You may be unsure whether you’re in business, or your activity is just a hobby. A hobby is a spare-time activity or pastime pursued for pleasure or recreation. Unlike a hobby, a business is run with the intention of making a profit and has basic reporting requirements, such as declaring income and claiming expenses. It’s important to know the difference between a hobby and a business.
Characteristics of a business
There is no single rule that determines if you’re in business, but below are indicators that you may be.
- You’ve made a decision to start a business and have done something about it, such as registered a business name or got an ABN.
- You intend to make a profit or genuinely believe you’ll make a profit from the activity, even if you’re unlikely to do so in the short term.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include
- keeping business records and account books
- having a separate business bank account
- operating from business premises
- having licenses or qualifications
- having a registered business name.
If you determine that your activities are a hobby, you don’t have any additional tax or reporting obligations. You should check regularly to make sure your activities still qualify as a hobby.
If your activities are a hobby but you supply goods or services to businesses, they may request your ABN when they pay you. As you don’t need an ABN, you can use the Statement by a supplier form to avoid the business withholding an amount from their payment to you for not having an ABN.
Online selling
If you sell products or services online, you need to understand whether you are doing it as a hobby or carrying on a business.
When selling online becomes a business, the income you earn from it is subject
to tax. If this is the case, you may also be eligible for tax deductions.
Quick checklist
There are questions you can ask yourself to work out if you are undertaking a hobby, or carrying on a business that should be declaring income:
- Did you set up your online sales with the intention of being a business?
- Do you pay for your online-selling presence?
- Is your main intention to make a profit?
- Do you make repeated or regular sales?
- Do you sell your online items for more than cost price?
- Do you manage your online selling as if it were a business?
- Is what you are selling online similar or the same as what might be sold in a ‘bricks and mortar’ business?
Each time you answer ‘yes’ to a question the likelihood that you are carrying on a business increases. However, all of the questions need to be considered together to get an accurate picture of your personal situation.
Do you sell or trade shares online?
A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares – this is considered a business. If you simply hold shares to earn income, this is not considered a business.
Do you fall into the business category if so you will need to apply for an ABN straight away. Call Taxwise on 08 9248 8124 to chat about setting up an ABN or click here to apply online.
