Sometimes it’s difficult to know whether your activity should be defined as a hobby or a business.
This is especially true in the start-up phase, when you are testing a new idea to see if it works.
It’s important to be able to recognise the difference between a hobby and a business, because there are various tax, insurance and legal implications. Keep in mind that hobbies producing an income can sometimes grow into businesses. It’s therefore essential to regularly monitor the situation and avoid complications down the track.
How do I tell if my activity is a hobby or 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. While there is no single factor that determines if your activity is a business, there are various things that could indicate that it is a business for tax purposes.
The easiest way to determine if you have a business or a hobby is to consider a few simple questions:
- Is the activity being undertaken for commercial reasons?
- Is your intention, purpose or prospect to make a profit?
- Are you regularly undertaking the activity?
- Is your activity planned, organised and carried on in a business-like manner?
If you answer yes to two or more of these questions, it would be reasonable to assume that you are operating a business.
Many people mistakenly believe that there is a dollar threshold that determines whether you are in business or not. Once you're in business, a dollar threshold can affect your tax obligations but it doesn’t determine the difference between a hobby and a business.
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 additional tax or reporting obligations.
However, you may need to meet certain requirements to transact with a business, for instance providing a ‘Statement by a supplier’ to avoid businesses withholding the top rate of tax (47%) from any payment made to you. In addition, you can’t claim any losses from your hobby.
So I think I’m running a business…now what?
Running a business has some significant tax implications. All revenue generated by your business activity (or enterprise) forms part of your assessable income and may incur tax. On the upside, any expenses incurred in earning this income are deductible and any losses can be offset against other income.
If you believe that you are operating a business, you will need to:
- Make sure you apply for various 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 your annual tax return and
- Keep records for your business for tax and other obligations.
In addition, you may need certain licences or permits to run your businesses. You can check out the licencing obligations using our free Business Licence Finder.
When your hobby transforms into a business, we have a range of support and advice available for you, including our article 8 steps to starting your business and our free Starting a Business workshop to get you across all the essentials of running a business. You can also get free and confidential advice from of our experienced business advisers by calling 133 140.