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Business Tip - Hobbies – When do you need to declare the income?

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Published on Wednesday, 15 April 2015 15:43

The ATO (Australian Tax Office) provides guidelines about how much can you sell before you need to declare the income like a proper business, the question is whether the activity is a hobby or not. It is not simply based on turnover, but on the intention to make profit and other indicators of formal set-up such as having a business plan.

To determine if a hobby has become a business with income to declare, ask yourself these questions -

1. Does your activity have a significant commercial purpose or character?
2. Do you have more than just an intention to engage in business?
3. Do you have a purpose of profit as well as a prospect of profit?
4. Is there repetition and regularity to your activity?
5. Is your activity carried on in a similar manner to other businesses in your industry?
6. Is your activity planned, organised and carried on in a business-like manner?
7. Does your activity have characteristics of size, scale and permanency?
8. Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?

Each time you answered yes to the questions above, it increases the probability that you are in business though no one indicator is decisive, they must be considered in combination and as a whole.

From the ATO website –

Are you operating a business?

If you are in business:

• The money you earn from your business activities is generally assessable income
• You can generally claim a deduction for the expenses you incur in earning that income
• You may be able to offset any loss you incur against other income you earn or carry the loss forward to offset future income.

If your activities are a hobby, the above points do not apply.

What is an enterprise?

You will often see the term 'enterprise', especially in relation to the ABN and GST. Basically, this term covers commercial activities but does not include hobbies or employment.

Businesses are referred to as enterprises for GST and ABN purposes, and so are the activities of charities and religious institutions.

Carrying on a business includes anything you do in the course of starting or ending a business. Often, the date you start the business is before the business starts to trade.

Characteristics of a business

The following are some factors that courts and tribunals take into account in working out if a business exists for tax purposes.

While no one factor can be used to work out whether you are carrying on a business, taken together they can show whether your activity is a business:

• Does your activity have a significant commercial character? It is important to consider whether you carry on your activity for commercial reasons and in a commercially viable manner.
• Do you have more than just an intention to engage in business? You must have made a decision to start your business and have done something about it. If you are still setting up or preparing to go into business, you might not yet have started the business.
• Do you have the purpose of profit as well as the prospect of profit? Do you intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term?
• Is there repetition and regularity to your activity? Businesses usually repeat similar types of activities, although one-off transactions can amount to a business in some cases.
• Is your business similar to other businesses in your industry? Is the way you operate consistent with industry norms or other businesses in your industry?
• What is the size, scale or permanency of your activity? Is the size or scale of your activity consistent with other businesses in your industry? Is it enough to allow you to make a sustainable profit?
• Is your activity planned, organised and carried on in a businesslike manner? This can be shown using:

1. business records and account books
2. a separate business bank account
3. business premises
4. licenses or qualifications
5. a registered business name.

See a video at the page that explains the difference between hobby or business (there is a transcript available also) scroll down the page.

If you do some work at home but you are not carrying on a business at or from your home, see the following ATO publications for general information about small business tax and deductions for home office etc:

• Starting and running your small business
• Taxation Ruling TR 93/30 Income tax: deductions for home office expensesExternal Link
• Practice statement PS LA 2001/6 Home office expenses; diaries of use and calculation of home office expensesExternal Link.

Why does it matter?

It matters because it may affect if:

· Any money you receive from the activity is assessable income;

· You are entitled to an Australian Business Number (ABN);

· You can or must register for goods and services tax (GST).

Need help? Not sure? Call for FREE 30min Advice / Strategy session today!

Call 0407 361 596 Aust

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