WHAT THIS RULING IS ABOUT: 1) Is the income you receive from gambling assessable under the Income Tax Assessment Act 1997 (ITAA 1997fl ' 2) Can you claim deductions under section 8-1 of the ITAA 1997 for expenses related to your gambling activities? THE SUBJECT OF THE RULING: In the 2004 year you engaged in gambling activities. You did not have another occupation. You bet on United Kingdom horse racing and soccer. You placed your bets through an overseas betting exchange. You placed bets six or seven days a week depending on the time of year and weather conditions in the United Kingdom. You are not a sporting expert. You only have an acquaintance with the sports you wager on. You bet with $2,500 sums. In the 2004 year you estimate that you turned over approximately $2,500,000. You regard your gambling activity as a hobby. It is a recreational activity that you carry out while you watch television. You consider that the winnings from your betting activities should not be included in your assessable income. COMMENCEMENT OF ARRANGEMENT: 1 July 2003 RULING: 1) Is the income you receive from gambling assessable under the ITAA 1997? No. You are not carrying on a business for tax purposes. 2) Can you claim deductions under section 8-1 of the ITAA 1997 for expenses related to your gambling activities? No. You are not carrying on a business for tax purposes EXPLANATION: (This does not form part of the Notice of Private Ruling) Assessable income A taxpayer is liable to tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income. Ordinary income Income is generally assessable as ordinary income under section 6-5 of the 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. Statutory income Under section 6- 10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is amounts that are not ordinary income but are included as assessable income by provisions of the tax law. Deductible expenses Under section 8-1 of the ITAA 1997 you can claim deductions for expenses to the extent they are incurred: a) in gaining or producing assessable income; or b) are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. No deduction is allowed under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income. A deduction is also not allowed where a provision of the tax law prevents it. Gambling Income Betting and gambling losses are not deductible under section 8-1 of the ITAA 1997 unless you carry on a business of betting or gambling. Income Tax Ruling IT 2655 discusses the Commissioner's opinion on whether you are considered to be carrying on a business of gambling. At paragraph 7 IT 2655 states: '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 125 1, although mere punting may constitute a business, the intrusion of chance into the activity as a predominant ingredient will generally preclude such a finding...' The Court in Brajkovich v. FC of T 89 ATC 5227; (1989) 20 ATR 1570 (Brajkovich), identified the principal 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 Courts have held that to deterrnine this issue it is necessary to examine the manner in which the taxpayer conducted their gambling activities, that is, did they rent an office, employ staff, use a database for form guides or to calculate the odds, did 1hey take steps to lessen and exclude the element of chance, did they maintain adequate records or their position from day to day and week to week. You do not rent an office or employ staff. You have little experience regarding many of the sports you bet on. 2. The scale of the gambling activities, i.e., the size of wins and losses The taxpayer's activities in terms of 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 said that scale of itself is not determinative of the outcome. The Court did not consider Brajkovich, who bet over $950,000 over three years and who was involved in horse training, to be carrying on a business of gambling. This supports the view that you are not carrying on a business of gambling. 3. Whether betting is related to or part of other activities of a businesslike character, eg., breeding horses In most cases where there is a finding that a taxpayer is carrying on a business of betting or gambling, the betting transactions are connected with some other activity which itself constitutes a busimss carried on by the taxpayer, for example, breeding or training horses (Prince v. FC of T (1959) 7 AITR 505; 12 ATI) 45). In this case, the taxpayer conducted a business as a bookmaker and also had interests in horse training businesses, etc. You have no interest in other related activities besides the betting activities. This supports the view that you are not can-ying on a business of gambling. 4. Whether the punter appears to engage in his activity principally for profit or principally for pleasure The courts have found that such issues as attendance at race meeting, a passion for gambling, etc., need to be considered when concluding whether the activities are conducted for profit or pleasure. In Brajkovich 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 fcommercial' activities". You regard your activity as a hobby. This supports the view that you do not carry on a business of gambling even though you are endeavouring to cam a profit from it. 5. Whether the form of betting chosen is likely to rewaid skill and judgement or depends purely on chance In Brajkovich 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...' You choose what sports to gamble on and how much to wager, however, your overall gains are dependant on chance rather than skill. 6. Whether the gambling activity in question is of a kind which is ordinarily thought of as a hobby or pastime The type of activity undertaken, that is, betting on sporting events, is ordinarily thought of as a hobby or pastime rather than engaging in a business. In Babka v. FC of T 89 ATC4963; (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 rnerely because a person devotes considerable time to it and has retired from a previous full time profession; The taxpayer's activities fell short of carrying on a business. They were not so considerable and systematic and organised that they could be said to exceed those of a keen follower of the turf., and Although mere punting, especially with the aid of computers, can now be so systematic and dedicated to profit making that it may constitute a business, the intrusion of chance into the activity as a don-finant ingredient will usually preclude such a finding. Application to your circumstances We have determined that you are not carrying on a business of gambling. We have based our decision on the indicators from IT 2655 and the decision in Babka's Case. The winnings you receive in relation to this activity are not assessable under section 6-5 or section 6-10 of the ITAA 1997. The expenses related to the activity are not deductible under section 8-1 of the ITAA 1997. This determination is based on your circumstances in the 2004 income year. If your circumstances change materially, you will need to reassess your situation.