More and more Australians have a ‘side hustle’ or sell products in their leisure time to make a few extra dollars. From arts and crafts such as jewellery design, candle making, sewing to photography, blogging and live streaming there are many hobbies out there that can utilise dedicated platforms to make extra money, without much thought.

There are different legal, tax, record-keeping and insurance obligations between a business and a hobby. There is also a thin line between hobby and business, it is important to know when the income earned from a hobby needs to be reported to the Australian Taxation Office (ATO). If you get it wrong there could be legal ramifications, resulting in tax liabilities and penalties imposed by the ATO.

Difference between a hobby and a business

An individual’s intention and the regularity of the activity can provide a distinction between a hobby and a business. Businesses are set up and operated with the intention of making a profit whereas this is not the primary reason to start a hobby.

Hobbies are usually conducted in an individual’s spare time as a recreational pastime, with minimal income generated, therefore not requiring the individual to pay taxes on that income.

 When your hobby starts turning into a business

There is no single rule to determine when your hobby turns into a business, however the ATO will review several factors when they are determining whether or not your hobby is a business, including;

  • Profit making intention of the taxpayer;
  • If losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there was no plan in place to show how a profit was going to be made;
  • The transaction was isolated and there was no repetition or regularity of sales;
  • Activities are not carried on in the same manner as a normal, ordinary business activity;
  • The activity is carried on a small scale;
  • The intention of the individual is to carry on a hobby, a recreation or a sport rather than a business; and
  • Any product/s are sold to friends and relatives and not to the wider public

 

Are you running a business?

There is no single factor to determine if you are running a business, however if you answer ‘yes’ to most of these questions it’s likely your hobby has turned into a business:

  1. Is your purpose to make a profit and do you believe you have the opportunity to make a profit?
  2. Have you registered a business name or obtained an ABN?
  3. Do you have a business plan?
  4. Do you provide quotes or invoices?
  5. Do you maintain records?
  6. Do you have a separate bank account?
  7. Do you advertise? This includes having a website, via social media and via traditional marketing techniques.
  8. Have you invested capital into the activity?
  9. Is your activity carried on in a similar manner to other businesses in your industry?
  10. Do you use specialised knowledge, skills or qualifications to earn this income?

If you answer ‘no’ to most of the above you are likely engaging in a hobby rather than a business. It is important to assess your activities if they change or grow, so you know when you need to register for tax and other business responsibilities.

Contact our office if you believe your hobby may be becoming a business and want to know what you need to do to ensure you are set up correctly.