and C make all decisions regarding the Syndicate by agreement.

The Syndicate is not registered as a club or in any other form.

The Syndicate does not have any dispute resolution procedures in the event of a dispute arising amongst the members of the Syndicate as to the amount or timing of any distribution of winnings to members of the Syndicate.

The Syndicate does not have any business plans, financial projections or formal agreements for the sharing of winnings. The Syndicate does not have any guidelines or policies for betting. The placement of bets and the sharing of winnings are entirely at the discretion of A, B and C.

The Syndicate does not have an office. It does not keep records apart from those that are provided to it by the betting agencies.

The Syndicate does not utilise any consultants or service providers. It has very minimal expenses. There are no financial accounts or internal management accounts for the Syndicate.

The Syndicate currently has X members. The main members are A, B and C who collectively have a majority interest in the Syndicate while Y other family members and friends hold the balance.

(B) Operation of the Syndicate and the roles of members

The Syndicate is not seeking new members; accordingly, there is no process for seeking new members. The members, who have joined, are strictly family and friends. Similarly there is no process for a member leaving the Syndicate and no member has left the Syndicate to date. There is no dispute resolution process and there has been no major dispute among the members, who are family and friends.

With respect to the races on which the Syndicate places a bet, A watches races live on a streaming service each week. In addition A watches races live at the racetrack, B and C each watch races live each week however, they do not go to the racetrack.

D, who is a friend of A, B and C placed bets on behalf of the Syndicate. They were an employee of P Pty Limited.

For a period E, a friend of A, B and C and who is a consultant to Q Pty Limited also placed bets on behalf of the Syndicate.

(C) The betting activities of the Syndicate

The Syndicate does not have a betting system that eliminates luck or chance; there is no arbitrage or any systematic automation.

The Syndicate does not keep a record of the number of winning or losing bets.

Although information about the value of winning and losing bets is not recorded by the Syndicate estimates of the amounts won and lost during an income year were provided,

The majority of bets placed by the Syndicate are exotic bets.

The Syndicate provided an estimate of the average number of bets placed each day

A, B and C place bets with the assistance of publicly available information and publicly available software as well as by using personalised software. The publicly available software facilitates the placement of bets.

The personal software which was developed by A, B and C generates betting options which are often, but not always, adopted.

In each of the recent income years an estimate of the combined time spent by A, B and C in the development and maintenance of the personal software was provided.

In each of those years it was estimated that approximately the same amount of time was spent on the development and maintenance of generic software.

In order to select animals to bet on, publicly available historical data, (in the form of results and videos) is used.

How a bet is determined depends on where the Syndicate is betting - betting on a betting agency against other punters, versus betting on the tote, versus betting on fixed odds on the TAB in the pub. Each has to be considered separately and is treated differently.

With respect to the selection of animals on which the Syndicate may make a bet, those tasks are performed only by .A, B and C; they are not done by any other member of the Syndicate.

While members of A's family are not members of the Syndicate, when those family members place bets for the Syndicate, they make decisions regarding the placement of bets as to when bets should be made and whether a bet should be made or not. Additionally, when friends or family are placing bets in pubs, they have discretion whether to bet or not; for how much; and the particular time they bet.

A, B and C attempt to place bets as often as possible, but there is no set schedule. As they spend most of their time on P business and Q business, bets are often placed with the assistance of the relatives of A, acting on advice from A.

The majority of the bets are placed from a residence and the remaining bets are placed from physical TAB locations with the assistance of the two friends referred to above. Bets are very rarely placed from the residence of A.

(D) Syndicate funds and payouts to members

The initial investment into the Syndicate was paid by A, and no other contributions have been made. Betting accounts were set up with various betting agencies.

As at the end of a recent income year the Syndicate's turnover was mainly through the Internet, with the balance at physical TAB locations.

At present most winnings are used for further bets, but if A, B and C consider that they have surplus funds, they will withdraw the excess funds from the betting accounts. This is entirely at their discretion.

The withdrawn surplus funds are placed in the personal bank accounts of A, B and C respectively and then distributed to Syndicate members.

(E) Rebates

The Syndicate participates in a standard promotional rebate scheme with one betting agency which is available to all betting agency customers subject to an annual turnover threshold.

The rebate schemes vary with other betting agencies,

4. Other gambling activities

In addition to gambling on animal racing A, B and C also gamble in other ways that are not related to animal racing.

Reasons for decision

Question 1 and Question 2

Summary

The Commissioner does not consider the betting and gambling activities of the Syndicate constitute the carrying on of a business of betting and gambling. Accordingly, any winnings received in relation to those activities are not assessable income in terms of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the expenses related to those activities are not deductible under section 8-1 of the ITAA 1997. Any losses from the betting and gambling activities are not deductible.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) includes the ordinary income derived directly or indirectly from all sources in and out of Australia as the assessable income of an Australian resident.

Ordinary income has generally been held to include three categories of income. They are 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 the operation of another provision of the legislation, are called statutory income and are also included in the assessable income of an Australian resident. This provision does not apply in the present case.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining assessable income, or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. This is except to the extent the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

Where you are carrying on a business of betting and gambling the winnings from betting and gambling will be assessable in terms of section 6-5 of the ITAA 1997.

Taxation Ruling IT 2655 Income tax: betting and gambling - whether taxpayer carrying on business of betting or gambling (IT 2655) contains the Commissioner's view on whether betting and gambling can be considered to be the carrying on of a business. In IT 2655 at paragraphs 6 and 7 it is relevantly stated:

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.

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, 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) identified criteria for determining whether or not a person is in the business of gambling. The criteria are:

1. Whether the betting is conducted in a systematic, organised and businesslike way

Australian 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? In other words did the Syndicate conduct its betting activities in a businesslike way?

In the present case the Syndicate is controlled by A, B and C who collectively made all the decisions about the operations of the Syndicate. The Syndicate did not rent an office nor did the Syndicate employ any staff.

The controllers of the Syndicate, A, B and C, placed bets for the Syndicate.

As well bets were placed for the Syndicate by others. In one arrangement two friends of the controllers of the Syndicate placed bets for the Syndicate. This was in the situation which involved D and E.

It is noted that in addition to being friends of the controllers of the Syndicate D was an employee of the P business while E is a consultant to the Q business. Both the P business and the Q business are businesses which A conducts and in which the two associates are also employed.

In another arrangement two relatives of A placed bets for the Syndicate.

These arrangements whereby friends and relatives acted as agents of the Syndicate to place bets are not the same as engaging employees for that purpose.

The employment of staff was one aspect of a business that is absent from the Syndicate's operations in the present case but there are other aspects to be considered. These include that no separate business or office premises were rented by or used by the Syndicate nor did the Syndicate maintain adequate records of a businesslike character in order to calculate a profit or loss from the betting activity.

Although, as it is estimated that the Syndicate places X bets on average a day it is considered that it would be necessary that the Syndicate be conducted in a systematic and organised manner in order to achieve that volume of betting activity.

However, it is further estimated that a very low percentage of bets are winning bets and consequently a very high percentage are losing bets. This indicates the significance that chance plays in the outcome of the betting activities of the Syndicate.

In the present case the majority of the bets placed by the Syndicate are exotic bets.

In Evans v FC of T (1989) 20 ATR 922; 89 ATC 4540 (Evans) when answering the question "Did the activities of the applicant constitute a business? " at 89 ATC 4558 Hill J said:

'...

However, the factor I regard as of considerable significance in this case in tipping the scales in favour of the applicant is that his betting was predominantly with the TAB or on-course totalizator (rather than with bookmakers) where the odds are unknown at the time the bet is placed and the dividend will be unable to be precisely calculated until it is announced 10 minutes or so after the race is concluded where it is dependent upon the total TAB and on-course totalizator betting upon the race less betting tax. This, plus a tendency on the part of the applicant to 'invest' in trifectas, quinellas and other exotic kinds of bets more dependent on chance than the bet on a particular horse (but where the dividend in the event of success is greater as evidenced by the win jointly with Mr Beirne on a trifecta bet) seems quite inconsistent with the money-making systematic businesslike character which is an essential ingredient in the carrying on of a business.

Accordingly the concentrated focus upon exotic bets by the Syndicate in the present case leads to the same conclusion as reached by Hill J in Evans.

In the present case the betting activities of the Syndicate predominantly involve an exotic bet. Therefore there is a significant element of chance in achieving a successful outcome from the betting activities. As Hill J found in Evans this means that the betting activities are not consistent with money making in a systematic businesslike manner which is an essential ingredient in the carrying on of a business.

Based on this factor, the betting activities of the Syndicate do not constitute the carrying on of a business.

2. The scale of the gambling activities

The volume and the size of bets are significant in most forms of gambling. However, the court in Evans found that scale itself is not determinative of the outcome.

The taxpayer in Brajkovich did not carry on a business of gambling. The taxpayer placed bets of more than $950,000 over three (3) years and was involved in horse racing.

In the present case the Syndicate estimated that it places X bets on average a day. Although the value of winning bets and losing bets is not recorded estimates of the total amounts won and lost by the Syndicate were provided for a recent income year.

The volume of betting activity needs to be considered in the context of the type of bets placed by the Syndicate.

In the present case the majority of the bets placed by the Syndicate are exotic bets.

Consequently by virtue of this type of betting the Syndicate will have a high number of losing bets.

Another aspect to be considered is that the aim of the Syndicate when placing each bet is to win a specific fixed sum on the bet. This affects the amount wagered on each bet because the amount wagered by the Syndicate will vary with the prevailing or anticipated odds that are on offer for any bet.

Note that for those agents acting for the Syndicate and who place bets at the TAB this objective of winning a fixed sum from each bet would tend to require the placement of bets as late as possible, that is, as close to the start of the race as possible in order to minimise the movement in odds and maximise the chance that the objective of winning a fixed sum will be achieved. The fluctuation in the odds throughout the period leading up to the start of each race will therefore influence the decision as to whether or not to place a bet and the amount to be wagered.

The pursuit of the Syndicate's objective to win a fixed sum on each bet resulted in the Syndicate's estimated turnover in a recent income year being winning bets of around $X and losing bets of about $Y. These multimillion dollar amounts are significant sums.

It is considered that the Syndicate needed to be both highly organised and systematic in its operations in order to achieve the scale and volume of bets that were placed by the Syndicate.

In this regard the betting activities of the Syndicate were conducted in a businesslike manner.

3. Whether betting is related to or part of other activities of a business 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 race horses (Prince v FC of T (1989) 7 AITR 505; 12 ATD 45) (Prince). The taxpayer in Prince conducted a business as a bookmaker and also had an interest in a horse training business.

It is noted that in the past the P business provided consulting services to entities connected with betting and gambling.

In the present case no member of the Syndicate is involved in any professional undertaking related to any of the activities on which bets are placed by the Syndicate.

Accordingly, there is no connection between the business activities of the P business or the Q business in which A, B and C are engaged and the gambling activities of the Syndicate.

4. Whether the gambling activity is principally for profit or principally for pleasure?

In Brajkovich Pincus, French and Gummow JJ at pp 5233-5234 said:

We also agree with the learned primary Judge that, in his punting and card-playing activities, the appellant was not engaged in any business. His evidence shows that he had from his youth a simple passion for gambling on a large scale, on the authorities, merely indulging that, without more, is not engaging in a business. 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.

The controllers of the Syndicate are driven by the element of sport, excitement and amusement. It is a manner in which they engage socially with each other.

Further, they have a passion for gambling that they have indulged since they first became friends.

A, B and C do not have a principal motive of profit in the conduct of the betting and gambling activities. The principal motive of those activities is pleasure.

5. Whether the form of betting chosen is likely to reward skill and judgement or depends purely on chance

In Brajkovich Pincus, French and Gummow JJ at p 5233 said:

On the question of skill and chance, some comment should be made. 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 mere random events. It is difficult to imagine circumstances in which people in the latter category could be regarded as in a gambling business. Particularly is that so where the form of gambling chosen is such that 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.

In the present case A, B and C are predominantly placing exotic bets on animal races. The Syndicate has no influence or control over the outcome of these races.

The outcome in this type of betting depends more on chance than skill or judgement.

Despite the sophistication of the selection process there will always remain the random effect of chance.

In these circumstances the outcome of a race is due more to chance than the skill and judgement of the Syndicate.

In the present case the type of betting chosen by the Syndicate is an exotic bet which is likely to depend purely on chance.

6. Whether the gambling activity is of a kind ordinarily thought of as a hobby or pastime

Betting on animal racing and other sporting events is ordinarily thought of as a hobby or pastime rather than engaging in a business.

In Babka, 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 the present case the betting activities of the Syndicate predominantly involve betting on animal races where the type of betting involves an exotic bet.

In addition to gambling on animal racing A, B and C also gamble in other ways that are not related to animal racing.

The betting and gambling activities of each of the three controllers of the Syndicate and the Syndicate is of the type that is ordinarily considered to be a hobby or pastime rather than the carrying on of a business.

Conclusion

A, B and C conduct some aspects of their betting and gambling activities in a sophisticated businesslike manner as those activities are systematic and organised to a high degree. The engagement of friends and family as agents of the Syndicate to place bets for the Syndicate is a primary example of the systematic and organised operation of the Syndicate.

However, the ever present element of chance in the outcome of the animal races upon which the Syndicate predominantly places an exotic bet, means that the Syndicate cannot be said to be carrying on a business.

Therefore, the taxpayer did not carry on a business of betting and gambling in the income year ended 30 June 2019 and is not carrying on a business of betting and gambling in the income year ending 30 June 2020.

Accordingly, the winnings received in relation to the betting and gambling activities of the Syndicate are not assessable income in terms of section 6-5 of the ITAA 1997 and the expenses related to those activities are not deductible under section 8-1 of the ITAA 1997. Thus any losses from the betting and gambling activities of the Syndicate are not deductible.

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