Major lotto, raffle and other gambling wins only come around rarely (or never, for most of us), and when they do, they don’t usually raise tax issues, at least not to begin with. Gambling winnings are not regarded by the Tax Office as assessable income as it considers gambling to be a luck-based recreational activity that in the long run results in losses for most people.

This is not an uncharacteristic act of generosity on the part of the ATO. If gambling wins were taxable across the board, it would have to also allow all the losses people make, and in the long run almost all gamblers lose money. Revenue based on turnover is collected from the various licensed operators instead, mainly by the States.

It is only in very exceptional cases that a person would be regarded by the ATO as a professional gambler, in which case wins would be taxable and losses deductible. A professional gambler is someone who is organised in a business-like manner and who relies on their net gambling wins to finance their living expenses. They would generally have a business connection with the relevant gaming industry – for example, a professional punter in horse racing might be a trainer or a breeder or have close connections to such a person. There may also be professional poker players who have made competing in poker tournaments their career.

Such people are few and far between, however, and your Powerball and Melbourne Cup wins should be safely beyond the taxman’s reach.

Not all countries exempt lottery wins, however. The US imposes a hefty 30% withholding on lottery wins by foreigners over USD 600, plus some state taxes. So be prepared for this when you’re chasing big jackpots like the US Mega Millions. Some European countries also tax lottery wins while others don’t.

Casino wins are also not taxed in Australia, again because that kind of gambling is regarded as a recreational activity. It follows that casino losses are not deductible either. The ATO does keep an eye on the bigger casino players who regularly gamble large amounts, not so much because they might be a professional gambler, but to assess whether the losses indicated in casino records are consistent with the income disclosed in their tax returns. Where there is an apparent discrepancy there could be a please explain from the ATO, followed by some amended assessments.

In fact, it’s always a good idea to retain documentary evidence of significant non-taxable windfall gains, not only from gambling, but also gifts or loans received from relatives or friends. There are plenty of court and tribunal cases where unexplained bank deposits and spending have ended up being taxed because taxpayers haven’t been able to prove that monies came from a non-taxable source.

There are special rules about assets acquired as a result of art union wins and the like. These are raffle-like lotteries run by charities that package up a luxury house in a desirable location, plus furnishings, plus a flash car, plus a stack of gold bullion. What happens when our lucky winner sells some of these items? Under the CGT rules, they are deemed to have acquired the house or the gold bullion at market value at the time of the win. So, if the winner sells their prize home for more than its market value on the date that they won the home, they will generally need to pay CGT on any increase (that is, the difference between the market value on the date they won the home and its subsequent sale price). Note that only 50% of the net capital gain is assessable. If they move into the prize home and use it as their main residence, any gain on its disposal is not subject to CGT. Cars are generally not subject to CGT either.

Many major prize winners choose to consult with an accredited financial adviser to help them decide how best to manage their life-changing win.

Once you have taken that luxury cruise, upgraded the house and car and made gifts to friends, relatives or charities, and what is left is invested for the long-term, the normal rules around superannuation, CGT and what have you apply in the normal way.

And a final word of advice.

While recreational gambling within clear limits can be a harmless bit of fun, a handful of problem gamblers have let it take over their lives, with dire consequences for themselves and their families. Only wager what you’re prepared to lose and if you’re up overall consider quitting while you’re ahead.