By Harrison Dell, Director.
The taxation of gambling winnings in Australia is a topic of interest for many, from casual gamblers to more serious participants. The more serious participants are interested as people do make consistent profits, and they are worried about tax on their winnings.
The key question revolves around the distinction between gambling as a hobby and gambling as a business. Punters who simply win, should seek tax advice and should not approach the ATO for a private ruling without that advice.
The ATO’s Ruling on Gambling Winnings and the Law
The Australian Taxation Office (ATO) provides clear guidelines on the taxation of gambling winnings. Central to these guidelines is the question: Is the individual carrying on a business through their gambling activities? The law and the ATO concur that the threshold for gambling to be considered a business is exceptionally high. This is primarily because, for most punters, gambling is a hobby and is not consistently profitable.
The ATO’s ruling is informed by several court decisions which have explored the nature of gambling and its potential classification as a business. These cases, such as Evans v. FCT, Babka v. FCT, and Brajkovich v FCT, have set precedents in determining the factors that contribute to gambling being seen as a business activity.
Business vs. Hobby
The distinction between gambling as a hobby and as a business is nuanced. For gambling to be considered a business activity, it must be systematic, organized, and conducted with the intention of making a profit. This assessment is subjective and depends on various factors, including the frequency of gambling, the amount betted, the use of systems or strategies, and the level of skill involved.
When Are Gambling Winnings Taxed
In most scenarios, gambling winnings in Australia are not subject to taxation. This is the case when gambling is pursued as a recreational activity without the characteristics of a business operation and includes 99% of people – simply because they lose.
However, if you are a profitable gambler, there are circumstances where gambling winnings may be taxable. These include:
- Profitable Syndicate Betting: If individuals engage in syndicate betting that is coordinated and consistently profitable, it may be considered a business activity.
- Matched Betting with Guaranteed Wins: Using strategies to ensure winning outcomes can suggest a level of organization and profit motive akin to a business. This is often done by hedging bets on Betfair and relying on bonuses.
- Connections to the Gambling Industry: Individuals with professional ties to the gambling industry, like horse trainers or bookmakers, who engage in gambling may have their winnings subjected to taxation due to the perceived advantage and professional approach to gambling. If you have this experience and become a profitable gambler, you should seek tax advice.
- Simply Winning Too Regularly: Winning it big once or twice is unlikely to be a business, but consistently being profitable on a betting strategy means the risk grows. A key factor for business is regularity.
Casual vs. Professional Gamblers
The tax implications differ significantly between casual and professional gamblers. Casual gamblers, who gamble for fun and without systematic strategies, are unlikely to face tax on their winnings. In contrast, professional gamblers, whose activities can be deemed a business, may have their winnings taxed. The ATO looks at various factors, including the consistency of gambling, the methods employed, and the relationship of the individual to the gambling industry.
Several case studies illustrate how the ATO and courts interpret gambling winnings for tax purposes:
- Casual Gambler: An individual who bets occasionally on major sporting events, without a systematic approach or significant investment, is likely to be considered a hobby gambler with no tax implications on winnings. Even with a systemic approach and significant investment, unless there is profit they are still unlikely to be carrying on a business.
- Professional Gambler: An individual who dedicates substantial time to gambling, uses sophisticated methods, and derives a significant portion of their income from gambling, is more likely to be seen as conducting a gambling business.
Challenges in Defining Professional Gamblers
Determining whether gambling activities constitute a business can be complex and since losing significant cases in the 1980’s, the ATO is generally reluctant to audit gamblers unless they are extremely profitable or public.
The ATO considers each case on its individual merits, assessing various aspects of the gambler’s activities. The subjective nature of this assessment can lead to challenges in categorisation and have led to significant tax disputes, such as with David Walsh’s tax dispute that was settled.
For those who might be considered professional gamblers, maintaining records and documentation of gambling activities is crucial. This includes records of bets, winnings, losses, and any related expenses. These records can be pivotal in the event of an audit or tax assessment.
In Australia, gambling winnings are generally not taxable for the majority of gamblers who engage in this activity as a hobby. However, when gambling activities exhibit characteristics of a business, such as systematic and organised approaches aimed at profit-making, tax implications may arise.
Any gambler that is profitable should obtain tax advice on their circumstances. Punters should not obtain ATO rulings without professional advice.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.