Is This A Hobby Or Am I Running A Business?
When you’re at the stage of asking this question, it’s often the case that there’s no right answer. Many businesses will start out as hobbies, and there will be a point when you could say it’s either. Your accountant can help you consider the differences in the characteristics of commercial business and a hobby to make sure you’re lodging your taxes correctly.
Am I Running A Business?
You’re in business if your activity, as a whole, is commercial and aims to make a profit. There is no single factor that determines if you are in business, but some of the factors you need to consider include:
- You’ve taken steps to commence and operate in a business like manner, such as obtain an ABN and registered a business name or separate contact details for the business like an email or phone.
- You intend to make a profit – or genuinely believe you will make a profit from the activity.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organized and carried out in a business-like manner. This may include:
- keeping business records and account books
- having a separate business bank account
- operating from business premises
- having licenses or qualifications
- having a registered business name.
If you aren’t in business yet it is important to keep these factors in mind as your activities change or grow, so you’ll know when you need to register for tax and other business responsibilities or give your accountant a call to discuss.
What Is A Hobby?
Hobbies are pastimes or leisure activities conducted in your spare time for recreation or pleasure. A hobby may have the following characteristics:
- You can gain personal enjoyment and satisfaction from the activity, not because you need the money.
- You can gift or sell your work for the cost of materials.
- You can do it in your own time or when people contact you.
- You have no reporting obligations of a business.
If you determine your activities are a hobby, then you do not have any additional tax or reporting obligations. If your activities are a hobby but you supply goods or services to businesses, they may request your ABN when they pay you.
However, in this situation you do not have an ABN since your activity is done as a hobby, you are able to use the Statement By A Supplier ATO form. This will avoid the business you are supplying having to withhold an amount from their payment to you.
You can’t claim any losses from your activity if it’s a hobby.
Income-earning hobbies can sometimes grow into businesses. Make sure you monitor any change in income or practices so that you’re aware of your obligations before they happen. Once your hobby becomes a business, you may need additional licenses and permits specific to your type of business.
An Example Of A Hobby Becoming A Business
Darren sets up an online store to sell antiques from his grandmother’s estate after her death. The online store and website cost him $1,400 for the year. Some of the items are quite valuable and the total value of the sales is $34,000.
During this time, Darren discovers he enjoys the activity and starts looking for other antiques to sell. He scours Facebook Marketplace, garage sales and antique shops. He pays cash for the antiques and begins to repair antiques and sell them through his online store as well. Darren considers this is a hobby, as he only looks on the weekends, pays cash and has a full-time job.
Although he doesn’t pay to advertise, Darren has more than 1,000 visits per month to his website via a Facebook page he has set up, where he posts photos and details about the items for sale on a regular basis.
In addition to the sale of his grandmother’s estate, Darren has total sales of $26,950 from 150 items sold during the financial year.
Darren is carrying on a business, even though his sales started off as a hobby. He should declare his online income because he:
- has a specific online store for his antiques
- advertises his antiques (although at no cost) through Facebook
- repairs and resells them for a profit
- makes repeated sales over an extended period of time.
The sales from his grandmother’s estate do not need to be declared as income, but his other sales should be declared as income.
Online selling is often a business. Over the past few years the ATO has began to data match many online marketplaces against the information they have in people’s tax returns to make sure that all relevant income is declared.
To discuss your circumstances, please give us a call on (03) 8568 3606. With over ten years of combined experience working with a diverse range of clients, Bookkept is well equipped to assist your business or hobby – no matter how big or small!