Quite often we get asked by our clients if their side hustle would actually be considered a hobby (and thus not required to be disclosed in their personal income tax return). In 95% of these cases, the answer ends up being that the client is running a legitimate business.
Determining whether your activity falls into the category of a hobby or a business can sometimes be challenging, particularly during the initial phases when you’re testing a new idea to assess its viability.
Recognising the distinction between a hobby and a business is crucial because it carries various tax, insurance, and legal implications. Hobbies which generate income may eventually evolve into full-fledged businesses, so, it’s essential to periodically assess your situation to prevent complications in the future.
How can you discern whether your activity is a hobby or a business?
According to the ATO, a hobby is defined as a pastime or leisure pursuit conducted in your free time for personal enjoyment or recreation. Hobbies do not entail the reporting obligations associated with businesses.
While there isn’t a single determinant for classifying your activity as a business, several factors can suggest that it falls under the business category for tax purposes.
The simplest way to determine whether you’re running a business or pursuing a hobby is to consider a few key questions:
• Is the activity pursued for commercial purposes?
• Do you intend, aim, or anticipate making a profit?
• Is the activity regularly undertaken?
• Is your activity conducted in a planned, organized, and businesslike manner?
• If you answer affirmatively to two or more of these questions, it’s reasonable to conclude that you are indeed operating a business.
It’s important to note that there is no fixed monetary threshold that defines whether you are engaged in a business or not. Once you are in business, income levels can affect your tax obligations, but they do not determine the classification between a hobby and a business.
If you believe your activities are primarily a hobby, you don’t have any additional tax or reporting obligations. However, you may need to meet specific requirements when transacting with businesses, such as providing a ‘Statement by a supplier’ to prevent businesses from withholding the highest tax rate (47%) from payments made to you. Additionally, you cannot claim any losses incurred from your hobby.
Tip:
If you are a social media influencer or content creator, the ATO provides tax tips to assist you with the necessary tax declarations and deductions.
So, if you believe you are operating a business, what’s next?
Running a business carries significant tax implications. All income generated by your business activities becomes part of your assessable income and may be subject to tax. On a positive note, you can deduct expenses incurred in earning this income, and any losses can offset other income.
If you believe you are running a business, here are the steps to follow:
• Ensure you apply for various registrations, such as an Australian Business Number (ABN), and potentially goods and services tax (GST) registration.
• Consider the most suitable business structure based on your needs.
• Report your income to the ATO in your annual tax return.
• Maintain accurate records for your business to meet tax and other regulatory obligations.
• Additionally, you may require specific licenses or permits to operate your business.
Further Information
When your hobby evolves into a full-fledged business, we offer a range of support and guidance, including our free (new and improved) business setup guide available for download from the resources section of our website.
Grab your copy today!
