Question 1: Income Tax Status of Gary’s Income

Even though income derived from gambling is generally not taxable in Australia, gambling that generates consistent long-term profits through the application of skill for instance blackjack, poker and sports betting is more often than not taxable (Latimer, 2010). While the Australian Tax Office (ATO) has historically overlooked the taxation of profits obtained from gambling activities, it has in the recent past started to make deliberate efforts to identify and target individuals who make a significant proportion of their income through gambling. This is evidenced by the recent pandemonium surrounding the ATO and David Walsh, who made millions of dollars as a professional gambler (Meredith, 2012).

Australian tax law is stipulated by the Income Tax Assessment Act 1997 (ITAA97) and the Income Tax Assessment Act 1936 (ITAA36). According to section 6-5 (1) of the ITAA97, the assessable income entitled to a taxpayer entails income relating to ordinary concepts. Ordinary income in this case constitutes income obtained from an earning activity. Such an activity might either be an investment, labour, or a combination of both in the carrying on of a business. While “income from business” is not defined in both the aforementioned Acts, a business is defined by section 6(1) of the ITAA36 and ITAA97 as “including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”

In this case, if an individual engages in gambling activities, where such activities constitute a business venture, then the profits and losses incurred from those activities can be considered to be ordinary income and as such, they are part and parcel of a taxpayer’s assessable income. From the foregoing, it is evident that Gary’s income for the year ended 30 June 2015 is taxable. First, Gary applied the skills gained through his career in Information Technology to develop the computer program (Horsemate). To this end, he had to attend horse races for a whole year monitoring the performance of the program and gathering historical information from magazines, which he used as input for the program. Moreover, he set a limit of $500 per race and placed no more than five bets per day. This strategy was most likely aimed at ensuring that he did not incur very huge losses on any one given day. However simple it might appear, this can be considered as a business strategy.

Secondly, the IT consultant was able to make consistent earnings through gambling. This can be inferred from the fact that he had the capacity to generate $85,000 from 20% of the fees he earned from his consultancy work. Judging from the total amount of money he made by the end of the financial year, Gary probably invested roughly $20,000 in gambling. Finally, the fact that Cool Runnings was willing to buy the computer program proves beyond reasonable doubt that Gary’s gambling venture was a viable business opportunity. The two offers from the company, $50,000 plus 20% of winnings over 10 years or a lump sum payment of $300,000 for the sale of Horsemate, was also proof the that the program had the capacity to generate significant returns in the foreseeable future.

Question 2

To fully appreciate the relevant tax treatment of the two options, one should be cognizant of the nature of taxable income. Income can generally be classified into two broad categories, ordinary income and statutory income (Barkoczy, 2015). . Ordinary income is income according to ordinary concepts or the judicial notation of income developed by the courts, that is, a cash inflow rather than the appreciation of wealth. Statutory income on the other hand entails assessable income by certain statutory provisions such as capital gains, bonuses and premiums.

Because the first option entails the sale of the computer program for a lamp sum amount, it will be considered as a sale of an asset at a profit. As such it will be treated as ordinary income, which falls under assessable income. The profit will particularly be computed as the difference between the total revenue generated from the sale of the program and the total cost incurred in creating the program.

On the other hand, if Gary chooses the second option, it will be tantamount to investing capital in the company. Nonetheless, the first down payment will be treated like the lamp sum amount. Having invested in the company, the 20% of winnings over the 10 year period will be treated as capital gains and as such, it will be categorized under statutory income.

Question 3

According to Section 4 (1) of the ITAA97, the income tax payable by an individual is computed using the formula below:

In order to secure the lifestyle of employees in retirement the government requires all employees to contribute a certain percentage of their income toward a superannuation fund. Despite being self-employed Gary should also make this contribution. Fortunately, these contributions are concessional, which implies that they are transferred to the superfund before any tax is charged on them. Once in the fund, these contributions are taxed at 15%. However, if Gary decides to make extra contributions to the fund from his after tax income, then the tax will not be exempted. This would also apply if he were to make these contributions on behalf of his spouse.

The superannuation contribution is however subject to caps. For the 2015/2016 financial year, the general concessional contributions are capped at $30,000 for employees under the age of 50 (Australian Taxation Office, 2015, p. 1). Assuming that Gary is still under this age limit, any amounts above $30,000 will be added to the assessable income and taxed at the normal rate. The following tax rates were applicable for the year ending July 2015.

The above rates do not include the:

• Medicare levy of 2%
• Temporary Budget Repair Levy; this levy is payable at a rate of 2% for taxable incomes over $180,000.

The medical levy surcharge is imposed because Gary does not have a private medical cover. The table below illustrates the rates applicable for this surcharge.

References

Latimer, P. S. (2010). Australian business law 2012. North Ryde, N.S.W: CCH Australia.

Meredith, R. (2012, July 30). Taxation of Income Derived from Gambling. Retrieved from DERWENT & TAMAR CHAMBERS: http://derwentandtamarchambers.com/2012/07/taxation-of-income-derived-from-gambling/s

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2015), Principles of Taxation Law 2015, (8th edition), Pymont: Thomson Reuters

Barkoczy, S (2015). Foundation of Taxation Law 2015, (7th edition), North Ryde: CCH.

Income Tax Assessment Act 1997 (Cth).