It may seem fairly obvious whether a person is in business or not, but the distinction can be important for other reasons.
It's important to establish, from a tax point of view, whether your “activity” is more than a hobby, and is in fact a bone fide business. Hobbies are activities which lack a profit motive, amongst other factors, and just as you don’t have to pay tax on hobby income you cannot claim hobby expenses as losses against other income. However, some hobbies can display certain characteristics of a business at some point, which may give rise to taxable income.
It is an ongoing issue, from the ATO’s point of view. “A hobby is a spare-time activity or pastime pursued for pleasure or recreation,” the ATO said in a recent document on the topic. “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.”
Some years ago, a court case involving turtles was initiated by the ATO. Breeding and selling turtles was seen as running a business, with substantial tax and penalties charged on three years of undeclared profits. The turtle enthusiast claimed to be simply funding a personal hobby, but there was found to be significant financial purpose and viability in his online sales.
It's worth bearing in mind - In this era of e-commerce the ATO has become more sophisticated in obtaining data for their audits.
Of course, if a LOT of money being made, the ATO are more likely to look at it as a business. However, when determining if a person is conducting a business or a hobby the ATO considers the common-law business indicators.
There is no set gross money limit that indicates a business.
It is therefore important to know the difference between a hobby and a business. To help, the ATO has come up with a set of guidelines. It says that there is no single rule that determines if you're in business.
The following are indicators that you may be in business:
- 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.
We refer many of our creative clients to Taxation Ruling TR 2005/1 Income tax: Carrying on a business as a professional artist, which you can access here.
The same principles apply broadly to all manner of activities and lack of profits does not necessarily mean someone is not in business. However, it is acknowledged that arts businesses have different characteristics to other businesses - they may sustain lower income and losses for a longer period while building reputation and creating a niche market.
To also help, the ATO has devised a “Hobby or business?” decision tool (access this here). Note that it is hosted on the business.gov.au site, and is not a tax-specific tool as it mentions other criteria such as consumer law.
If you do determine that your activities are indeed a hobby, the ATO will generally not expect that you to have any tax reporting obligations. You will not be entitled to an ABN. The ATO does advise, however, that taxpayers should check on a regular basis to make sure activities still qualify.
On a related note, the ATO say even if your activity is a hobby, but you supply goods or services to businesses, they may request an ABN when they pay you. “As you don’t need an ABN,” it says, “you can use the “statement by supplier” (hobby form) to avoid the business withholding an amount from their payment to you for not having an ABN.”