Do I operate as a Hobby or a Business and what are the Tax implications?
An important distinction in the 'world of tax' is the difference between a “business” and a “hobby”. Simply put, income received in the course of business is assessable income and is counted towards tax, whereas income received as a result of a hobby is not.
There is no single factor which determines if your income producing activity is a business or hobby, however, weigh these characteristics in mind:
Is there intent to start a business, and started preliminary steps to become a business (ie obtain an ABN)?
If yes, leaning towards business
If no, leaning towards a hobby
Is there intention to make profit (even if unlikely to do so in the short term)?
If yes, leaning towards business
If no, leaning towards a hobby
Is your size/scale consistent with your industry?
If you’re the size worthy of becoming competition in your industry, then you are likely to be operating a business
If you sell a knitted scarf to a friend every now and then, this is more likely a hobby
Is your activity planned and organized like other businesses?
If you keep accounts, reports, separate bank accounts, operate at another premises, have a registered business name; then these activities mean you operate a business
If the activity is infrequent or on a whim with no records kept, you more likely have a hobby.
Income from a hobby is not taxable, and there is no reporting obligations to keep. However, if you sell goods or services to a business (and don’t have an ABN to provide as this is a hobby), you will need to provide a ‘Statement by a supplier’ form to the business so they don’t withhold any payment because an ABN was not provided.
Remember, a hobby can grow into a business. Where the line is crossed largely comes down to the way the activity is conducted. Once a hobby becomes a business, income received will be taxable and there will be reporting obligations to keep.
Disclaimer
This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice
