Determining whether you are running a business or a hobby can be difficult. Generally, a hobby is an activity performed in your spare time with the single purpose of enjoyment. If, however, the hobby earns income and begins to make a profit, should it be considered a business?
Whether a taxpayer carries on or business is not defined by law, but is a question of fact and degree. Unfortunately, there is no single factor when making this determination, but the following points need to be considered:
- Do you intend to be in business?
- Have you decided to operate in a business-like manner? This may include an application for a business name or ABN, writing a business plan or opening a bank account.
- Do you intend or genuinely believe you will make a profit from your activities?
- Is the activity repeated and continuous?
- Have you obtained relevant licences and/or permits?
- Are you advertising your goods and services to the public?
- Do you have a business premises?
If the answer is yes to many of the above, then the likelihood is that you are considered a business for income tax purposes, which of course comes with certain obligations.
There are different types of business entities to choose from, and deciding which best suits your situation will determine what you need to report and how you lodge a tax return. There may also be restrictions on your ability to utilise any losses made, or offset these against other personal income.
As a business you are required to record all items of income and expenditure and regardless of whether a profit has been made, report this to the Australian Taxation Office by lodging an income tax return.
Businesses can be registered as Sole traders, Partnerships, Companies or through Trusts.
Your accountant will be happy to discuss your requirements with you, and together determine which entity best suits you and guide you through all ATO and business requirements.
Further references:
https://business.gov.au/planning/new-businesses/difference-between-a-business-and-a-hobby
https://www.ato.gov.au/businesses-and-organisations/starting-registering-or-closing-a-business/starting-your-own-business/are-you-in-business
Other related blogs:
Content creators – Income and GST considerations
What is a non commercial loss?
Author: Jessica Jones
Email: jessicaj@faj.com.au
