Is This A Hobby Or A Business?

Is This A Hobby, Or Am I Running A Business?

When you find yourself questioning whether your activity is a hobby or a business, it often feels like there is no clear-cut answer. Many businesses start as hobbies, and there will come a time when you need to determine which category your activity falls into.

To ensure you file your taxes correctly, your accountant can help you compare the characteristics of your hobby with those of a business. This comparison will ensure that you manage your tax obligations in the most effective manner possible.

Let’s get straight to the point

When your hobby starts generating income, it’s crucial to determine if it has become a business for tax and management purposes.

To decide, consider whether you have registered an ABN and business name and set up dedicated contact information. Engage in activities expecting profit, perform them regularly, compare your scale to similar businesses, and maintain accurate records and licenses.

A hobby is done in spare time for personal satisfaction, with earnings covering costs. It is generally exempt from tax reporting unless providing goods or services to businesses.

An example is Darren, who transitioned from selling inherited antiques as a hobby to running an online store, advertising, and making substantial sales, indicating a business.

To turn a hobby into a business, define your structure, build a strong brand, secure funding, and organise your workspace.

Determining Your Business Status

You are likely running a business if your primary goal is generating income. There is no single criterion to establish this, but consider the following factors:

• Professional Setup: Have you taken steps to start and operate your business professionally? This includes obtaining an ABN, registering a business name, and setting up dedicated contact information.
• Profit Intent: Do you engage in activities with the expectation or reasonable belief of making a profit? This includes investing time and resources with the intention of financial gain.
• Repetitive Actions: Are you repeatedly performing the same activities? Regularity and consistency in your activities can indicate a business.
• Commercial Scale: Is the scale of your activities comparable to other businesses in your industry? If your operations are similar in size and scope to other businesses, this suggests you are running a business.
• Record-Keeping: Are you maintaining accurate business records, separate bank accounts, and operating from a location with the necessary licenses? Proper documentation and organisation are essential for business operations.

These considerations are important whenever the scope of your activity changes. Knowing when to register your business for taxes and other obligations is crucial.

What Is A Hobby?

A hobby is an activity you engage in for personal enjoyment, not primarily for financial gain. Characteristics of a hobby include:

• Personal Satisfaction: You engage in the activity for personal satisfaction, not financial support.
• Cost Recovery: Any money made from selling products is often used to cover the cost of materials.
• Leisure Activity: You perform the activity in your spare time without external pressures or deadlines.
• No Reporting Requirements: You are not required to report your hobby for tax purposes as long as it remains a leisure activity.

If your hobby involves selling goods or services, businesses might request your ABN. If you don’t have an ABN, you can use the “Statement by a Supplier” form from the ATO to avoid having amounts deducted from your payments.

Example: Hobby Becoming a Business

Darren started an online shop to sell antiques inherited from his grandmother. Initially, it was a hobby, but over time, he began actively seeking out antiques to buy and sell.

Despite his full-time job and viewing it as a hobby, Darren’s activities — including maintaining a dedicated online store, advertising on Facebook, and making substantial sales — indicate he is running a business.

Steps to Turn a Hobby into a Business

• Business Model: Decide whether you will operate from home, alone or with a partner and whether you need to outsource any tasks. Determine if you will sell products or provide services and how you will reach your customers — online, in-person, or a combination of both.
• Brand Building: Develop a strong brand, including your brand voice, visual guidelines, and brand story. Your brand should be reflected in your website, social media presence, and all customer interactions.
• Financial Planning: Assess your financial needs and explore funding options if necessary. This might include applying for small business loans or grants or using personal savings to invest in your business.
• Operational Efficiency: Organise your workspace and streamline processes to improve efficiency and meet legal requirements. Consider ergonomics, workflow, and safety standards to ensure a productive working environment.

Conclusion

Turning a hobby into a business involves careful planning and clearly understanding your activities.

Whether you continue to treat it as a side gig or transition into a full-time business, keeping track of your activities and maintaining professional standards will ensure your success. 

Frequently Asked Questions

What Licenses Or Permits Do I Need?

Requirements vary by industry and state. The Australian Business Licence and Information Service (ABLIS) can help identify relevant licenses or permits based on your business activities.

How Do I Hire Employees?

When hiring, you must comply with Fair Work Australia’s guidelines, including minimum wage, employee rights, and workplace safety. You also need to register for PAYG withholding to manage employee tax obligations.

How Can I Fund My Business?

Funding options include personal savings, bank loans, venture capital, or grants. Check government grant options, which may provide financial support for small businesses and startups.

How Do I Manage Taxes And Reporting Requirements?

Australian businesses must lodge a Business Activity Statement (BAS) with the Australian Tax Office (ATO) regularly, reporting GST, PAYG withholding, and other relevant taxes. Small business owners often work with accountants to stay compliant.

Do I Need Insurance?

Yes, business insurance is vital. Public liability, product liability, and professional indemnity insurance are common types, depending on your industry. Workers’ compensation is mandatory if you employ staff.