It is a common misbelief that there is a dollar threshold that determines whether you are in business or not. Once you are in business, a dollar revenue threshold can affect your tax obligations, but it does not differentiate between a hobby and a business.
It is important to be able to recognise the difference between a hobby and a business because there are different tax, insurance and legal implications associated with each. In addition, hobbies producing an income can sometimes grow into businesses so it is important to regularly consider your activity so you know if your hobby has evolved into a business.
Sometimes it’s difficult to know whether your activity should be defined as a hobby or a business, especially if you are testing a new idea to see if it works. But the easiest place to start when it comes to distinguishing between the two activities is to know what they are and what they involve.
How do I tell if my activity is a hobby or a business?
Essentially, an activity that is organised in a business manner and involves making a profit could be considered a business.
According to the Australian Taxation Office (ATO) “a hobby
is a pastime or leisure activity conducted in your spare time
for recreation or pleasure” and does not have the reporting
obligations of a business.
When does the ATO consider my hobby a business?
Whilst there is no single factor that determines if your activity is a business, there are various factors that could indicate your hobby is a business for tax purposes.
Consider the following questions when determining if you are in business or pursuing a hobby-
How much time do you spend undertaking the activity?
Does the activity generate any income?
Does the activity generate or intend to generate a profit?
Do you have a Business Plan?
Is there a significant amount of money or capital invested?
Have you taken out loans or approached investors?
Have you spoken with consultants or advisors such as tax accountants or lawyers?
Are you organised in a business manner?
What is a business?
Generally, a business involves a set of continuous and repeated activities you undertake with the purpose of making a profit. Profit can be in money, but it can also be through other means, like being paid with good or services.
A one-off transaction can also be a business if it is either:
intended to be repeated
the first step in starting a business.
One of the main ways to tell if you’re operating a business is if
you engage in the activity with the aim of making a profit.
The more of the following questions where you answer yes, the more likely the activities you are undertaking would be a business:
Do you intend to be in business?
Is the size or scale of your activity enough to make a profit?
Are the activities repeated and continuous?
Are you doing the activity for commercial reasons?
Do you undertake the activity with the main intention of making a profit?
Do you perform the activity on a regular basis?
Are your activities planned, organised or carried out in a business-like manner? For example, do you:
Keep business records and have a separate business bank account?
Advertise and sell your goods and services to the public, rather than just to family or friends?
Maintain records to manage your finances (income and expenses)?
Operate from business premises?
Maintain required licences or qualifications?
Have a formal business plan or budget?
Have a business name or an ABN?
For a full list, download our Hobby or Business checklist -
You can also be considered a business even if you haven’t actually started trading yet, but you have made a decision to start and have been doing things in order to operate in a businesslike manner.
You can run one business or multiple businesses at the same time but not everything you do to make money is a business.
Your activities are not a business when they are:
• a one-off transaction (unless it is the first step in carrying on a business or intended to be repeated)
• done as an employee
• a hobby or recreation from which you don't seek to profit
• a simple investment, such as passively holding shares or a rental property
When a company is not in business
Most companies are in business if they intend to and are likely to make a profit.
However, some companies are not in business. For example, a company is not in business if it:
• holds assets solely for its shareholders' private use, and its running costs are funded solely by its shareholders
• provides social and recreational activities for members without seeking to make a profit.
What Is a Hobby?
A hobby generally takes the form of an activity you do in your free time, for your own personal enjoyment or satisfaction. You are in complete control of all aspects of the hobby. You can choose to keep your hobby private, give your products as presents, or even sell them for the cost of materials. When your activity is a hobby, you don’t need to worry about reporting obligations, such as declaring income amounts, to the Australian Taxation Office (ATO) as part of your tax return.
When does your business start?
Income-earning hobbies can grow into a business so it helps to keep an eye on any changes you experience in terms of income. Knowing when your hobby becomes a business will make sure you are ready to take on the obligations of running a business and avoid any penalties for not reporting your business activity.
Understanding when your business starts may also affect:
how tax laws apply to your activity and the assets you use in that activity
the tax concessions or deductions available to you.
Your business starts when you have more than an intention to be in business and have:
made the decision to start the business
acquired the minimum level of assets to start running your business
started your business activities.
Have your activities changed?
If your activity changes in a major way you must reassess whether you are in business. For example, this could be if:
you are now making a profit or now have an intention to do so
your activity was originally a hobby but you make arrangements to make money from it, such as selling online
you are in business but change, pause or stop your activities.
Why Would You Want to Operate a Business?
You might be wondering why you should start a business if you can make a bit of extra money with your hobby without dealing with reporting and tax obligations.
One of the biggest advantages to operating a business is that you will be able to apply for an Australian Business Number (ABN) – a unique 11-digit number that will identify you in your business dealings – from ordering materials from suppliers to invoicing your own customers.
And very importantly, possessing an ABN will enable you to purchase an Australian “.com.au” domain name for your website.
Other benefits of running a business include:
gain access to government concessions for business
establish a business identity when selling to customers and other businesses
claim tax deductions for business expenses against your taxable income
My Hobby generates revenue – do I need an ABN?
As a hobby is not a business, you would not be entitled to an ABN.
However, if you sell goods or services to businesses, they may ask you for an ABN when they pay you. You can use a Statement by a Supplier form to avoid the business withholding 47% from payments they make to you for not having an ABN. The statement lets the business know that you are selling the goods or services as your hobby.
You can download the Statement by a Supplier form here:
If my activity is a hobby, do I need to do anything?
If you believe your activities are a hobby, you do not have any tax or reporting obligations.
I think I am running a business…now what?
Running a business has tax implications. All revenue generated by your business activity forms part of your assessable income and may incur tax and any expenses incurred in earning this income are deductible. Business losses can also generally be offset against other income if the ATO requirements are met.
If you believe that you are operating a business, you will need to:
Make sure you apply for ATO registrations such an Australian Business Number and potentially, goods and services tax.
Consider which business structure is most appropriate to your needs.
Declare your income to the ATO in an annual tax return
Keep records for your business for tax purposes and other obligations.
Still not sure if you are operating a hobby or running a business?
The lines between having a hobby and a business can be difficult to determine, so if you are confused as to your circumstances, it is a good idea to seek advice that is specific to your circumstances.
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