When does an income-earning hobby end – and a business begin? It’s an important question for small operators to ask, but particularly if activities expand or evolve. While hobbies and businesses can be similar in some respects, they are viewed in very different ways by the ATO.
Perhaps you’ve been making your own crafts but have spotted an opportunity to sell them at markets. Or you’ve been offering graphic design services for family and friends, and are now getting other enquiries. Are you still pursuing a hobby or running a business? Here’s how to find out.
First things first… what is considered a hobby?
A hobby is an activity or pastime that you carry out in your own time for enjoyment or personal satisfaction. While you can sell your services to cover the cost of materials, you don’t have the same reporting obligations as a business. Basically, it is a leisure activity and you don’t need to declare your income on your tax return.
And what is a business?
A business on the other hand is generally run for commercial reasons. You will expect to make a profit from the activity, even if it is not immediately. You are required to keep records of your activities and declare any income you made in your annual return. You will also be able to claim certain business expenses as tax deductions.
As a business, you can apply for an Australian Business Number (ABN), which will then allow you to register a website address ending in .com.au
So is it a business or a hobby?
So how can you determine whether you are running a business? Start with a few questions.
· Is your activity planned, organised and managed in a businesslike way?
· Does it resemble other operations in the same industry that are businesses?
· Did you discuss or take a decision to start a business?
· Do you have business premises or operate business hours?
Sometimes, the most telling question is also the simplest. If someone was looking at your activity from the outside, would they assume you were running a business – or pursuing a pastime?
Follow your passion and see how far you can go.
In the event that your hobby has become a business, there is plenty of help available to help you manage and grow it. There’s a wealth of information on the ATO and business.gov.au websites, or you can talk directly to a business adviser.
Expanding a hobby into a business and exploring its income-earning potential is an exciting time, but it’s important to know your tax, insurance and legal obligations first. Once you do, the sky’s the limit for you and your business.
History is full of examples of people who started off with little more than a passion and a pastime, and ended up running successful, profitable businesses. Is there any reason why you shouldn’t be one of them?