"I'm earning $375k in sales, but I'm only running a hobby, so it's tax free"
This blog post is for you ^
Are you unsure whether you're running a business or pursuing a hobby? This is an important distinction to make when it comes to your tax obligations in Australia. Running a business means you need to register for an Australian Business Number (ABN), register for Goods and Services Tax (GST), and report your income and expenses in your tax return.
Pursuing a hobby means you do not need to register for an ABN or GST, your income is tax free and you cannot claim deductions for any losses you incur (don't even try it...).
So, how do you determine whether you're running a business or pursuing a hobby? Let’s take a deep dive into the following characteristics defined by the ATO:
Profit Motive
Regularity & Repetition
Size & Scale
Commerciality
Records & Procedures
It’s important to understand that there is no set rule, or requirement which makes your activity a business over a hobby. It is completely subjective. As such, a decision needs to be weighed against a variety of the below characteristics:
Profit motive: Are you pursuing your activity with the intention of making a profit? This is a key factor in determining whether you're running a business or pursuing a hobby. If you're pursuing your activity with the intention of making a profit, you're likely running a business. If you're pursuing your activity as a hobby and not with the intention of making a profit, you're likely pursuing a hobby.
Example: John enjoys painting and occasionally sells his paintings at local markets. He does not actively seek out customers or market his paintings. John is likely pursuing a hobby.
Regularity & repetition: Do you engage in your activity regularly and repeatedly? Engaging in your activity on a regular and repeated basis is a strong indicator that you're running a business.
Example: Sarah is a freelance graphic designer who takes on clients on a regular basis. She has a website, markets her services, and actively seeks out new clients. Sarah is likely running a business.
Size & scale: Is your activity on a large scale, with significant investment in time, money, and resources? If your activity is large in size and scale, it's more likely that you're running a business.
Example: Tom has a YouTube channel where he creates and uploads videos regularly. He invests a significant amount of time and money into creating his videos and has a large following. Tom is likely running a business.
Commerciality: Is your activity commercial in nature? If you're engaging in an activity with the primary purpose of making a profit, it's more likely that you're running a business. If it your activity is seen to be a commercial activity, in the eyes of the ATO then they may argue that you are actually running a business. Think; are you actively advertising, do you own commercial vehicles, rent commercial premises?
Example: Kate sells handmade soap at local markets and online. She actively markets her soap and has a website where customers can purchase her products. Kate is likely running a business.
Records & Procedures: Do you keep up to date and accurate records on your activities? Generally, you will be in business if you are operating like a normal business would. This includes keeping business records and accounts, owning a registered business name, or having a separate business bank account.
In summary, if you're pursuing your activity with the intention of making a profit, engage in your activity regularly and repeatedly, invest a significant amount of time, money, and resources, and your activity is commercial in nature, you're likely running a business. If you're pursuing your activity as a hobby and not with the intention of making a profit, you're likely pursuing a hobby.
It's important to determine whether you're running a business or pursuing a hobby, as this will affect your tax obligations. If you're running a business, you need to register for an ABN, register for GST, and report your income and expenses in your tax return. If you're pursuing a hobby, you cannot claim deductions for any losses you incur. If you're unsure about whether you're running a business or pursuing a hobby, it's a good idea to seek advice from a qualified accountant.
If you need help determining whether you're running a business or a hobby, or if you need assistance with your tax obligations, contact Maurer Taxation today. Our team of qualified accountants can help you navigate the complex world of taxation and ensure you're meeting your obligations under Australian law.
P: 0438 960 990
