A Business or a Hobby?
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 .com.au 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:
- Talk to a legal advisor, accountant or business advisor who can help you decide by looking at your earnings and situation.
- 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
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