Generally, your gambling winnings (whether they’re from the horses, the pokies or the casino) aren’t taxable, unless you conduct your gambling in such a sophisticated and systematic manner that you’re considered to be carrying on a gambling business. Winnings aren’t taxable because, if they were, losses would be deductible and we all know that most people, in the long run, lose on the punt.
A recent case in the Administrative Appeal Tribunal (Tribunal) emphasises the importance, if you buck the usual trend and have good run on the punt, to properly document your winnings or face paying tax even when you’re not carrying on a business of gambling. The case is also important more generally because it illustrates:
- the power of the Commissioner of Taxation to determine, in his judgment, what your “income” is in a given year; and
- how you then need to “prove” why the Commissioner’s judgment is wrong.
The Gambler and the Commissioner of Taxation
The case started because of numerous deposits in the bank account of a taxpayer (Gambler), a man known to regularly gamble at The Star, the Sydney casino. The Commissioner wasn’t satisfied that these were gambling winnings and issued amended assessments for the 2007 and 2008 years on the basis that these deposits were income of the Gambler.
The Commissioner can do this. He has the power under our tax laws to make a judgment of the amount of income on which tax is to be imposed. There’s little constraint on this power of the Commissioner, although it’s been said that the amount of income cannot simply be “plucked out of thin air”. The amount selected by the Commissioner is your income unless you’re able to show that the amount is wrong. Importantly, in any legal proceedings challenging the amount selected by the Commissioner, the taxpayer must prove that the amount selected is excessive. The Commissioner has no obligation to substantiate his judgment of the amount of your income.
Where the Commissioner’s selected amount is based on mere deposits in a bank account or that you possess assets the value of which is disproportionate to your declared income, generally you only need to provide a reasonable explanation for the appearance of the assets, unless there’s some reason why your explanation isn’t to be believed.
In this case, the Gambler didn’t dispute that he was a regular customer of The Star; he was a black level member, the highest level of membership. The Star’s records indicated that the Gambler had gone to the casino on 228 days in the 2008 income year.
What was disputed was whether he’d been winning. The Gambler said that he previously had bad luck on the punt until a trip to Vietnam and Cambodia where he learnt a fool-proof system of winning at baccarat. From then on his luck was very good. He won about $4 million in casinos in Cambodia and Vietnam. Upon his return to Australia he was a regular winner at The Star. He said that the system he’d learned resulted in him winning 95% of the time.
However, in upholding the Commissioner's judgment that the deposits were income, the Tribunal said the evidence, mainly the records of the Star, didn’t support the Gambler’s asserted winning run and for this reason he hadn’t satisfied his onus that the Commissioner's judgment of his income was excessive. The Tribunal found the Gambler’s story to be highly improbable, doubting that any system, even if it was based on mathematical science, could turn a game of chance into a virtually certain win.
An earlier gambling case suggested that it wasn’t necessary for the taxpayer to prove his winnings with precision. It was enough, in showing that the Commissioner’s judgment was excessive, to prove that many of the amounts deposited represented the same capital re-deposited after a withdrawal. The problem for the Gambler, it appears, was his records could not even prove this.
What to take from the case
- The Commissioner has considerable power to determine your income. Unexplained deposits in your bank account will likely be regarded as income.
- The tax laws then place the onus on you to prove why the deposits aren’t income.
- A lack of contemporaneous documentation will make this task very difficult.
- In providing an explanation for any deposits or assets, it’s important to understand the power of the Commissioner to verify your explanation. The Gambler’s story didn’t match The Star’s records and this was the main reason why he didn’t convince the Tribunal of his explanation for the deposits.