Income Tax - Assessment amended more than six years after tax payable - meaning of "evasion" within s.170 Income Tax Assessment Act 1936

Income Tax - Disclosure of excessive amount of non-assessable gambling wins - basis of calculation of additional tax under s.226(2) - meaning of "omission" within s.226(2)

Practice and Procedure - Appeal against Taxation Commissioner's assessment - no pleadings required to be filed - agreed statement of issues filed by parties - introduction of additional issue by Commissioner at commencement of hearing - whether Commissioner precluded from litigating new issue - principles of practice discussed - consequences as to costs.

Income Tax Assessment Act 1936: ss. 166, 167, 170, 190, 226(2).

Counsel and Solicitors P Roberts instructed by for Respondent: Australian Government Solicitor

In respect of the 1977, 1980 and 1981 years of income, the appeal be allowed.

In respect of the 1978 and 1979 years of income, the appeal be allowed in part, and the assessments be remitted to the respondent to be amended in accordance with law.

The respondent to pay the applicant's costs of all applications.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

In dispute in the five applications before me, heard together by consent, were income tax assessments of the applicant, Mr Evans for the five years of income 1977 to 1981.

2. The assessments in question were all issued in December 1984 following an investigation of the affairs of the applicant carried out by a Mr Short then of the Australian Taxation Office in February 1982. Three of the assessments, that is to say those relating to the 1977, 1978 and 1979 years, were amended assessments, the original assessments having been made on 7 June 1978, 22 August 1979 and 28 July 1981 respectively. In the returns lodged by the applicant for the 1977, 1978 and 1980 years the applicant appended a note indicating that he had pursued an interest in horse racing and greyhound racing betting as a hobby and social activity for many years and that as a result of the taxpayer pursuing his hobby he had winnings exceeding losses, or in the case of the 1980 year losses exceeding winnings, of an amount not exceeding a nominated figure. Although no such note accompanied the 1979 return the winnings of that year were referred to in the note to the 1980 return which return was lodged on the same day as the 1979 return. The failure to include a comparable note in the 1979 return was, it seems, inadvertent.

3. By way of example the note included in the 1980 return was in the following form: -

"The taxpayer has for many years pursued an

interest in horse racing and Greyhound racing

betting as a hobby and social activity. As a

result of the taxpayer pursuing his hobby, his

winnings exceeded his losses for the previous year

by an amount not exceeding $480,000, however,

during the year ended 30th June, 1980 losses exceed

winnings by nearly $114,000".

4. No note accompanied the 1981 return which was lodged after the investigation had commenced. However, in answer to a question of Mr Short in an interview on 17 June 1982, Mr Evans advised that he had won an additional $150,000 in 1981 but that he had lost heavily in 1982.

5. At the conclusion of the investigation in which Mr Short records that Mr Evans "cooperated fully", Mr Short prepared an asset betterment statement for the years in question. The resultant surpluses thrown up by this statement were accepted by Mr Short as having been derived from the applicant's gambling activities in the years in question. Mr Short, neither in his investigation report nor in the oral evidence given before me, suggested that the amounts treated by him as income were derived from some non disclosed source of income. Rather, he formed the view that the surpluses had the character of income because Mr Evans was carrying on a business of punting. He recommended accordingly to his superiors that assessments for the years 1977 to 1981 be amended to include the amounts thrown up by the asset betterment statement. This recommendation presumably encompassed the issue of original assessments for the 1980 and 1981 years. His recommendation was in due course implemented and assessments or amended assessments issued.

6. The result of the assessments with a comparison of Mr Evan's estimates of betting wins can be seen from the following table:

Year Estimate Taxable Increase Adjusted Tax Penalty

of "not Income of taxable assessed

income exceeding" as income income

returned assessed

$ $ $ $ $ $

1977 33,000 5,398 30,147 35,545 17,126.55 9,951

1978 149,000 6,296 174,909 181,205 106,443.54 57,635

1979 480,000 7,377 421,867 429,244 255,705.54 89,750

1980 (114,000) (920) 46,746 45,826 19,723.16 6,954

1981 150,000 (17,745) 140,215 122,470 64,948.50 15,142

7. The penalty, representing additional tax for "omitted" income under s.226(2) of the Income Tax Assessment Act 1936 ("the Act") was calculated in essence as 10 per cent of the tax said to have been evaded until February 1983 and 20 per cent per annum from 14 February 1983 until the date of assessment.

8. The applicant duly objected to the assessments in a lengthy and largely irrelevant document which owed its origin to the then requirement of s.190(a) of the Act that a taxpayer was irrevocably bound on an appeal by his grounds of objection. Upon the objection being disallowed the Commissioner was duly requested to refer the objection decision to the Supreme Court of New South Wales, a request which, upon the jurisdiction to determine such appeals being vested in this Court, resulted in the present proceedings.

9. At a directions hearing before Lockhart J on 9 August 1988 his Honour directed the parties to file with the Court an agreed statement of issues and failing agreement to each prepare, file and serve on the other a statement of the issues as seen by the respective parties. It would seem that the parties were able to agree on the issues, for an agreed statement was filed with the Court on 26 August 1988. The issues were stated to be as follows:

"The parties agree that the following matters are

at issue:

1. Whether the amounts for the assets and

liabilities of the applicant set forth in the

adjustment sheets issued to the applicant by

the respondent are correct.

2. Whether the amounts received by the applicant

from gambling or punting activities were

assessable income of the applicant under

section 25(1) or 26(a) of the Income Tax

Assessment Act 1936 ("the Act") or according

to ordinary concepts and usages and, in

particular, whether those activities amounted

to the carrying on of a business.

3. Whether the respondent was entitled to issue

the amended assessments for the years of

income ended 30 June 1977, 1978 and 1979.

4. Whether the applicant was liable to pay

additional tax under section 226 of the Act."

10. On the basis that the matters referred to in the agreed statement were the issues, and the only issues, between the parties the applications were in due course set down for hearing.

11. However as senior counsel for the applicant was opening the applicant's case, counsel for the Commissioner indicated that a new issue would be raised by the Commissioner, namely whether there were undisclosed sources of income other than betting wins which contributed to the taxable income as assessed. He referred to correspondence from the applicant's accountant which subsequently became Exhibits 11 and 12 and to which I shall refer later in this judgment. He made no application to the Court for permission, if permission were needed, to withdraw from the concession implicit in the statement of issues agreed by the parties that the sole explanation of the increase in the taxpayer's assets was gambling wins.

12. Before proceeding with my findings of facts in this matter, I wish to say something about the procedure adopted by the Commissioner in this case.

13. Historically, in the normal case where matters are instituted in a superior court the Rules of Court have provided for pleadings to be prepared, filed and served so that the issues of law and fact which arise may be defined in advance. There were two reasons in particular for such a procedure to be adopted. First, and foremost, was the desire in the interests of justice that the parties themselves know the case they must each meet and that neither be subject to ambush by the introduction of an issue which is unexpected. Second, was the need for the Court to understand what the issues are so that evidence irrelevant to the real issues between the parties might be excluded and the proceedings be conducted in a way conducive to the resolution of the issues which the parties had defined. The time set aside by the Court for the hearing was in consequence determined by reference to the estimates of the parties as to the time required having regard to the issues which were so defined.

14. This Court from its inception has adopted some flexibility and formal pleadings have not been required in all cases. However, where formal pleadings are not ordered the Court expects that the issues between the parties will be defined in some other way, as for example, through the affidavits filed by each party.

15. In taxation appeals it was not the practice of the High Court nor of the State Supreme Courts when jurisdiction was conferred upon them to require pleadings to be filed. When this Court acquired the jurisdiction previously exercised by the Supreme Courts and before them the High Court no Rules of Court were formulated requiring pleadings to be filed in taxation appeals, probably because it was thought that in most cases the issues between the parties were clear enough and that the institution of a formal system of pleadings for tax cases generally might lead to an increase in delay and costs that could not be justified.

16. However, as Aickin J said in Bailey v. Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214, 227:

"The fact that a proceeding may go forward without

pleadings does not deprive the Court of such

control as is necessary to ensure that the issues

are defined and that each party is provided with

the necessary information as to the case which he

has to meet."

17. The procedure of requiring in taxation appeals the parties to state by agreement if possible the real issues between them as adopted by Lockhart J in the present case was an attempt by means of a less formal procedure than would be involved in the filing of pleadings to define the issues.

18. In ordinary inter partes litigation which proceeds by way of pleadings the question whether a party is to be held to the issues of fact specifically raised by the pleadings or particulars given is, where pleadings have closed, always a matter for the discretion of the Court: Mummery v. Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 and Order 13 rule 2 of the Rules of this Court. Whether in a case such as the present the Court has a discretion to confine, should it so desire, the Commissioner to an agreed statement of issues, is a more difficult question.

19. What is referred to this Court in a tax appeal is the Commissioner's decision on the objection which is lodged by the taxpayer with the Commissioner under s.185 of the Act. In the ordinary case where the Commissioner, for example, assesses on the basis that a particular amount constitutes assessable income or that a particular amount claimed as a deduction is not allowable and the taxpayer objects to that treatment of the amount, the issue that is referred to the Court will be whether the amount in question was assessable income or the amount claimed was truly an allowable deduction. This being the case the Commissioner could not on an appeal to this Court involving the assessability of an item seek to justify the assessment, the item being admittedly not assessable income, by arguing that some deductions which had been allowed by the assessment were in law not allowable so that the whole or part of the tax payable was still payable and the assessment accordingly not excessive (cf. 190(b) of the Act). In such a case the Commissioner should, subject to the constraints in s.170 of the Act, where applicable, issue an amended assessment disallowing the deduction.

20. Where the assessment is amended in any particular (and the disallowance of a deduction is in my view "a particular" in the relevant sense notwithstanding that the effect of the amendment might in a particular case be that the ultimate tax payable is not at all affected) the taxpayer will have a right to object against the amended assessment although that right is limited to a right to object against the alteration or additions in respect of, or matters relating to the particular alteration: s.185 of the Act. It must be borne in mind that the assessment of which the Act speaks in s.170 is not a piece of paper which sets out the tax payable; it is the process which ultimately produces a legal effect culminating with the notice of assessment: Batagol v. Federal Commissioner of Taxation [1963] HCA 51; (1963) 109 CLR 243. The particulars of that assessment are "the ingredients" of that process that is to say how the assessment is made up: McAndrew v. Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263 and cf. Trautwein v. Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63, 94-5 per Latham CJ; Federal Commissioner of Taxation v. Offshore Oil NL (1980) 80 ATC 4457, 4462 per Deane J.

21. Where, however, the issue between the Commissioner and the taxpayer is whether a particular amount is income, it would seem that the Commissioner can support the assessment under one section notwithstanding that the assessment, when made, was made by reference to some other section: Federal Commissioner of Taxation v. Reynolds (1981) 81 ATC 4131 but cf. Danmark Pty Ltd & Forestwood Pty Ltd v. Federal Commissioner of Taxation (1944) 7 ATD 333.

22. An assessment made under s.167 of the Act (a so called "default assessment") may stand in a quite different position to the class of assessment made by reference to the taxpayer's returns or other information under s.166. Under s.167 if the necessary prerequisites of the section be fulfilled the Commissioner makes an assessment not of the taxable income and tax payable but of the amount upon which, in his judgment, income tax ought to be levied. When that assessment is made it becomes the taxable income for the purposes of s.166. While s.167 is, as was said by the High Court in George v. Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183, 204 "epexegetical to s.166" and not therefore an independent power, it does not follow that the issues thrown up on an appeal to the Court where s.167 is availed of will necessarily be treated the same way as those where the assessment objected to was made under s.166 without the aid of s.167.

23. Particulars will in appropriate cases be ordered to be supplied by the Commissioner where the assessment is made under s.166 without the aid of s.167 but the Commissioner will not be ordered under s.167 to disclose the sources of income whence the increases in the applicant's assets came so as to make the gains income (George's case ante). As the High Court said in George's case at 204:

"The fact is that unless the taxpayer discharges

the burden laid upon him by s.190(b) of proving

that this ascertainment or judgment is excessive,

he cannot succeed and it can be no part of the duty

of the Commissioner to establish affirmatively what

judgment he formed, much less the grounds of it,

and even less still the truth of the facts affording the grounds."

24. It would seem to follow from George's case that before this Court a taxpayer must, in a case such as the present where s.167 is availed of, justify, if required, not merely the character of capital rather than income, of any discrepancy in his assets but further prove that the discrepancy results from the particular transaction which has the character of capital excluding thereby on the balance of probabilities all other sources of income. This being the case it does not seem to me that the Court can, at least where s.167 has been availed of, confine the Commissioner to issues either that were considered by the assessor or that have been agreed upon in advance by the parties.

25. This is not to say that the resiling by the Commissioner from his agreement with an applicant as to the issues will be met with any particular enthusiasm by the Court. This will be particularly so where the Commissioner seeks to introduce at the very last moment and immediately before the commencement of evidence an issue which requires the Court to investigate whether an applicant has other sources of income and requires that applicant to negate the existence of such sources having regard to the provisions of s.190(b).

26. While the Court may not be in a position to preclude the Commissioner from seeking to litigate the new issue it will in the interests of fairness readily grant an adjournment to the taxpayer and order the Commissioner to pay the costs thrown away as a result. Even if, as in the present case, no adjournment is requested the Court may, where the hearing is, as it was, extended by the intervention of the newly introduced issue, order the Commissioner to pay at least those costs which have resulted from the introduction of that issue.

27. It is, in my view, incumbent upon the solicitors of the parties to ensure that they comply with an order to file a statement of issues and if counsel is to be briefed to ensure that counsel's concurrence in that statement is obtained. Failure so to do will be regarded as discourtesy to the Court.

28. The applicant was born in 1953. It is not disputed that he has a keen interest in racing. From an early age he attended race meetings with his father, bet his pocket money and when not betting attempted to pick the winners on races which he listened to on the radio. He studied law full time at Sydney University for approximately two and a half years but for financial reasons gave up full time study to work as a clerk with Telecom. He resigned from Telecom in November 1976 intending to acquire a business following a planned holiday and resume university study. In fact he never returned to university.

29. After investigating the possibility of opening two other businesses the applicant purchased a laundromat business, paying the deposit on 30 September 1977 and completing the purchase on 14 November 1977. The purchase price for that business was $16,500. It was subsequently sold on 18 July 1979 for $21,230 of which $5,470 was apportioned to goodwill and $15,760 was apportioned to plant and fittings. I should add that the effect of the asset betterment statement was to treat the whole of the capital profit so made as income (in Mr Short's view as gambling wins) although it is clear that the real profit after taking into account costs of purchase and sale (stamp duty, agent's commission and the like) should have been subtracted from the figure arrived at before the resulting taxable income was ascertained. In the result however this discrepancy will be irrelevant so it is unnecessary to consider a submission by counsel for the applicant that I reduce the taxable income in the 1980 year by $4,500 being a realistic estimate of the profit made, there being no evidence before me from which the precise profit could be calculated other than the respective purchase and sale prices.

30. In October 1978 the applicant entered into a partnership agreement with a friend to carry on the business of a wallpaper shop. The applicant was to provide the capital and the friend worked in the shop. The partnership was still operating at the end of the period with which the present appeals are concerned.

31. In December 1979 the applicant purchased the King Arthur's Court Hotel in Kings Cross, Sydney. He paid the purchase price of $355,000 in cash but refinanced the hotel virtually immediately with the result that effectively the purchase was financed by way of mortgage from the Bank of New South Wales for $320,000. The borrowed moneys were placed on deposit with Partnership Pacific and have been accounted for in the course of evidence.

32. Whereas at the laundromat a full time manager was employed and the applicant's involvement was not great, the applicant was at the hotel on most business days although he employed a full time manager with experience in running hotels. Although it is clear that the applicant attended many race meetings, both metropolitan and provincial, after purchasing the hotel he generally worked at the hotel on the mornings of race meetings and left at midday, when the meetings were in Sydney, returning to the hotel after the races to help with night staffing and to close up the hotel. It seems that in the whole of the period in question the applicant attended interstate meetings only occasionally; from his recollection once in Melbourne and perhaps half a dozen times in Brisbane.

33. The applicant returned net income from the laundromat of $4,047 in the 1978 year and $7,044 in the 1979 year. The income for the period 1 July 1979 to 18 July 1979 when the business was sold was $1,284. The laundromat, although obviously a cash business was managed by a lady who collected the takings and banked them. The applicant was not even a signatory on the account. There seems in these circumstances little likelihood that any part of the amounts included in the amended assessments for 1978 and 1979 or the assessment for 1980 came from the laundromat. It was not put to the applicant specifically by counsel for the Commissioner that they did. In any event the fact that the sale price of the business inclusive of assets was only $21,230 would suggest that there was not much room for income to have been derived in cash greatly in excess of that which was returned. I find that no part of the income in dispute in this case was derived from the laundromat business.

34. The wallpaper business was not the subject of much evidence at all. It was started off from scratch and the applicant's contribution was small. In the 1979 year the applicant's share of the partnership's returned loss was $54, in the 1980 year a profit share of $2,401 and in the 1981 year a profit share of $923. Mr Short was apparently content that these figures were accurate; no suggestion was made before me to the contrary. Accordingly I find that no part of the income in dispute in this case was derived from the wallpaper business.

35. Evidence was given before me by the manager of the hotel, Mr Segreto, by the applicant's accountant Mr Gilovitz and by the applicant as to the financial system in place. The applicant said, and I accept his evidence, that he was concerned to ensure that cash was properly accounted for because the applicant wanted to know how the business was going; he wanted to be sure that he was not being robbed by his employees and further he wished to improve the business, which was run down at the time of purchase, and increase its value. The resale price of a hotel is determined amongst other factors by reference to recorded trading figures. To deplete the takings would reduce the sale price ultimately obtainable.

36. To this end the cash receipts from liquor sales of each profit centre of the hotel (public bar, saloon bar and bottle shop) went through the cash register and were recorded. Often Mr Segreto was responsible for counting the money in the cash register, sometimes the applicant. Sometimes both did it together. The result was tallied with the cash register records which were forwarded to the accountant in the form of a record of cash takings prepared by Mr Segreto.

37. That evidence alone would not exclude the possibility of cash being taken by the applicant and not put through the cash register. However, a further safeguard was introduced. Each four weeks an independent firm N H Tate & Co carried out a stock take to enable a reconciliation to be made by reference to stock on hand at the beginning and end of the month and purchases during the month and this was reconciled with the cash takings through the cash registers. The firm of N H Tate & Co also gave regular estimates of expected profits having regard to industry experience. Copies of this material went to the applicant's accountant and these were apparently checked by him.

38. In these circumstances I see no reason to doubt that the returns prepared by the accountant from the material furnished to him properly disclose the income from the hotel business and I reject the suggestion to the contrary, made by counsel for the Commissioner which was hotly denied by the applicant, that he was "attributing" the profits of the hotel to betting. As the applicant said, and I believe him, he was "not that stupid" and it would have been a ridiculous thing for him to have done.

39. The returns from the hotel were small and certainly smaller than were apparently forecast at the time the hotel was purchased. There were three reasons given for this, which I accept, namely, the reduction of the blood alcohol limit from .08 to .05; the increasing awareness of the general public of health and fitness issues in relation to alcohol and the introduction of random breath testing which had a particularly large effect on inner city hotels where the clientele generally had to drive home after attending the hotel.

40. Apart from the above sources of income and the betting wins, the only other sources of monies which were disclosed by the applicant in his income tax returns in the years in question were:

(a) payments from Telecom in 1977

(b) interest from banks, building societies and finance

companies

(c) interest from a mortgage and an unsecured loan

(1981 year)

(d) income from a real estate partnership with Mr

Gilovitz (1980 and 1981 years).

41. The applicant swore in the witness box to the accuracy of the returns (excluding the issue of the betting wins). He swore that the returns included all income which he had derived, maintaining the assertion, of course, that the betting wins were not income. Unless therefore I reject the applicant's evidence to this effect, either in whole or in part, I would conclude as Mr Short did after his investigation that the increase in the applicant's assets was to be explained by gambling wins and by those alone. I shall return to this matter when considering the attack on the applicant's credit by counsel for the Commissioner.

42. The estimates of the gambling wins (or losses) made by the applicant for the years 1977 to 1980 were made by him after the end of the year of income and in conjunction with his accountant, probably at the time the income tax returns were prepared. Advice had been sought and obtained from senior counsel in or about May 1978 as to the assessability of the applicant's gambling wins, the occasion of the advice being that the applicant had by then won what he felt was "a fabulous sum of money at the races" and he wanted to know what the tax law consequences were. Since the 1977 year return was lodged around the same time as this advice was given it may be inferred (although the applicant did not recall whether this was counsel's advice) that the note in the returns for these years was prompted by the advice given, notwithstanding that the advice was that no tax was payable.

43. In evidence were the calculations made in conjunction with the accountant for the 1978 and 1979 years. In essence the applicant looked at his assets at the beginning and end of the year and his expenditure on capital assets and living expenses during the year, and the ultimate increase in assets after adding expenditure and subtracting income from other sources was treated as gambling wins. While the process was neither as refined nor as detailed as that adopted by Mr Short, in effect both adopted the same method of arriving at gambling wins. This procedure was necessary because apart from his cheque book and deposit slips from 1978, and his TAB telephone account statements, the applicant kept no contemporaneous records of his gambling transactions. By the time the investigation was conducted, the applicant did not have the TAB statements for the whole of the period in question although some statements were available in respect of part of the 1981 year. As will be seen, even these statements were of little assistance to the applicant in demonstrating that he had gambling wins of the magnitude assessed.

44. The applicant described his gambling activities both in his affidavit evidence and in his oral evidence and this evidence was not in dispute. They were, he said, haphazard and did not involve any methodical pattern of betting. His bets ranged in size from quite small sums to much larger sums, the largest bet being $58,000 on a horse ("Rainbow Demon") owned by the applicant and his then girlfriend which bet was unsuccessful when the horse, the favourite in the race, ran near last.

45. His other bets did not exceed a few thousand dollars. I shall return to the question of the racehorses later in the judgment.

46. The applicant used no computer to assist his gambling activities; maintained no office for his gambling activities; had no staff to assist in these activities; did not study the form extensively in advance of a race meeting; did not analyse race results or trends; operated no system and subscribed to no tipping service. His bets were, he said, and I believe him, a mixture of intuition and judgment. He obtained no information about potential winners from Mr Moc a small trainer who trained the applicant's horses nor from any other source at the course. He gave no real thought to amassing wealth or capital from his gambling. To use his words:

"The more money I won the more recklessly I

gambled, enjoying the thrill of gambling of what,

to me, were large sums of money, in fact often more

than I could reasonably afford. I enjoyed going to

the races ..."

47. In the period to 30 June 1977 the applicant's bets were mainly placed with the tote if on course, or the TAB if off course, and only rarely with bookmakers. The bets were generally cash bets. At some time the applicant opened accounts with the TAB in Sydney, Melbourne and Brisbane and bet substantially through these accounts as well as on course through the totalizator. Also in later years the applicant dealt with a number of well known bookmakers who extended credit to him. However the majority of his bets seem to have been placed either with the TAB or on course with the totalizator.

48. Some corroboration of the applicant's evidence can be found in his banking records through which he was taken in detail in cross-examination. In addition to many cheques of quite large denomination made out to cash which the applicant deposed were for betting there were many large cheques made out to the TAB which organisation only permitted phone bets if the TAB account was in credit. Many deposits were clearly from the TAB or tote; many others were cheques from acquaintances who, the applicant said, asked him to cash cheques for them at the races. I have no reason to doubt the applicant's evidence in this regard. There were many deposits in cash which the applicant deposed came from racing. Again I accept the applicant's evidence in this regard.

49. The fact that there were large deposits and withdrawals from or in favour of the TAB as early as November 1977 was not lost on the applicant's bankers. On 15 November 1977 the accountant of the Penshurst branch of the Bank of New South Wales rang the accountant of the Bexley branch to ask what he knew of the applicant. The accountant recorded in a diary note that the applicant "has been for some time remitting by T/T amounts of $10,000/$15,000 to his T.A.B. telehone betting account in Melbourne. Also he today paid into his account with us a T.A.B. cheque for $150,000. It may be prudent to exercise some caution in deals with this account." The $150,000 TAB cheque was a partial payment of a total $178,000 being a winning trifecta ticket that the applicant had jointly with a friend Mr Beirne. The win was corroborated by Mr Beirne who also gave evidence.

50. The applicant's bankers continued to have concern about the applicant's account. On 5 May 1978 the manager recorded "he (the applicant) has made his fortune by betting and can quite easily lose the lot the same way."

51. On 8 January 1980 the manager recorded that the applicant had $25,000 by mail in transit from TAB Melbourne and that he had a credit with the local TAB of $180,000. On 7 May 1980 the bank records that the applicant negotiated a cheque for $40,000 through the Newcastle Jockey Club Tote. These entries in the bank diary notes to some extent further corroborate the evidence given by the applicant.

52. The cross-examination relating to the applicant's banking records was at least in part aimed at demonstrating that on the applicant's recollection in 1989 of his affairs the surplus of gambling income after subtracting gambling outlays differed from the estimate he had made each year. It was no doubt also aimed at indicating the magnitude and extent of the applicant's betting. The figures arrived at were:

Year Estimate Excess of Betting Betting

Betting Deposits Outlays

Deposits

over Outlays

$ $ $ $

1978 149,000 91,295 502,795 411,500

1979 480,000 135,752 724,492 588,740

1980 (114,000) 427,935 763,785 335,850

1981 (150,000) 351,948 1,347,648 995,700

53. While in fact the discrepancies were not in each year as great as might have been expected, the problem was that the applicant was not after a considerable passage of time able with precision to identify all cheques or deposits as gambling and there were a number of transactions of which he was quite uncertain. Further he would, he said, after depositing an amount into the credit of his TAB account change his mind and withdraw it and perhaps redeposit the amount to his bank account and draw a cash cheque to bet elsewhere or pay the amount in another cheque to the credit of his TAB account in another State. Hence the figures taken from the bank account provide no real guide either as to the value or quantum of betting. Since of course they exclude cash transactions and cash on hand at the beginning and end of any year, and as the applicant clearly had significant cash on hand at any one time, and placed many bets in cash, I found the figures of little assistance.

54. As I have already indicated, there were difficulties in gaining much assistance from the computer print-out of the applicant's TAB accounts from April to June 1982 that were admitted in evidence. First, the records covered a period (29 November 1981 to 13 March 1982) in which the applicant was overseas: his passport was tendered in evidence to prove this absence. Yet there was, what appeared to be, a huge volume of bets registered on that account in that period.

55. This was explained by evidence not only from the applicant but also from Mr Segreto, Mr Grocott, Mr Creighton and Mr Beirne, the last three being friends of the applicant and fellow gamblers.

56. It seems that the applicant, in part with a view to improving the goodwill of the hotel and in part to assist his friends, made available the facility of his TAB accounts to his friends and permitted some customers of the hotel to place bets on the account. Thus, his friends and his manager, Mr Segreto, knew the account number and computer security code ("PIN number") of each of the applicant's TAB accounts. Mr Segreto would also place bets for customers of the hotel on the account accepting the money in advance if only one bet were placed or more normally accepting the bet on credit to be settled up later, usually on a Friday. Where Mr Segreto placed the bets on the TAB account for friends or customers he would keep track of the bets and the dividends paid. On Fridays the betters met for luncheon. According to Mr Segreto, whose evidence I accept, there were 20 to 30 attendants and sometimes more. Generally, it would seem, the betting accounts were settled in cash although sometimes cheques were accepted. Despite some criticism by counsel for the Commissioner of differences said to exist between the evidence of the applicant and Mr Segreto their accounts, in my view, did not fundamentally differ and were corroborated by Messrs Grocott, Creighton and Beirne. Although the method of dealing with the TAB telephone account left much to trust it seems that the trust was not abused.

57. The effect of this evidence was to leave no reliable documentary evidence from which it was possible to determine the volume of betting or the amounts bet from time to time. I reject the submission by counsel for the Commissioner that the applicant was operating an SP bookmaking operation and laying off the bets on the tote and accept Mr Segreto's evidence that no charge was made by the applicant and a fortiori no profit was made by him on the transactions in which friends or customers of the hotel participated.

58. Evidence was given by the applicant that he had between 1978 and 1983 owned, together with his girlfriend of the time, Rhonda Howard, 13 horses and a share in another horse. The first horse was purchased on impulse by his girlfriend, and was ultimately registered in her name, and the second at the suggestion of a trainer Mr Moc who trained the horses until he had a disagreement with the applicant in 1983. Others were purchased at yearling sales, generally without professional advice as to whether the horse was a likely winner or as to stud prospects, although on some occasions Mr Moc gave advice.

59. According to the applicant his racehorse ownership was a financial disaster and the figures bear this out. His prime motivation was the pleasure and prestige of winning races with his own racehorses. Mr Moc gave evidence in corroboration and was somewhat scathing about his former client. He said:

"It appeared to me that he had no idea as to what

he was doing. He certainly did not approach the

purchase of this racehorse (the first) in a

professional manner. I would describe my initial

impression of him as being 'so green it was not

funny'".

60. Speaking of later purchases Mr Moc observed that the applicant did not have horses examined by a veterinary surgeon before purchase and that:

"It appeared, to me, that he purchased horses on

the grounds of whether he liked the look of the

horse as opposed to its likely racing potential.

...he did not carry out any analysis in respect of

the proposed outlay of the purchase price for a

horse and the ongoing expenses, to determine

whether the purchase would be profitable."

61. Mr Short in preparing his asset betterment statement proceeded on the assumption that these horses had all been purchased by the applicant and that they were assets of his business, so that they were depreciable and that the expenses, which were allowable as a deduction were paid by the applicant. However, the applicant gave evidence that his girlfriend paid amounts in cash towards the joint purchase and that he, the applicant, gave amounts to her so that in effect Miss Howard paid one half of the overall cost. Training expenses were shared between them and the horses were registered in their joint names with the Australian Jockey Club with the exception of the first which, as I have already indicated, was registered in Miss Howard's name. Although in the result nothing, in my view, turns on the question of ownership of the horses I accept the applicant's evidence that Miss Howard did make some contribution to the horses and did share the expenses of them with him. It is not necessary to decide for the purposes of the present case whether Miss Howard's interest amounted to 50 per cent in each horse.

62. According to the applicant his share of prize money which was shared with Miss Howard in the years in question totalled $17,211. The horses when sold generally realised considerable losses in relation to their initial purchase prices.

63. In the 1980 tax year the applicant lent to Mr Moc the sum of $100,000 to assist in the purchase of a home. Training fees were treated, at least on many occasions, as paying off the loan which took three years to repay. When the applicant's horses won, the applicant cancelled a part of the loan. When other training fees were needed the applicant gave money in advance. The applicant also advanced moneys to Mr Grocott who gave evidence before me. The transaction was a little complicated and was the subject of some cross-examination but in the end I am satisfied that the applicant did make the loan to Mr Grocott as deposed to by the applicant and that the loan was repaid.

64. From time to time as Mr Beirne deposed the applicant would lend money to his friends at the races when the friends ran out of cash and these loans would subsequently be repaid; sometimes a cheque was given by the friend out of which repayment was to be made. This evidence helped explain some of the cheques deposited by the applicant in his bank account from betting associates.

65. In December 1979 the applicant contracted to purchase, in his own name, a block of units at St Kilda with settlement taking place on 16 April 1980. However, prior to that purchase he had entered into a joint venture with his accountant Mr Gilovitz (the documentation was in evidence before me) to share profits on the transaction. The purchase price came solely from the applicant's funds, half being advanced to a company associated with Mr Gilovitz to enable that company to pay half the purchase price to the vendor.

66. The applicant authorised Mr Gilovitz to act on the applicant's behalf to obtain a loan on the property and in the course of so acting Mr Gilovitz wrote two letters (Exhibits 11 and 12 before me) to which I will return in considering the first issue for decision. The mortgage being obtained, the sum of $198,000 was paid into Mr Gilovitz's trust account. The applicant gave evidence that of this amount on 30 June 1980 he received $180,000 in cash by accompanying Mr Gilovitz to the bank with which Mr Gilovitz banked, taking with him an airline bag into which the cash was put. The money, according to the applicant was needed by him before 30 June to enable the applicant to settle gambling liabilities to three persons named by him.

67. According to Mr Short, the applicant when first questioned about the proceeds of borrowings did not remember what had happened although ten minutes later gave the explanation which I have recorded above. Mr Short had then questioned Mr Gilovitz who had, according to Mr Short, said that he had twice accompanied the applicant to his bank on that day to withdraw cash. On the first occasion $10,000 had been withdrawn and on the second $179,000. The applicant remembered only the one occasion. No attempt was made to crossexamine Mr Gilovitz about this matter before me. However, I note that the accounting records prepared by Mr Gilovitz which were apparently attached to the partnership's 1980 tax return say in a note which is presumably in Mr Gilovitz's hand-writing and certainly authorised by him:

"Received mortgage on property $198,000 less

costs = $189,000. Mortgage money paid to Evans &

Gilovitz $94,500 each (actually $179,000 was paid

to RE and $10,000 was paid to MPG) $84,500 being

monies repaid to RE from MPG on loan a/c between RE

and MPG." (emphasis added)

68. No doubt RE is the applicant and MPG Mr Gilovitz.

69. This note would corroborate the applicant's evidence that there was only one banking occasion in which he received $179,000, not as he recalled $180,000. The difference of $1,000 does not seem to me material.

70. In his asset betterment statement calculation Mr Short took no account of a loan which the applicant said he had received from his brother Mark at the time the applicant purchased the house in which he thereafter resided. Mr Short was of the view that the loan was not a genuine commercial agreement. This was despite a document signed by the brother acknowledging the loan, prepared, it may be assumed to convince Mr Short. When seeking finance from his bankers for the hotel, however, the applicant disclosed the loan as a liability with "no time tie". The applicant deposed that his brother had for a time adopted an alternative life style and was uninterested in money. Later his brother had married and the loan had been repaid. I am satisfied on the balance of probabilities that the loan was a real loan and that the asset betterment assessment for the year over-estimated "income" by the extent of this loan. However, as will appear this will not affect the outcome of the appeals.

71. The Commissioner submitted that I should find that the discrepancy thrown up by the asset betterment calculation came from other sources of income or in the alternative that the applicant had not satisfied the onus of proof resting upon him under s.190(b) of excluding such other sources of income. The submission rested in part upon the two letters, Exhibits 11 and 12 to which reference has already shortly been made and upon submissions made as to the credit of the applicant. I propose therefore first to consider the question of credit.

72. The applicant was a most impressive witness. He was clearly very intelligent and gave his evidence to the best of his recollection with clarity and apparent honesty and candour. Unless therefore the applicant's credit was shaken in cross-examination I would have no hesitation in accepting him as a witness of truth.

73. Counsel for the Commissioner made a number of criticisms of the applicant's evidence which I shall deal with briefly. Apart from the letters, Exhibits 11 and 12, counsel referred to a diary note made by a relieving manager of a meeting with the applicant on 13 July 1978. The manager was apparently unable to be contacted to give oral evidence. The note referred to a proposal to purchase a property at Padstow for $57,000. The applicant recollected the interview but denied it had anything to do with a property at Padstow or that he had ever desired to purchase a property there. The note referred to the laundromat clearing $200-$250 per week net. The note suggests that the applicant had agreed that he should properly be called a professional punter and that he had declared "most" of his winnings.

74. I do think that the diary note operates to shake the applicant's credit. Other diary notes suggest the occasion of the meeting had to do with the hotel so that the manager may have been mistaken about the Padstow property. Whether or not the applicant referred to the laundromat earning $200-$250 per week can be doubted; for the reasons which I have already given it is unlikely that the figure would have exceeded at that time $140-$160 per week. However the discrepancy does not in my view shake the applicant's credit. The reference to "professional punter" is irrelevant and without knowledge of what precisely the applicant said does not advance the Commissioner's case. It seems unlikely having regard to the conference with senior counsel about the income tax consequences of gambling held shortly before the date of the meeting with the bank officer that the applicant would have made the bald comment attributed to him.

75. The next criticism concerned a suggested discrepancy in the applicant's evidence concerning whether the cash float for the hotel bars was used as a source to pay out the customers or friends who used the applicant's TAB accounts and won. The applicant's evidence was somewhat confused on the matter but I accept Mr Segreto's denial that the cash float was mixed with betting monies and place little significance on the apparent confusion appearing in the transcript of the applicant's evidence (p 140).

76. Third, there was a suggestion based on evidence of Mr Segreto that the applicant was paid $500 per week "salary". However, it is clear from the evidence of the applicant corroborated by Mr Gilovitz that the $500 came through the hotel bank account; it was not taken as cash; and was debited to the applicant's capital account. In these circumstances the evidence assists the applicant rather than the Commissioner.

77. Fourth, the Commissioner pointed to the discrepancy of evidence said to arise concerning the St Kilda units and the partnership with Mr Gilovitz. I have already dealt with this in detail. The applicant's account of the matter is substantially corroborated by Mr Gilovitz.

78. Fifth, the Commissioner points to the fact that the applicant had told Mr Short that the gambling wins in the 1981 year were $150,000. It was put to the applicant in cross-examination from his bank records that the applicant could no longer reconcile the figure of $150,000 as gambling in this year. For the reasons I have previously given the bank account records on their own are unhelpful and the cross-examination did not affect the applicant's credit at all. However, it might be noted that Mr Short's calculation arising from the detailed asset betterment statement was only $10,000 less than the applicant's estimate.

79. Sixth, reference was made to the applicant having told Mr Short during the investigation that as at 30 June 1979 he had cash ($300,000) in a safe at home. In cross-examination the applicant said that the money was kept in a safe at his father's home. He explained and I accept his explanation that he did not know Mr Short and did not want to tell him that money was kept at his father's house in case his father might later be bothered.

80. Next, the applicant admitted in cross-examination that he had owned a brood stallion which was not a racehorse which he had not disclosed either to Mr Short or in his affidavit. It was not suggested that the stallion was worth much or that it was productive of income. The applicant said, and I believe him, that he was asked to supply a list of racehorses and omitted the stallion because it was not a racehorse.

81. Reference was made to the question whether Miss Howard had paid half of the money for the horses and as to what was said on this matter to Mr Short and to suggested conflicts of evidence between Mr Segreto and the applicant as to the taking of bets from friends and customers. These matters and other minor matters raised do not affect my impression of the applicant as a witness of truth.

82. I turn then to the two letters, Exhibits 11 and 12 written by Mr Gilovitz.

83. Exhibit 11 was a letter written on 16 May 1980 to a firm of solicitors in Victoria in response apparently to a request from that firm, to whom the applicant had applied for finance, for details of assets and earnings. The letter records among the assets the hotel at a figure of $450,000 (said by Mr Gilovitz to be a guess as to its value) and concludes:

"Mr Evan's earnings from the hotel after allowing

for all interest and other business expenses is

approximately $48,000 per annum."

84. As I have already found, that figure is clearly incorrect. It is however possible, as Mr Gilovitz himself said in evidence, that Mr Gilovitz took that figure from projections of the hotel's profits made prior to the purchase of the hotel. It appears that the letter itself was sent without being shown to the applicant.

85. Exhibit 12 is a letter written, apparently to a mortgage broker. It reads as follows:

"We advise that we act as accountants for the

abovenamed and that during the last few years Mr

Evans has had investments in several small

businesses prior to acquiring a substantial

freehold hotel at Kings Cross, Sydney.

Mr Evans has accumulated his funds by astute

dealings and investments. Prior to the acquisition

of the freehold hotel Mr Evans retained his funds

in liquid form. The funds were held partly in the

form of first mortgage loans but mostly with banks

on fixed deposit or on call in the short term money

market.

Accordingly, Mr Evans' income mainly comprised

interest on funds which during the year ended June

30, 1978 averaged $320,000 earning $33,600 interest

and during the year ended June 30, 1979 amounted to

$385,000 earning $40,425 interest.

Income from his investment in laundromats earned

approximately $10,000 per annum and from other

investments an insignificant amount.

We trust that the above is sufficient and for your

information enclose a copy of our letter of May 6

forwarded to Messrs Kawecki Rubenstein & Sholl."

86. The applicant denied that he had had in the 1978 and 1979 years amounts on deposit as stated or that he had derived interest of the amounts stated in the letter. Mr Gilovitz had no recollection of writing the letter but said that he would have believed at the time that the information was true and that the information in the letter would have come from the applicant. At one stage he suggested that he might have extrapolated the interest figures calculated at 10.5 percent from what he knew the applicant had in 1980. His evidence, even allowing for the time that had elapsed since the letter was written, was confused and unconvincing.

87. It has been pointed out to me that Mr Short had copies of the two letters when he came to do the asset betterment statement and that he must have concluded that the information in the letters was wrong. Alternatively, it was said I must form the view that Mr Short was incompetent. However, whatever view Mr Short took, if any, of these letters is irrelevant, as is Mr Short's competency.

88. I do not regard the comment in Exhibit 11 as to the hotel earnings to be of any significance as I think it is more probable than not that the figure of hotel earnings was but a projection made by Mr Gilovitz. However, Exhibit 12 in regard to interest is of more concern particularly as it is clear from Mr Gilovitz's calculations that as at 30 June 1979 the applicant did have cash available to him of around the $385,000 referred to in the letter.

89. At the end of the day I am unable to say whether the information in the letter is or is not true. Certainly I am not satisfied on the balance of probabilities that it was true but since the applicant bears the onus of showing on the balance of probabilities that his income came solely from gambling he has, in my view, not succeeded to the extent of the $33,600 referred to as interest in the 1978 year and the $40,425 referred to in the letter for the 1979 year. It is clear that the monies on hand at the end of the 1979 year were spent on the hotel or are otherwise traceable and thereafter no further amount of interest could have been earned in later years.

90. I am however on balance not prepared to disbelieve the applicant in respect of the other matters to which he has sworn. I have observed him carefully in the witness box during his cross-examination and taken into account the clear corroboration of much of his evidence and the relative lack of conflict and inconsistency as illustrated by the minor matters raised against him by counsel for the Commissioner. I therefore accept his evidence on all matters other than the question whether he derived interest income in the 1978 and 1979 years.

91. It will be recalled that the assessment in issue in the 1977 year was an amended assessment. The assessment having been made more than six years after tax originally became due and payable on the original assessment the Commissioner is only empowered by s.170 to amend if he could properly form the opinion that any avoidance of tax was due to fraud or evasion.

92. It was not seriously contended that in the present case there was fraud. The meaning of the expression "evasion" presents some difficulty. Whatever it may mean it must mean more than mere omission. As Dixon J said in Denver Chemical Manufacturing Co v. Commissioner of Taxation (NSW) [1949] HCA 25; (1949) 79 CLR 296 at p 313:

"It is probably safe to say that some blameworthy

act or omission on the part of the taxpayer or

those for whom he is responsible is contemplated.

An intention to withhold information lest the

commissioner should consider the taxpayer liable to

a greater extent than the taxpayer is prepared to

concede, is conduct which if the result is to avoid

tax would justify finding evasion."

93. In the present case it was virtually conceded by counsel for the Commissioner that s.170 did not authorise the issue of an amended assessment in the 1977 year. The concession, if made, would, in my view, have been correct. The taxpayer in his return disclosed gambling wins "not exceeding" $33,000. In fact the asset betterment assessment in respect of that year was erroneous in any event because it had proceeded on the assumption that the applicant had no assets at all at the commencement of the 1977 year, when in fact the bank records disclosed something in excess of $15,000 in assets held at the commencement of the year.

94. In my view whatever the meaning of "evasion" it can not be said in the present circumstances that the avoidance of tax, if there was one, was a result of fraud or evasion on behalf of the applicant.

95. It follows that the applicant is successful in his appeal in relation to the 1977 year.

Did the Activities of the Applicant in Gambling Constitute a Business?

96. The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.

97. There is no one factor that is decisive of whether a particular activity constitutes a business. As Jessel MR said in the famous dictum in Ericksen v. Last (1881) 8 QBD 414 at p 416:

"There is not, I think, any principle of law which

lays down what carrying on trade is. There are a

multitude of things which together make up the

carrying on of trade."

98. Profit motive (but see cf Inland Revenue Commissioners v. Incorporated Council of Law Reporting (1888) 22 QBD 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on (Inland Revenue Commissioners v. Livingston (1927) 11 TC 538), repetition and a permanent character, continuity (Hope v. Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1, 9; Ferguson v. Federal Commissioner of Taxation (1979) 79 ATC 4261, 4264), and system (Newton v. Pyke (1908) 25 TLR 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.

99. Where the issue is whether an activity of punting without more constitutes a business, there is a special problem. While some knowledge of form of the animals and skill in assessing that form may improve the prospects of winning or at least militate against the prospect of losing, the fact remains that the element of chance looms large on betting on the races, be that horse racing, greyhound racing or trotting. While two-up may, if properly played, be the only game of pure chance (excluding mere lotteries) the difference between card games and betting on the races is but a matter of degree. This is not to say that the bookmaker can not be said to be carrying on a business: clearly he can. The bookmaker's activities are purely commercial and involve all of the indicia of business referred to above. The element of chance, while still present, is however greatly reduced by the averaging of bets and the ability of the bookmaker to lay off part of his risk with others and also perhaps by his ability at least in part to set the odds which he offers. The customers of a bookmaker and a fortiori the customers of the totalizator are in a different position. This difference was referred to by Rowlatt J in Graham v. Green (1925) 9 TC 309, 314 where his Lordship said:

"Now we come to the other side, the man who bets

with the bookmaker, and that is this case. These

are mere bets. Each time he puts on his money, and

whatever may be the starting price, I do not think

he could be said to organise his efforts in the

same way a bookmaker organises his. I do not think

the subject matter from his point of view is

susceptible of it. In effect all he is doing is

just what a man does who is a skilful player at

cards, who plays every day. He plays to-day and he

plays to-morrow and he plays the next day and he is

skilful on each of the three days, more skilful on

the whole than the people with whom he plays, and

he wins. But I do not think that you can find, in

his case, any conception arising in which his

individual operations can be said to be merged in

the way that particular operations are merged in

the conception of a trade. I think all you can say

of that man, in the fair use of the English

language, is that he is addicted to betting. It is

extremely difficult to express, but it seems to me

that people would say that he is addicted to

betting, and could not say that his vocation is

betting."

100. Where the activity of gambling is closely associated with some other business such as that of bookmaking, breeding or training horses the courts will more readily find that the gambling will constitute a business activity. So in Vandenberg v. Commissioner of Taxation (1933) 50 WN(NSW) 238 at p 239 in holding that gambling wins in transactions not directly concerned with the bookmaking business were income Halse Rogers J said:

"Whether or not betting transactions are carried on

in such a way that they may be regarded as a

business, is always a question of fact. But when

we have, as the foundation fact, or basic fact, if

one may so call it, the bookmaking business carried

on by the appellant, whose sole source of income

is, in any event, a racecourse activity; and when

it is found that he not only fields, but uses his

knowledge of racing, in general, and whatever

information he is able to obtain because of his

constant association with racecourses ... and when

we have such a man systematically indulging in a

course of betting on a large scale and intermixing,

without record, the proceeds of his betting with

those of his bookmaking, I think that the proper

inference to draw is that betting with him was a

business."

101. The taxpayer in Trautwein v. Federal Commissioner of Taxation [1936] HCA 46; (1935) 56 CLR 196 in contrast with the taxpayer in Jones v. Federal Commissioner of Taxation (1932) 2 ATD 16, both of which were decided by Evatt J had established a stud farm for the purpose of breeding racehorses. He raced his own horses and horses under lease, and devoted a substantial amount of time to the activity. He bet frequently and systematically using valuable racing information which he acquired from trainers and others and used agents to place bets for him. He was not a mere punter. It was found that Mr Trautwein's betting was neither dominated by enjoyment and amusement of the sport nor was such enjoyment or amusement the main factor in it. The betting was:

"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." (p 207)

102. Mr Jones on the other hand, while betting in large amounts and having an arrangement with trainers whereby he received information and shared fifty-fifty with them his wins if the information was proved accurate, was a mere punter and was held not to be carrying on a business:

"He acquired no property in connection with betting

at races, he had no business premises, he had no

proprietary interest in any horse, he was not a

trainer of horses, he kept no books and no records

of his wins or losses, he had no bank account of

his own at all, let alone any business account, he

never hedged in any of his betting transactions, he

did not set aside or determine upon any amount of

capital outlay for the purpose of "investment" in

his supposed business, he never banked his

winnings, he was not a member of any recognized

club associated with racing and the trades

incident thereto, and the only person he employed

was one man for a short time to attend Tattersalls

Club and pay his bookmakers upon settling day.

With one or two exceptions, the appellant cannot

remember the names of the horses upon whose success

he wagered large sums of money. ... All that I

have said can best be summed up by saying that,

during the relevant period, the appellant acquired

and developed a bad habit which he was in a special

position to gratify. I do not think that the

gratification of this habit was a carrying on of

any business on his part, despite his many bets and

his heavy losses." (pp 18-19)

103. Even where the taxpayer races and breeds racehorses and owns blood stock receiving prize money and incurring racing and stud expenses he will not, as the decision of the full High Court in Martin v. Federal Commissioner of Taxation [1953] HCA 100; (1952-3) 90 CLR 470 shows necessarily be held to be carrying on a business in respect of his gambling unless his betting, racing and breeding racehorses is:

"so considerable and systematic and organised 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." (p 479)

104. So also in Shepherd v. Federal Commissioner of Taxation (1975) 75 ATC 4244 the taxpayer owned and raced various racehorses but on the facts of the case neither her prize money nor her betting wins were found to be the product of a business. Rath J of the Supreme Court of New South Wales held rather that the taxpayer, while having a passion for horses, indulged in horse racing as a pastime; although a keen follower of the turf, the turf was not her business.

105. The test of whether a business of gambling, or for that matter any business, is carried on will be largely objective, determined by reference to the nature and extent of the activities carried on and it has been said by Lord Buckmaster in J & R O'Kane & Co v. Inland Revenue Commissioners (1919-22) 12 TC 303 at p 347 that:

"the intention of a man cannot be considered as

determining what it is that his acts amount to;

..."

106. Nevertheless the subjective purposes and intentions of the person said to be carrying on a business will have relevance whether the activity be some more normal activity such as breeding cattle (cf. Federal Commissioner of Taxation v. Walker (1984) 84 ATC 4553, 4564-5 per Davies J; Martin v. Federal Commissioner of Taxation [1953] HCA 100; (1952) 90 CLR 470, 474 per Webb J); or whether it be said to involve a business of punting: Brajkovich v. Federal Commissioner of Taxation (1988) 88 ATC 4457 at p 4467 per Jenkinson J (pending appeal at time of writing). For an activity of gambling to be a business it would be necessary that it be undertaken for the purpose of profit rather than for pleasure or the satisfaction of addiction so often present in betting on the races.

107. There has been no decision of a court in Australia, nor, so far as I am aware, in the United Kingdom where it has been held that a mere punter was carrying on a business. As all betting gains are taxable in the United States the question does not arise in that jurisdiction. There is dicta in New Zealand in support of the proposition that a mere punter could carry on a business: Commissioner of Taxes v. McFarlane (1952) NZLR 349 at p 383; Duggan v. Commissioner of Inland Revenue (NZ) (1973) ATC 6001 and the possibility of a professional punter was left open in Martin's case and appears to have been accepted by the full High Court in Hines v. Federal Commissioner of Taxation (1952) 9 ATD 413 where Dixon CJ, Williams and Fullager JJ considering a taxpayer whose activities of betting were otherwise unrelated to any other betting activity said at 420:

"A question might perhaps have been thought to

arise as to whether the magnitude and regularity of

Mr Hines' betting transaction did not warrant the

conclusion that he was carrying on a business of

betting and that the profits of such a business

were assessable income in his hands."

108. However, Webb J in Langford v. Federal Commissioner of Taxation [1954] HCA 54; (1954) 92 CLR 517 at p 524 appears to have regarded what was said in Hines as having been overruled by Martin so far at least as it may have been thought following Langford that mere heavy winnings could result in the conclusion that a punter was carrying on a business.

109. In Case K25 reported at (1978) 78 ATC 243 the Taxation Board of Review by majority (the Chairman, Mr Stevens and Mr Fairleigh QC, Mr O'Neill dissenting) held that the winnings of a punter were income although the outcome of that case appears to have been complicated by an issue of whether the taxpayer had discharged the onus of demonstrating that his methods of operation were not such as to constitute his betting activities a business. Mr O'Neill whose knowledge and experience in income tax matters was, and is, renowned, regarded Graham v. Green (supra) as deciding that mere punting could not by its very nature amount to a business.

110. For present purposes I am prepared to assume that mere punting may constitute a business. If however a punter is to be held to be carrying on a business it will be because his activities of betting will be systematically conducted so as to get the most favourable odds obtainable (cf. D H Prince v. Federal Commissioner of Taxation (1959) 12 ATD 45 at p 65). Webb J in Langford referred to this element as "system or organisation" words which his Honour would seem to have taken from the judgment of the full High Court in Martin.

111. The use by a taxpayer of a computer as in Case K25 whether as a data base for form guides or to calculate odds may be evidence of system; so too the formulation of a plan designed to obtain the best odds; the taking of steps so as to lessen or exclude the element of chance ("the crushing bets" referred to by Webb J in Prince at p 65). Presumably a professional punter would have a fund of capital with which to bet and would keep adequate records to record his position from day to day and week to week. This is not to say that all of the above elements would be required before there could be a finding of a professional punter or that the matters listed are necessarily exhaustive. Volume of punting and size of bets of themselves are not, in my view, determinative of the outcome although neither can be said to be irrelevant. As Webb J observed in Prince at p 65:

"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."

112. Which it is will depend on the facts of the case.

113. In the present case there is conceded a considerable volume of bets made regularly over a number of years with bets varying in size from small to large. Although the taxpayer had during the years in question other business interests (the laundromat, wallpaper business and hotel) these activities were not particularly successful so that the taxpayer clearly financed his lifestyle out of his gambling wins. Attendances at race meetings no doubt took time and, although no attempt was made in the evidence to quantify or explore it, I have no doubt that betting at the TAB office initially or later through his telephone account also took a deal of the applicant's time although he worked from day to day at the hotel. Each of these factors lends support to the Commissioner's view that the applicant was carrying on a business of gambling.

114. Nevertheless I have concluded that in the circumstances of the present case the applicant was not a professional punter. What was lacking to characterise his gambling as a vocation or business was the element of system or organisation. The applicant on the facts before me did not spend large amounts of time studying form; he subscribed to no tipping or information services; had no sources of information such as trainers. He made no attempt to work out combinations of bets designed to give him a positive result or limit his exposure to risk; he made no use of technology such as computers; did not go about calculating odds nor ensuring that in his bets he got the best odds. His gambling was undertaken not in accordance with a preformulated plan but as the mood took him. He had no allocated capital with which to conduct his activity and kept no records of his winnings or losses.

115. However the factor which I regard as of considerable significance in this case in tipping the scales in favour of the applicant is that his betting was predominantly with the TAB or on course totalizator (rather than with bookmakers) where the odds given are unknown at the time the bet is placed and the dividend will be unable to be precisely calculated until it is announced ten minutes or so after the race is concluded where it is dependent upon the total TAB and on course totalizator betting upon the race less betting tax. This, plus a tendency on the part of the applicant to "invest" in trifectas, quinellas and other exotic kinds of bets more dependent on chance than the bet on a particular horse (but where the dividend in the event of success is greater as evidenced by the win jointly with Mr Beirne on a trifecta bet) seems quite inconsistent with the money making systematic business-like character which is an essential ingredient in the carrying on of a business.

116. In my opinion the applicant's activities have the volume and extent sufficient to characterise him as being addicted, and indeed heavily addicted, to gambling but they lack the system and organisation essential if they are to be characterised as a business. It follows therefore that to the extent that the increase in the applicant's assets is attributable to his betting activities, in my view, they do not constitute the proceeds of a business.

117. The Commissioner submitted that for a punter to win consistently there must be skill involved, particularly when you look at the matter over a five year period. You could, he said infer a system and therefore a business from success over a five year period. Alternatively, it was argued that system was a mere "shibboleth" and therefore in law presumably insignificant. I have already rejected this argument. The former argument amounts to no more than saying that a taxpayer who succeeds carries on a business whereas another taxpayer with the same volume and magnitude of gambling and the same system and organisation or lack of it does not. While such a principle would greatly assist the revenue it lacks both logic and judicial support.

118. For the Commissioner it was argued that I should place particular significance on the horse owning activities with Miss Howard. Having regard to the evidence it could not have been and was not seriously suggested that these activities amounted to a business of themselves of which the proceeds of gambling were but an incident. If anything the case seems the very opposite of the normal situation, that is, it was only if the applicant was carrying on a business of punting that it could be said that the horse racing activities were an incident or adjunct of that punting business. In my view, neither activity amounted alone or in combination to a business, howsoever that business might be called.

119. An issue concerning the correct construction of s.226(2) was argued before me. It was conceded by the Commissioner that where a taxpayer in a note to a return disclosed that he had made a particular quantum of profit from gambling but did not characterise that profit as assessable income no penalty could for that reason be exigible under s.226(2) for the taxpayer had not in the relevant sense "omitted" from his return any assessable income. Rather the taxpayer had included the amount in his return but characterised it incorrectly. So much follows from the decision of the full Court of this Court in North Coast Grazing Pty Ltd v. Federal Commissioner of Taxation (1987) 87 ATC 4553.

120. However, it was argued for the Commissioner that where, as here in the 1980 year, the taxpayer discloses an amount from gambling wins, which amount is claimed to be non assessable, and it turns out that there was a greater amount of money derived from gambling than disclosed, then the amount of assessable income "omitted" is the whole of the gambling gains rather than the difference between the amount included in assessable income and the amount referred to in the return or alternatively that the additional tax is required to be calculated on the whole of the gambling gains.

121. To take an extreme example: where a taxpayer refers in his return to gambling wins of $100,000 and it is ultimately found that the wins were $100,000, no amount of additional tax under s.226(2) would be applicable; there would be no omission. Where, however, it is ultimately found that the wins were $100,001, the whole amount of $100,001 was relevantly omitted. Although in the result it is unnecessary in the present case to decide the issue, in my opinion, the argument of the Commissioner leads to a complete absurdity as the above example illustrates, and I would have been slow indeed to accept an interpretation of s.226(2) which produced such a ridiculous result. There seems to me to be little difficulty in interpreting s.226(2) when referring to the omission of income as, in the above example, referring to the $1. Then when the additional tax comes to be calculated under the section with its reference to the tax that "would be payable if it were assessed upon the basis of the return furnished by" the taxpayer those words should be construed as meaning "upon the basis of a return containing an omission of $1" rather than upon the basis of a return containing an omission of $100,001.

122. However, as I am of the view that the gambling wins should be excised from assessable income in the 1980 year it will follow that no additional tax will be payable by the applicant in that year under s.226(2). Additional tax will however be payable by the applicant in respect of the 1978 and 1979 years having regard to the failure of the applicant to satisfy the onus of proof in those years in respect of the interest income omitted, but not in respect of the balance of the amount included in the assessments which I am satisfied on the balance of probabilities was represented by gambling wins and was not assessable. The assessments in these years will need to be remitted to the Commissioner for further consideration of the remission of additional tax under s.226(3) of the Act. Section 226 will have no application at all in respect of the 1977 and 1981 years in respect of which the applicant has been wholly successful.

123. Although in respect of the 1978 and 1979 years of income the respondent has been to some extent successful, I am of the view that in the circumstances the respondent should pay to the applicant his costs of each application. In the result overall, the applicant has been largely successful and even in respect of the 1978 and 1979 years from a financial point of view the applicant has been significantly successful. A large amount of time was taken up at the hearing as to other and alternative sources of income outside the interest income and on this issue as on the principal issue of whether the gambling wins were income the Commissioner was unsuccessful. I have regard further to what I said at the outset to the introduction of the issue at the latest possible stage and the time spent ultimately in dealing with it including the taking of the evidence of Mr Gilovitz.

124. Accordingly, I will allow in whole the applicant's appeals in respect of the 1977, 1980 and 1981 years and allow in part the appeals in respect of the 1978 and 1979 years. I direct that the assessments in respect of the 1978 and 1979 years be remitted to the respondent to be amended in accordance with law and I order the respondent to pay the applicant's costs of all applications.