Taxation & Tax Tips

A Business or a Hobby?

cakes of soap stacked o a table top. different colours. small business start ups

Now that the EOFY is creeping up on us tax tips and planning is important, and it’s a great time to double-check all your tax return facts.

One of the simple ones you may not know the distinction between is a business and a hobby.

What is a hobby?

Usually, a hobby is a pastime that you enjoy doing in your spare time for recreation or satisfaction.

Benefits of being a hobby

  • Personal enjoyment and satisfaction
  • You can sell your work for the cost of the materials you use to create it
  • You can do it in your own time
  • You don’t have the reporting obligations of a business

What is a business?

The ATO says you are in business if “your activity, as a whole, is commercial with an aim to make a profit”.

Benefits of being in business

  • You can apply for an Australian Business Number (ABN) to use in your business transactions.
  • You can register for a website once you have an ABN
  • You’ll have access to government information, services and concessions for business
  • You can claim tax deductions for business expenses against your taxable income

How do you know if it is a business or a hobby?

This is the important part. We need to know the difference between a hobby and business for tax and legal purposes.

Key questions to consider:

  • Is the activity being undertaken for commercial reasons?
  • Is your main intention, purpose or prospect to make a profit?
  • Do you regularly and repeatedly undertake your activity?
  • Is your activity planned, organised and carried out in a businesslike manner?

If the answer is yes to the majority of these questions it is likely you are running a business, although it will depend on your individual circumstances.

To get an answer specific to your circumstances, you can:

  1. Talk to a legal advisor, accountant or business advisor who can help you decide by looking at your earnings and situation.
  2. Or get a private ruling from the ATO, which will provide an answer that will protect you from penalties and interest.

What do I need to do if it’s a business?

When running a business you:

  • Will need to declare your income to the ATO in your annual return.
  • Can claim for deductions on your expenses and generally need an ABN
  • Will need to keep records for your business for tax and other obligations

Once your hobby becomes a business, you may need additional licenses and permits specific to your type of business. For example, if you are running a home-based business you may need council approval to operate from your residence depending on the type of business.

Did you know? More tax tips!

Tax Tips: You don’t need to declare the amounts you make from your hobby to the ATO. You can’t claim any losses from your activity if it is a hobby

Tax Tips: It’s a myth that there is a dollar threshold to be in a business. Some people can have very expensive hobbies! What matters is whether, as a whole, your activity is commercial with an aim to make a profit. If you’re in business, there are dollar thresholds that can affect what you can claim for tax purposes.

If you are unsure of whether your hobby is merging into a business our business services team can help you sort out your circumstances.

We have created a tax tips cheat sheet for you to download to assist with other areas you should be checking at tax time. You can download this cheat sheet by clicking here

Use the form below to contact us or call us on (02) 4353 2333

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