Many small businesses start out as a hobby: from occasionally selling goods online eg eBay, Gumtree, Marketplace or at local market stalls, to buying and selling muscle cars, to performing occasional gigs at a local cafe, or promoting a product on Instagram. And what might have started as a hobby can unexpectedly turn into a business, without you realising the point of crossing from one to the other.
Therefore, it’s important to be able to recognise the difference between a hobby and a business, because there are various tax, insurance, employment and legal implications. Many people mistakenly believe that there is a dollar threshold that determines whether you are in business. However, that's not the case, it's actually about how you conduct that activity and the individual facts of your situation.
Business
When you are running a business, you need to apply for an Australian Business Number (ABN), keep proper records, and include the income and deductions in your tax return. You will be taxed on the profits (like any other taxable income).
Businesses have the following characteristics:
✔️ The activity is planned, organised and carried on in a businesslike manner. This may include keeping business records, operating a separate business bank account, having licences or qualifications, having a registered business name and operating from a dedicated business premises.
✔️ The size or scale of the activity is consistent with other businesses in the industry.
✔️ The activities are regular and repeated.
✔️ Your intention, purpose or prospect is to make a profit, even unlikely to do so in the short term.
✔️ The taxpayer made a decision to start a business and has registered an ABN or applied for a business name.
Hobby
A hobby is generally seen as a pastime or leisure activity conducted in your spare time for recreation or pleasure.
A hobby has the following benefits:
✔️ you achieve personal enjoyment and satisfaction
✔️ you can gift or sell your work for the cost of materials
✔️ you can do it in your own time
✔️ you don't have the tax or reporting obligations of a business which means you don’t need to declare the income you make and also can’t claim any expenses or losses from your hobby.
If your activities are a hobby but you supply goods or services to businesses, they may request your ABN when they pay you. For payments more than $75, to ensure they don't withhold 47% from your payment because you don't have an ABN, provide a 'Statement by a supplier' form that provides the justification that they need not withhold tax.
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