Tax rule lags the technology

On May 23, the Osaka District Court ruled that if a person repeatedly buys a large amount of racing tickets, his or her losing tickets should be regarded as “necessary expenses.” This is the first ruling of its kind. The taxation authorities should rethink its taxation policy for income generated through winning racing tickets.

In the trial, a 39-year-old man was charged with violating the Income Tax Law by evading about ¥570 million in income tax over a period of three years. He had made earnings by repeatedly buying racing tickets in large amounts. He was found guilty of evading the tax. But if the court had not decided that his losing tickets constituted necessary expenses, he would have been forced to pay much more income tax than his actual income.

The man automatically purchased betting tickets for most of the races sponsored by the Japan Racing Association held at all the racing tracks in Japan by using computer software for race predictions, into which he had incorporated his own calculation formula. He opened a bank account specially for paying for ticket purchases and receiving refunds for winning tickets.

From 2005 through 2009, he purchased ¥3.5 billion worth of racing tickets and received ¥3.65 billion as refunds, thus earning ¥150 million. The taxation authorities refused to treat his losing tickets as necessary expenses and told him to pay ¥810 million including penalty tax — more than five times what he earned. This was an absurd decision.

The prosecution charged the man with evading ¥570 million in income tax including penalty tax from 2007 through 2009. It argued that his income should be regarded as “occasional income” for which no necessary expenses are accepted.

But the court decided that his income is “miscellaneous income” for which necessary expenses are accepted and ruled that he evaded ¥52 million in income tax including penalty tax. It said that his purchase of a substantial number of racing tickets over a long period of time should be regarded as a type of asset management, for which necessary expenses are accepted.

About 40 years ago, the National Tax Agency issued a notice saying that income from race betting should be treated as occasional income. But that was when people bought racing tickets at ticket booths or over the telephone.

Thanks to the Internet, people can now easily buy large numbers of racing tickets over long periods of time. Currently about 3 million people buy racing tickets over the Internet, accounting for about 60 percent of the JRA’s ticket sales.

The taxation authorities should quickly differentiate between regular, large-volume purchases and occasional purchases of racing tickets, and take an appropriate approach. If some people are ordered to pay income tax on refunds while others are not, people will feel that the taxation policy is not equitable.

Withholding tax at the source for a large race ticket refunds may be one way to create a sense of equality.