In recent times, betting on the Melbourne Cup, whether in an office sweepstake, at a racetrack, or through the TAB, has become a popular pastime. This year, Melbourne Cup race day is on 1 November and the prize money totals $6,200,000. If you were intending to place a bet, would your winnings be income that you should pay tax on?
For many people, betting on the Melbourne Cup will be a casual affair. You will select a horse or a jockey either by name or colour, and place a $1 or $2 bet. Many will do this as part of an office sweepstake and will watch the race with colleagues in the boardroom or tearoom. If this is you, the likely outcome is that even if you win big, the amount will be treated as a windfall, and you will have no taxation obligation.
However, it is settled law that gambling winnings or losses may be taken into account in calculating assessable income if they are part of some larger business. A common example may be in relation to the betting winnings of a jockey, a horse trainer or a person that has an interest in several racehorses. What is not so clear is whether such winnings and losses may be assessable if they are not part of a larger business.
Treating gambling winnings as taxable income may sometimes result in a Pyrrhic victory for the Inland Revenue because gambling losses must also be taken into account. Statistical analysis confirms that the odds are fractionally against the player in a casino and he or she stands to lose all funds outlaid over time. The prospect of large losses claimed by gamblers in excess of taxable income may give the Commissioner pause for thought.
The proposition that betting activities in themselves will not often constitute a business may be illustrated by a court case involving a man who bet on horses on a large and sustained scale, and his winnings provided virtually his only means of support. In that case, the Judge said:
“I think all you can say of that man, in the fair use of the English language, is that he is addicted to betting… There is no tax on a habit. I do not think ‘habitual’ or even ‘systematic’ fully describes what is essential in the phrase ‘trade, adventure, profession or vocation’. All I can say is that in my judgment the income which this gentleman succeeded in making is not profits or gains.”
In another case concerning a man whose sole income for some years had come from playing poker in casinos and poker tournaments, the court needed to decide if his winnings were “earnings” for the purposes of child support. He had received television exposure as a poker player and had a poker-related website. He generally played according to a particular routine and entered casinos only at certain times of day with the aim of winning £200. His poker occupied three or four days playing time per week. The Court concluded that although the man had played poker in casinos using a particular strategy and had set a target sum for his earnings, he had not shown organisation of his activities sufficient to constitute a trade. The Judge stated:
“Isolated appearances on television and having one’s own website are hardly, these days, evidence of organisation amounting to a trade or profession.”
Like all things, whether your gambling is sufficient to give rise to assessable income or not will be a matter of fact or degree and always tested with the benefit of hindsight. In an age where YouTube and such record your every move and fame can come from the most unusual places, we may see the view of when gambling stops being gambling, and becomes a business, change.
But for now at least, unless you have race horses, are a jockey, are in a racing syndicate, or have some business or profession connected with the horse racing industry, it is reasonably fair to say that your little flutter on the gee-gees and any winnings should not be subject to tax.
For more information please contact your Crowe Horwath tax adviser.