Death and taxes |

This article first appeared in the Sep/Oct 2010 issue of World Gaming magazine.

When gambling we accept the odds are often slightly stacked against us. In the UK each casino publishes what the “house edge” is on each game they offer. When betting on horses, the organising body such as the Hong Kong Jockey Club has a ‘take out’ from the betting pool before distributing the balance of money to the winners. Even playing poker requires many unpredictable factors to simultaneously fall into place before you come out ahead.

So what if you are a winner? Can the taxman come after your gambling wins?

For most people, the taxman will allow you to keep your gambling winnings without imposing any tax. The reasoning behind this is the long held view that gambling is irrational and has little genuine comparison to a normal business activity .

The distinguishing features of gambling compared to normal business activity centre around three issues:

Does the event involve a significant element of chance and/or randomness?
Does the bettor have an ability to influence the outcome of the event?
Is there any underlying commodity or asset that can be delivered?

Given the above, tax authorities globally steer clear of taxing gambling winning unless the bettor is also involved in the business of gambling, such as being a bookmaker or horse trainer. The ‘associated industry test’ is widely used in the UK to determine if a gambler is taxable.

The Australian tax authorities confirmed after the 2005 World Series win of an Australian tax resident that even in the case of poker, where the individual has a significant influence on the outcome of the event, the winnings did not constitute income according to the ordinary concepts of income or capital gains . The randomness and elements of chance involved in every poker hand combined with factors beyond the individual gambler’s power to influence, such as how other players play, would have been considered in arriving at their conclusion.

Occasionally authorities will look at the scale of activity or the repetition involved in assessing if gambling is being conducted as a business. Poker play involves significant repetition of staking money with the hope of winning. As any poker player will tell you, you lose more hands than you win. Recently a Canadian court ruled that despite undertaking organised, large volume purchasing of lottery tickets for significant monetary outlay over a long period of time, two brothers who won were not taxable .

Authorities often cite profit motive as an indicator of whether the gambling is being conducted as a business. I don’t know of any gambler who outlays money in the hope of not getting back more money than they outlaid or who plays a game with the aim of losing. Even slot machine players, who repeatedly press the button, minute after minute, hour after hour, do so in the hope they get a bigger pay day for the individual bet they are wagering each time. This is despite the undeniable fact that most individual button presses lose. Every press has the same motivation – a big payoff resulting in a big profit.

The two big challenges for most authorities in changing their position on taxing gambling winnings involve opening the floodgate for all those who have gambling losses to claim deductions, and the administrative challenges of record keeping for gambling wins and losses. In Japan, punters are taxed on their gambling wins under what is known as occasional income. Punters are allowed to deduct the cost of their outlay and all associated expenses with gambling (such as the cost of the trip to and from the race track) against any wins.

With the advent of internet betting infrastructure such as Betfair, access to betting into many markets is now possible from many jurisdictions. Authorities would find it difficult to assert taxation power over an individual who is not a tax resident of their jurisdiction, even though they may be betting (and winning) on events being held in their jurisdiction.

All regulated gambling already provides governments with significant tax revenues in the form of turnover taxes, license fees and industry fees. Trying to tax winnings may have a negative impact on net government revenue collection and potentially drive some gambling underground.

For most, your tax residency is the determining factor as to whether you need to give a slice of your wins to the taxman. If you are a successful gambler, it may pay to locate in a jurisdiction ‘friendly to winners’.

The author is a Singapore based lawyer. The information in the article is not provided as legal advice and individuals should consult their own advisers and/or tax authorities as to their individual circumstances.

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