Brajkovich v. Federal Commissioner of Taxation
88 ATC 4457
Judgment date: Judgment handed down 9 June 1988.
Jenkinson J.: Appeals against decisions on objections against assessments of the applicant's income tax.
In respect of each of the years of income ended 30 June 1980, 1981, 1982 and 1983 the applicant claimed as an allowable deduction from his assessable income losses alleged to have been incurred by him in gambling. In respect of each of the years of income ended 30 June 1984 and 1985 losses incurred in gambling in preceding years of income were claimed as deductions from assessable income.
88 ATC 4458
In his assessment for each of the four successive years of income which ended on 30 June 1983 the respondent wholly disallowed the claimed gambling losses and, in consequence, he disallowed the losses claimed pursuant to sec. 80 of the Income Tax Assessment Act 1936 in respect of each of the two succeeding years of income. In respect of each of the six years his decision was wholly to disallow the applicant's objection against his assessment.
The applicant was born on 18 October 1943. He grew up in Kalgoorlie, conceiving in his youth an interest in gambling. He gave evidence that his parents had conducted an illegal gambling house in Kalgoorlie, and that he knew of people in that city who, in his belief, lived by gambling. He came to Perth in or about 1968. He worked as a life insurance salesman and as an estate agent. In or about 1970 he began buying, renovating and reselling suburban dwelling houses. He prospered and expanded both the scale and the variety of his dealings in real property. In or about 1975 he formed a partnership with Michael Francis Brown. The firm carried on the business of trading in, and developing, real property. When he celebrated his thirty-sixth birthday in October 1979 the applicant controlled assets the value of which exceeded by more than one million dollars the liabilities to which he and entities controlled by him were subject. A substantial part of those assets consisted of real estate subject to a discretionary trust called in evidence ``the Brajkovich Trading Trust'', of which the trustee was at relevant times Justin Nominees Pty. Ltd. The applicant and his wife were the directors of that company. There were other companies, and another discretionary trust, the assets of which the applicant could control.
The applicant did not commit much time or money to gambling before 1980. But he kept in his mind - and spoke to his wife and to his partner Mr Brown about - an ambition to acquire, before he was 40 years old, enough wealth to provide himself with what he thought to be sufficient capital for his pursuit of a gambling career. It was his intention, when his wealth should in his opinion be sufficient for the purpose, to withdraw from the business of buying and developing and selling land and to devote most of his time to gambling. By his thirty-sixth birthday he thought his wealth sufficient, and he began to carry out his intentions. The partnership with Mr Brown was dissolved and during the period from November 1979 until November 1982, when he was gambling frequently and in very large sums of money, the applicant abstained from acquiring land, which had been his stock in trade for almost 20 years, except on a few occasions when he was tempted by a particularly attractive opportunity to purchase. Sales of land by the applicant and by Justin Nominees Pty. Ltd. continued during that period, which I will call ``the gambling period'', but the applicant's evidence was that real estate agents negotiated the sales and that his involvement in the sales occupied little of his time. He had ceased to occupy business premises and had ceased to employ staff by February 1980. His real property business files were transferred to his home.
The applicant gambled during the gambling period on horse races, on games of cards which he was playing, and at an illegal two-up school in Perth. He also bet on a few occasions on Australian Rules football games. In respect of the year ended 30 June 1980 he claimed that his gambling losses exceeded the amounts won by $125,000. The excess of gambling loss over gain claimed in respect of each of the three succeeding years was:
- 1981: $392,000
- 1982: $280,000
- 1983: $146,750
The applicant's claims disclose an average weekly net gambling loss during the gambling period of more than $6,000. (There were a few weeks each year when his gambling activities were curtailed by family holiday commitments.) In June 1980 payments in respect of gambling losses aggregated more than $100,000, according to the applicant's evidence. In notices of objection against assessments in issue in these appeals it is asserted that in one particular night he lost $85,000 playing two-up.
In November 1982 the applicant's reflections on his lack of success in gambling resulted in a resolution to gamble only in a small way and for purely recreational purposes. To that resolution he has adhered, according to his evidence.
The applicant failed until February 1983 to furnish a return of his income for any of the years ended 30 June 1980, 1981 and 1982. In
88 ATC 4459
July 1982 the respondent had issued in respect of each of the first two of those years a default assessment under sec. 167 of the Income Tax Assessment Act 1936, but amended assessments were issued after the applicant furnished returns.
Except when he was holidaying with his wife and children, the applicant attended race meetings in Perth each Saturday, and also attended one or two weekday meetings each week at places within a few hours' journey by car from Perth, during the gambling period. Except during the first few months of the gambling period, when he wagered in cash on the racecourse, the applicant attended Tattersall's Club in Perth on the Monday morning of nearly every week, when bookmakers and those who bet with them under credit arrangements settled the betting transactions of the preceding seven days. During Monday afternoon he played cards in the clubhouse, gambling heavily on the games played. In the early evening he repaired to premises in William Street, Perth where, according to the applicant's evidence, a man commonly known as ``Ginger'' conducted a two-up game. There the applicant would commonly play two-up until about five o'clock on Tuesday morning, he swore.
Before and during the gambling period the applicant had proprietary interests in racehorses. His partner Michael Brown, having married a lady who was very interested in horses, persuaded the applicant to join him, in or about 1976, in acquiring thoroughbred fillies with a view to racing them and thereafter to breeding racehorses. Offers were made by the partners for several properties thought suitable for a stud, but none was bought. When in 1979 the business partnership between Brown and the applicant was dissolved, Brown sold his interests in the horses they had acquired to the applicant. Thereafter racehorses were acquired by the applicant. Some were raced in his own name, some in the names of other persons, and some in the names of the applicant and another person. Justin Nominees Pty. Ltd. was stated in the trust estate income tax returns relating to the Brajkovich Trading Trust for the years ending 30 June 1980, 1981, 1982 and 1983, the declaration on each of which the applicant signed, to be carrying on trade in horses. Profits and losses of the trade were disallowed by the respondent and the applicant did not contest those disallowances. The stock of horses in which Justin Nominees Pty. Ltd. was said to have traded does not appear to have exceeded at any time 10 in number or about $60,000 in trading stock value at cost. The applicant's evidence was that the racehorses he owned during the gambling period, whether or not registered in his own name for racing purposes, were held by him so that he might have horses in training in the stables of a number of racehorse trainers. Where he had a horse so placed he felt able, he swore, to communicate frequently with the trainer of the horse and he believed, until bitter experience had shaken his belief by the latter months of the gambling period, that in the course of those discussions with the trainer he would acquire information valuable to him in his attempts to predict the winners of horse races. Accordingly he bought racehorses so that he might have one in the stable of each of nine or 10 leading trainers in the vicinity of Perth. He professed a lack of interest in racehorses and a lack of interest in winning races, except in so far as his desire to win money by gambling on races could be the more effectively gratified.
The applicant paid approximately $250 per week for the training of each of his racehorses. He accepted that during the gambling period training expenses of his racehorses aggregated about $50,000 per year. He made no claim to deduct training expenses from his assessable income. During the gambling period the number of racehorses in which he had a proprietary interest fluctuated between eight and more than 20.
The applicant gave evidence that he sometimes encouraged the supply of information useful in his racecourse gambling by responding to the supply of such information by jockeys, and sometimes by other persons engaged in racing, in a way which was said to be customary: he bet $1,000 on the horse he was told would win and gave the informant the amount won, if the horse did win. If the horse did not win, he bore the loss. These payments, to which the applicant referred as ``slings'', were made in cash and the applicant abstained, as I suppose in accordance with custom, from claiming any income tax deduction in respect of them.
The applicant gave evidence that, when he gave up the active conduct of the business of
88 ATC 4460
land dealing in which he had been engaged and dedicated most of his time to gambling, he was engaging in gambling as his business and as the substantial means of earning his living. It was his belief at the beginning of the gambling period, he swore, that with a capital fund of about $400,000 or $500,000 he would gain not less than $100,000 per year by gambling.
The applicant did not give evidence of his having employed any system or method or technique by adoption of which he expected, or hoped, that his gambling on cards or two-up would be profitable. But he did give evidence of a number of measures which he took in order to gain success in gambling on horse races. His involvement in the owning of racehorses was motivated, according to his evidence, by his belief that the relationship of an owner with his trainers and with other persons in the racing industry would facilitate the acquisition by him of information useful in racecourse gambling. He cultivated the acquaintance of persons likely to provide him with such information, he swore, at Tattersall's Club and on racecourses and at bloodstock sales and in trainers' stables. A few months after the commencement of the gambling period the applicant made arrangements which enabled him to place bets on credit with more than a score of bookmakers. He studied to obtain the best odds by various tactics in and about the betting ring and he often made what he swore were saving bets in a race in which he had wagered heavily on the horse he favoured to win. He studied recordings of television films of the Perth races. He studied form guides in newspapers and had regard to the published opinions of racing journalists. He utilised in his study of horses' form the race books in which he noted his bets and other information. From the race books he compiled a settling sheet for use at his weekly settlement with bookmakers at Tattersall's Club. More than 100 of the race books had been kept by the applicant and were tendered in evidence. But many others had been discarded by him. His evidence was that the records he made in the race books were not intended to be used by him for the purpose of preparing his income tax returns.
The applicant swore that he had been advised in 1978 or early in 1979 by an officer of the Taxation Department that if he engaged in ``professional punting'' his income derived from that activity would be taxable. Charles Galluccio, who acted as the applicant's accountant and tax agent during the gambling period, deposed in an affidavit tendered on behalf of the applicant on the hearing of the appeals that he saw the applicant ``5 or 6 times a year during the period 1979-1982''. The affidavit contains the following paragraphs:
``4. I advised the Applicant to keep records of his gambling wins and losses; to pay bookmakers and other creditors by cheque; and to retain deposit slips for any gambling wins paid into his bank account.
5. I advised the Applicant that such records would be needed to substantiate any claims he made in his tax returns and for accounting purposes generally.''
The applicant's evidence was that on Monday morning at Tattersall's Club he settled his gambling transactions on horse races and card games which had occurred since the last Monday morning settling. Usually the settlement was weekly. He discharged his own obligations at the settlement by cheque (either his own or a cheque drawn by one of his gambling debtors and given that morning to him or to one of his gambling creditors at his direction) or in cash paid that morning by one of his gambling debtors to him or to one of his gambling creditors at his direction. He swore that he took cash to the two-up game and at the game borrowed cash at need from Ginger. The applicant's obligations to Ginger he discharged by cheque, either during the week in which the obligation was incurred or at the next Monday morning settlement at Tattersall's Club.
According to the applicant's evidence very few of his gambling receipts were paid into his bank account. Cash receipts by him from gambling were used in gambling and in discharging gambling debts, and cheques - by which few gambling obligations were settled by bookmakers - were either endorsed by the applicant to a gambling creditor or were made payable to one of his gambling creditors at his request.
The applicant swore that at only about a dozen race meetings did his wins exceed his losses during the gambling period and that on only about three occasions did his wins on all forms of gambling exceed his losses during a week.
88 ATC 4461
If the applicant's evidence be accepted, his net gambling losses are represented substantially by the aggregate of the amounts for which he drew cheques payable to his gambling creditors. Particulars in writing of the claimed deductions which the applicant prepared shortly before the hearing of the appeals show each such a cheque, with number, date, name of payee, and amount, and a note as to whether the payment related to races, cards or two-up. That information he derived from his cheque butts. In respect of the year ended 30 June 1980 the itemised cheques total $101,837. None of them is dated earlier than 3 June 1980. The balance of the amount claimed as a deduction is made up by the following particulars:
Lost in cash at races $4,200 November '79 to May '80
Lost in cash at two-up $19,000
In respect of the year ended 30 June 1981 the itemised cheques total $392,213. To that the particulars add $30,000 ``lost cash two-up'' and deduct $31,650 ``received winnings from races - banked''. In respect of the year ended 30 June 1982 the itemised cheques total $362,005. From that amount there is deducted $82,500: ``less cash received from cards, two-up, races''. In respect of the period from 1 July 1982 until November 1982 the itemised cheques total $146,750, the amount of the deduction claimed in respect of the year ended 30 June 1982.
The applicant swore that he made records of cash transactions in respect of his gambling which were not accounted for in settlements of the kind I have described by making notes either on pieces of paper or on the covers of his cheque books. These covers were detached from the cheque butt slips of paper which they enclosed when all of the butt slips which recorded particulars of cheques given in payment of gambling debts were culled from his cheque books and furnished to the Taxation Department. Later the pieces of paper and the cheque book covers on which notes had been made were lost or mislaid. The applicant swore that he had moved records of that kind several times from one office to another and that on one occasion in 1984 there had been a small fire in his office. But the applicant swore that records of that kind and the cheque butt slips had enabled him, when he furnished to his tax agent the information on which his returns had been based, to determine accurately the annual net gambling loss in each year of income in respect of which he had claimed a deduction for such a loss.
The applicant was asked while giving oral evidence on the hearing of the appeals why he had delayed furnishing his income tax returns for the first three years of income in which gambling losses were claimed until February 1983. The following evidence was given by him:
``There are a couple of reasons. I was stripping the family trust. I was doing -
I beg your pardon? - I was stripping the family trust, doing the Slutzkins.
Yes? - And I sort of had not made up my mind whether the money from that I would distribute to myself or whether I would distribute it elsewhere. That was one. And the other one: I did not have time and I just did not get round to doing it till I sort of got really organized and got everything together and taken an office and a secretary and sat down and spent a week or so on all the records and did it.''
On the next day the applicant gave further evidence on that subject and concerning his attitude to the recording of his gambling transactions:
``His Honour: You said, I think, that the reason why you delayed on the 1980 year was that some transaction was going forward, in relation to some entity of yours, that is called a Slutzkin? - Well, that came out this morning, your Honour, when they were talking about S.G. and A.J.
88 ATC 4462
Brajkovich's Trust, the Brajkovich Family Trust -
Yes? - and we went into the amount of 700-odd thousand dollars that I had written down somewhere, and one of the reasons I delayed doing my return was I was not sure whether I would distribute that to me, or what I would do with it. So, I sort of played around with it for a year or two, got legal advice -
Well, that was available. I mean, you were in a position to distribute, what - at the end of the 1980 year? - I am not sure that the date that I was given earlier on this afternoon is anywhere near correct. I really thought then, you know, been - proved me wrong today, that I did not strip that company till 81. I am sure I did not, but I will check that this evening.
Yes? - But, that - I did not know how to treat that 700-odd thousand, whether to distribute it to me, to another family trust, or what to do with it.
Yes? - So, that was one of the reasons I delayed doing the returns.
Well, what other reason would you have - or did you have? - Well, I had no tax to pay, nothing coming back and it was not important to me. It did not -
What do you mean you had no tax to pay? - Well, as far as I was concerned I had all these losses that it was not that important to me.
Are you - when you decided to become a professional gambler, it was your belief that you would be able to claim the losses as a deduction just as you have to bring into account the winnings if you won; is that right? - That is correct.
Did you get any - discuss with anybody interested in income tax law what attitude the Commissioner took to people who suddenly decided to call themselves professional gamblers? - General discussions.
Did you get the impression that nothing could be regarded as certain - it could not be regarded as certain by any means that you would be accepted by the Commissioner as a professional gambler? - I had discussions about even - I think I may have formed it and not ever used it - forming a company to make sure I got the deductions, formed the company and the articles - memorandum of association of that company instead of having a list of all things you are entitled to do, just having the sole purpose of gambling. I even went as far as -
Well, that is really what I - the sort of thing I wanted to ask you, that is really my question. Did not you believe in 79 and 80 and 81, 82 that it was very chancey as to whether the Commissioner would accept you as a professional gambler? - Well, that is the risk I took. I had discussions with an investigator -
Well, maybe it is, maybe it is, but you told me a moment ago, you had nothing to worry about it was just that you knew you did not have to pay any tax because you would have losses, but you could only be in that relaxed state of mind if you either were confident that the Commissioner would accept you or alternatively were confident that if the Commissioner did not, the legal system would. That you would be - there would not really in the long run be any question as to whether you were a professional gambler. Are you suggesting you had that sort of confidence? - I had that sort of confidence. I will always put my money where my mouth is.
Yes? - And I would take the punt. As I say, I did contemplate going bookmaking but after a discussion with an investigator from the tax department who stated quite clearly to me that if I - I told him, I said: you keep investigating the companies. I can sell them faster than you can investigate them. I am going professional punting and his name was Peter Peacock and he says, if you have wins you would be taxed. It was much easier for me to just go and draw a heap of cash out of the bank and pay these bookmakers. So hence, I said, right, if I am going to be taxed on my winnings I will certainly claim any losses I have as a deduction. Hence, why the cheque books and these records. Other than that it was easy just to go to the bank and draw 100,000 and go to the Tatts and peel it off and pay them. But I went to, what I considered, quite a bit of trouble to keep
88 ATC 4463
records. And once again, as I said, at two-up and cards they certainly do not issue receipts or invoices.
But you had had dealings with the Commissioner, had not you. You surely must have realized what an unpleasantly suspicious mind he had, would not you? - Sure. I do not bow to him either.
I know but you tell me you were going to a lot of trouble to keep - to pay your debts by cheque so that there would be a record; is not that right? - Well -
That is why you did it? - Exactly.
So you could not be pushed around by the Commissioner, you would have the records? - That is right.
And you are a man who has been in business for many years, and has had dealings with the Commissioner on and off over the years? - Correct.
What do you say to the suggestion that it might have entered your head that if you were going to keep records as a means of protecting yourself against the Commissioner you would need to keep also records of what you received as well as what you said you paid by cheque? - That is correct.
See, if you are trying to construct a defence against a disbelieving and suspicious government authority it is just a waste of time, is not it, to do what you did and just keep one set of records because it all comes back, does not it, to your oath as to what really happened -? - Sure.
- just as it would have come back to your oath if you had done the whole thing in cash? - Exactly.
The cheques do not really help at all, do they, when you only keep records of that side? - By the same token, had I won enormous amounts the amount that I wanted to show that I won entirely relied on my honesty. I mean, -
That is right, I accept that - So on the other hand - I mean any small businessman has got the option of paying tax on what he wishes to pay tax on.
Well maybe so, but why, if you say that you were seeking to see to it that there was more than just your oath about it and so you went to all the trouble of paying by cheque, not go to the trouble of keeping records of the other parts of the system? - Well I think I started off better than what I finished up with. I did, as you saw earlier on, keep reasonable records for me and banked some cheques, but then I suppose as losses mounted I got slacker and slacker with it. You know, there were very few winners, and I can honestly say that even - and my secretary, if you ask her later, will tell you - when I came back to real estate that there were cheques there from - rent cheques from the estate agent that had gone stale, that had been posted to me that I had not even banked.
But that is a different question, is not it? - No, I am just saying that -
It is one thing to be careless about money, and thereby lose money, it is another thing altogether to let the Commissioner of Taxation get into you by reason of carelessness or stupidity when you have got hundreds of thousands of dollars of what you say are losses mounting up? - But from year to year you did not think they would keep mounting.
You thought: well, hang on, I have had a horror run, it will change next week.''
The applicant and his former partner gave evidence that in the conduct of his real estate business he made records on scraps of paper and cigarette packets and kept the records in an untidy fashion, but that he was able to utilise efficiently his unorthodox recording methods.
Per Williams A.C.J., Kitto and Taylor JJ. in
Martin v. F.C. of T. (1953) 90 C.L.R. 470 at p. 479:
``The definition of income from personal exertion includes the proceeds of a business carried on by the taxpayer, but the pursuit of a pastime, however vigorous the pursuit may be, does not usually amount to carrying on a business and gains or losses made in such a pursuit are not usually considered to be assessable income or allowable deductions in computing the taxable income of a taxpayer. The onus, if the case is one in which onus assumes any importance, is on the appellant to satisfy the Court that the extent to which he indulged in betting and
88 ATC 4464
racing and breeding racehorses was not so considerable and systematic and organized that it could be said to exceed the activities of a keen follower of the turf and amount to the carrying on of a business.''
Per Menzies J. in
Prince v. F.C. of T. (1959) 12 A.T.D. 45 at p. 65:
``When the taxpayer's betting is looked at, the first point in favour of his contention that betting ceased to be his business on the 19th March, 1949 is that on that day he did cease to be a registered bookmaker. He says further that at the same time he ceased to conduct the doubles business that he had. Furthermore, he maintains that from 1942 on he had no interest whatever in any starting price business and he denies that at any time thereafter, he had any financial interest in Prince & Prince. I propose to consider the matter in the first place on the footing that all this is true and that the only betting with which I am concerned is what, according to the taxpayer, is to be regarded as `punting'.
What the taxpayer claims is that he was a heavy and successful punter and that for the period between the 19th March, 1949 and the 30th June, 1954, what he won exceeded what he lost by £76,578. This gratifying result, it is said, was the by-product of a `hobby' and a `spasmodic interest' in horseracing (Exhibit `B'). This rewarding hobby was systematically pursued with energy, and a wealth of accumulated experience. Moreover, the taxpayer was not only an owner, but he had a training establishment, at which he spent a good deal of the time. Often, he ran his horses not for the stake or for the joy of winning, but to make favourable bets. His betting was systematically conducted so as to get the most favourable odds obtainable and, as I have already indicated, the account of the way in which bets were laid suggests a tactical operation rather than a gamble. Commissioners were used who acted in accordance with a previously devised plan; when good odds were obtained, there were crushing bets to lessen or exclude the element of chance; the laying of bets for others was, according to the taxpayer, turned to his own advantage. Furthermore, money-making by wagering was pressed to the point where the taxpayer from time to time laid the odds to bookmakers and other punters. He says now that all these operations were crushing bets, but this is not supported by his records. After considering the whole of the evidence that was given, I am satisfied that the taxpayer was a racehorse owner and a gambler in a big way, not because he loved horses (although I accept his statement that he did), not because he enjoyed taking a chance, not because he was addicted to betting, but because as a matter of business he turned his wide knowledge, his experience and his ability to making his living out of horses and racing; particularly out of horses that carried not only his colours but his money.
The taxpayer's financial methods confirm my view that betting was his business and that the racing of horses was in the main a means of successful betting. His racebooks recording progress totals were used to keep him informed of how he stood after each race; he kept settling books which departed but little from those which he kept as a bookmaker. Staff from Prince & Prince, starting price bookmakers, from time to time represented him at settlings. In short, his betting shows all the indications of a strenuously conducted moneymaking business rather than those of a pleasant pastime. It may be thought a relaxing hobby to attend a race meeting now and then and to bet upon the horses racing, but to back horses sometimes at three meetings a day and some ninety meetings a year indicates not mere pleasure but either an addication [sic] to gambling or a business; between these two there is no doubt that in the taxpayer's case it was a business.''
Per Evatt J. in
Trautwein v. F.C. of T. (1936) 56 C.L.R. 196 at pp. 206-207:
``In my opinion the present taxpayer occupies a very different position to that of the taxpayer in
Jones' case (1932) 2 A.T.D. 16. From a long time antecedent to the seven years under review, he had become interested in racing and interested from the point of view of moneymaking. He had begun to devote a substantial amount of time trouble and organizing effort to acquire what he could from the sport. He established a stud farm for the purpose of
88 ATC 4465
breeding race horses. He raced his own horses and horses under lease sometimes operating to a very considerable extent. In these racing activities, he used the names of other persons so as to obtain better financial results. He betted frequently and systematically. He attended races regularly over all the years. He carefully selected the races on which he would bet and acquired valuable racing information from his trainers and others. He paid large sums of money in the purchase of horses in order to race them. He used agents both to bet for him and to settle for him. He used to bet in large sums of money, putting as much as £1,000 on a single race. From the years 1915 to 1923 he claimed deductions in his returns in respect of betting losses. It is contended that for him racing was merely a pastime and an amusement and he was, of course, active in the hotel trade. I have no doubt that he obtained enjoyment and amusement and sport from his racing activities especially when he was successful with his horses or in his bets. But it is not possible to find that the element of sport or pastime or amusement either dominated or was the main factor in these transactions. On the contrary, trying to look at the matter over a long period of time and having special regard to his employment and organization of all the means of moneymaking that are associated with the sport of racing including prize money, betting on his own horses, and betting on other persons' horses, I reach the conclusion that, throughout the relevant period, his betting transactions were part and parcel of the carrying on of a horse-racing business by him, such business including systematic betting on his own horses and also those of other persons... Accordingly I find that the proceeds of betting throughout the years 1920-1927 were part of the proceeds of the taxpayer's business.''
I find that the amounts wagered by the applicant during the gambling period were of the order indicated by his evidence and that during that period his gambling was undertaken at the places, and with the regularity, asserted by him. I find that after the commencement of the gambling period his retention of racehorses then owned by him and the acquisition by him of racehorses during that period was for the purpose of enabling him to gamble on horse races with more success than he thought would attend that gambling if he were not an owner, because he believed that the ownership of horses would result in his obtaining information useful in gambling which he would not otherwise obtain. I find that he regularly took other action, such as seeking the best odds, making saving bets and studying the form of horses, which he believed would enhance the prospects of success in gambling on horse racing. These are findings which tend in favour of a conclusion that the gambling activities of the applicant were undertaken in the way of a business.
I am persuaded that when the gambling period commenced the applicant hoped that the gambling activities on which he was about to embark would yield him substantial gains and I am persuaded that he believed a fund of some hundreds of thousands of dollars would be required for successful gambling on the scale he contemplated. It may be, although I am not persuaded, that the applicant not only hoped but also believed that he would make substantial gains by gambling, in the long run. But I am not persuaded that he expected average gains of the order of $100,000 per year, nor that he would have been dissatisfied with an average gain of $50,000 per year, as he swore that he would. I am persuaded that, while the applicant strongly desired to make a substantial financial success of gambling, the desire for that success had nothing to do with a desire for an income to afford him a living. It was, as I find, the desire to be free, at least for a time, of the disciplined effort of conducting the business in which he had been engaged, and the desire to experience the excitement which he thought he would derive from successful gambling, that led the applicant to diminish his activities in real estate and to embark upon gambling activities. After he had given evidence that he had told his wife and his partner, Mr Brown, of his intention to become ``a professional punter'' once he had what he thought to be sufficient funds for the purpose, the applicant gave this evidence:
``Did you discuss in any detail the matter with Brown? - Yes, we had several overseas trips together to buy land overseas and also to New Zealand to buy horses, etcetera. And we would sit on the plane and things like this and we had time, we just
88 ATC 4466
talked about gambling, gambling methods. You know, what I wanted to do, what he wanted to do, visions in life.''
After he had given evidence that he regarded racehorses as a means to acquire useful information, the applicant gave this evidence:
``You said you did not particularly like horses. Well, how did you feel about the thrill of horse races themselves? - Well, I do not enjoy a horse race; I enjoy the - I just like the gambling part of the horse race. As I said on many occasions to Rod Evans and that, I would sooner win 100,000 from Rod Evans in gambling rather than win the Perth Cup.
And is it implied in what you are saying that you would win $100,000 on the Perth Cup as a stake? - As a stake, it is in excess of 100,000, you know, some people are in it for the glory, other people are in it that like horse racing; I was in there because I wanted to gamble.''
Rod Evans was a bookmaker with whom the applicant regularly gambled on horse races. The applicant's financial position and land dealing expertise left him free throughout the gambling period to devote a large part of his time to gambling, and to lose more than $20,000 a month in gambling, without anxiety for the financial security of himself and his family. The balance sheet of the Brajkovich Trading Trust disclosed net assets of $204,028 on 30 June 1980 and of $96,627 on 30 June 1983. The Trust's trading profit and loss statements disclose aggregate net profits of $721,011 for the period from 1 July 1979 to 30 June 1983. In the same period gross income of the Trust from sales of land and buildings aggregated $4,143,662. Land and buildings forming part of current assets of the Trust at cost on 30 June 1980 were $1,230,463, on 30 June 1983 $1,432,708. The applicant swore that he spent only about five to 10 hours per week in controlling the affairs of the Trust and that some of the land transactions of the Trust were merely transfers between the Trust and other entities which he controlled. In respect of the gambling period a clear understanding of the real property business activities of the applicant otherwise than through the Brajkovich Trading Trust could not be derived by me from the evidence. It may be that the applicant gave little of his time to such activities. If so, his skill is the more to be admired. But I am persuaded that during that period he relied only on real property transactions (including the leasing by him of real estate) as the source of the funds by which he intended to support himself and his family, and that he thought of the monetary gains he hoped - and perhaps expected - to derive from gambling as a measure of his gambling success and as one of the sources of the pleasure he expected gambling to afford him, not as the product of an activity undertaken in order to gain a livelihood.
I am unable to accept as correct the applicant's explanations of his abstention from making income tax returns for the years ended 30 June 1980, 1981 and 1982 until February 1983, six months after service on him of the default assessments. In respect of no other year of income from 1972 had the applicant furnished his income tax return more than a few months after the due date. One of the explanations, literally understood, I find quite unworthy of credence: ``I did not have time and I just did not get round to doing it till I sort of got really organised and got everything together and taken an office and a secretary and sat down and spent a week or so on all the records and did it.'' Another explanation, that the applicant delayed the furnishing of his own returns while he deliberated about transactions concerning companies and trusts under his control, the determination of which deliberations would affect the content of his own returns or some of them, cannot be accepted as credible in the face of other evidence and other circumstances. His tax agent was seeing him regularly during this prolonged period of deliberation, but gave no evidence of consultation about the subject of the deliberations. From neither witness nor counsel for the applicant was there any explanation as to why such deliberations might be so prolonged, nor how the applicant's return for the year ended 30 June 1980, for example, might be affected by a decision taken in 1981 or 1982. The third explanation, that the applicant regarded the furnishing of the returns as unimportant because he thought that no tax was payable in respect of the years for which returns were not made, cannot be accepted. The applicant is an intelligent man of business who had dealt with officers of the Taxation Department on a number of occasions before
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1980 concerning investigations of his affairs and he was in touch with his tax agent during the years when he abstained from furnishing returns.
I am persuaded that from about August 1980 until he furnished returns in February 1983 the applicant had it in mind that, unless his gambling should become profitable, he would claim as deductions from his assessable income the substantial gambling losses he had sustained, and that those claims would probably be considered unsympathetically and suspiciously by the respondent's officers, and that prolonged deferment of the furnishing of his income tax returns would increase the suspiciousness and diminish the sympathy of those officers. I think it probable that the applicant deferred furnishing the returns either because he did not want to declare his gambling winnings assessable income unless and until his gambling losses were so substantial that he would judge that the benefit of deducting gambling losses outweighed any detriment he might later suffer by the treatment of his winnings as assessable income, or because disregard of the obligation to furnish income tax returns enhanced the pleasure the applicant was deriving from his release from other cares of business. Whatever the true explanation of the long delay, it does not throw direct light on the question whether any of the applicant's gambling activities amounted to the conduct of a business. It merely provided the subject matter of evidence by the applicant which, as I think, impaired his credit as a witness.
During the hearing of the appeals an order was made in each appeal with respect to a year of income within which a part of the gambling period fell, in exercise of power conferred by O. 29 r. 2(a) of this Court's Rules, that:
``the following questions arising in the appeal, namely
- (a) whether winnings of the applicant from all gambling or from some and which kind or kinds of gambling derived during the year of income ended 30 June 198... are assessable income of the applicant in respect of that said year; and
- (b) whether losses of the applicant in all gambling or in some and which kind or kinds of gambling incurred during the said year are allowable deductions in respect of the said year;
be decided separately from and before the trial of any other question in the appeal.''
These orders were made because the parties accepted that, if those questions were answered in the applicant's favour, determination by the Court of the amounts of the net losses would require a substantial time, and that the parties might be able to determine those amounts out of Court at less expense of time and money than hearing by the Court would involve. The questions are framed in recognition of the possibility that one form of gambling by a taxpayer may be conducted in the way of business and another form of gambling may be for that taxpayer merely a pastime.
If the beliefs and intentions and attitudes of a taxpayer are to be regarded as having an influence on determination of the question whether his gambling was the conduct of a business, there is nothing in the evidence bearing on those states of this applicant's mind to justify any distinction between his gambling on racing, on cards and on two-up. All three were but modes of the wholehearted devotion he paid to gambling. There was nothing in the evidence to suggest that in one mode he found more of pastime or pleasure than in another, except his evidence that he eventually diminished his involvement in gambling on horse races because of a growing conviction that the activities of other persons in pursuit of their own economic interests were denying him a fair chance of winning. There was nothing in the evidence to suggest that he hoped for, or that he expected, a better rate of return on money wagered in one mode than in another, until the disillusionment with horse race gambling, to which I have referred, overtook him. But if consideration be withdrawn from the applicant's beliefs and intentions, and if attention be directed to what he did, there is ground for distinguishing between the gambling on horse races and the gambling on cards and two-up. In respect of each of the latter two activities there is no evidence that the applicant took any measure to enhance the chance of winning. There is simply no evidence at all as to how he conducted his gambling in those two modes, except that in each case he wagered and lost large sums and that to the cards he devoted about five hours a week and to two-up about nine hours a week. Nothing of the systematic or the organised is disclosed about either of those two forms of gambling, except that the
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applicant brought to each a large amount of what might be likened to working capital and that he was constant as to the time and the place of the activity, and that he kept a record of his net losses. In respect of neither of those two forms of gambling does the evidence of what was done suggest the conduct of a business. The evidence of what was done strongly suggests an unrestrained indulgence of an appetite for gambling as a source of emotional and, perhaps, intellectual satisfaction. The applicant claimed in evidence that he was even more reckless in some of his business ventures in real estate than he was in his gambling activities. I was not persuaded to accept that evidence.
The applicant's gambling on the turf savours more of business, having regard to the evidence he gave of the methods he adopted in carrying on that activity. But even in that sphere a consideration of what, objectively regarded, was done by the applicant suggests a whole-hearted involvement in a recreational world of gambling and in the world of ``inside information'' to which the punter not uncommonly craves access, rather than the conduct of a business. The evidence discloses very little of purposeful reliance on the horses the applicant was racing, either for income from prize money or for betting advantage, except as providing a means of cultivating acquaintance with a number of trainers from whom that inside information was desired. A consideration of all the activities by which the applicant sought to gain success in betting on horse races does not, as I think, justify a conclusion that he was in that quest carrying on a business.
The few bets which the applicant placed on football matches were a response, I would find, to his conception of what was expected of him as a heavy gambler by other heavy gamblers and bookmakers of his acquaintance. They were not placed for the purpose of making financial gains and were not, as I find, productive of assessable income or deductible losses.
Per Webb J. in
Martin v. F.C. of T. (1952) 90 C.L.R. 470 at p. 474:
``The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.''
Per Evatt J. in Trautwein v. F.C. of T. (1936) 56 C.L.R. 196 at p. 205:
``It is to be noted that Warrington L.J., dealing with this question of betting as a trade or vocation, said: `That question, when it arises, will have to be decided on the facts of the particular case' ((1925) 2 K.B. at p. 770). Therefore, in Jones' case (1932) 2 A.T.D. 16, I endeavoured to make a close analysis of the particular facts of the case...''
I have sought to apply both a subjective and an objective test upon an analysis of the particular facts of this case. Upon the application of either test or, upon a general impression, of both together my conclusion is that no business of gambling was carried on by the applicant and that accordingly in each of the appeals concerning the years of income ended 30 June 1980, 1981, 1982 and 1983 each of the questions raised for decision should be answered in the negative. The determination of those questions in that sense substantially disposes of all the appeals, each of which will be dismissed with costs.