More than 11,000 individuals and businesses who may be evading their tax obligations through various online selling websites such as eBay and Gumtree will be targeted by the ATO as a part of its data matching program. Individuals who are involved in selling goods and services of a total value of $20,000 or greater will be targeted. In light of these activities, it is crucial that taxpayers know the distinction between a “hobby” and “business” when it comes to online selling.
The cautionary tale of the turtle seller
A court case in 2010 highlighted the importance of taxpayers knowing the difference between performing a hobby and carrying on an online business. The case centred around a taxpayer that raised and sold over 1,200 turtles. They were sold after being purchased from an interstate supplier and advertised on the internet; payments were then received in both cash and direct deposit. Gross sales were in excess of $100,000 over a three-year period and were not reported on income tax returns.
Although the taxpayer claimed that he was simply enjoying a pastime, the court concluded that he was conducting an online business and therefore the gross income was assessable income. The individual was required to pay the primary tax and additional penalties and costs.
The conviction of the turtle seller serves as a warning of what happens if taxpayers fail to correctly identify that they are carrying on a business.
Checklist for online selling
We have provided a checklist from the Tax Office below which should help you determine if your online selling constitutes a business or a hobby.
1) Did you set up your online sales with the intention of being a business? Does it have a significant commercial purpose or character?
If you set up a “shop” on an online trading or auction site, you may be carrying on a business – this is more likely if you paid fees to operate this “shop”. You are also more likely to be considered a business if it involves commercial sales of product rather than sales to relatives and friends.
2) Do you have more than just the intention to engage in business?
If the online space you sell on looks like a shop, has a brand name, a proper business name and any other signs that people would likely consider to be a business, then you are most probably carrying on a business – again, this is more likely if you paid fees for this to occur.
3) Is your main intention to make a profit?
If the answer is “yes”, you may be carrying on a business. However, even if you do not make a profit, you may still be carrying on a business. If you deliberately buy items to sell online for more money than you paid, then you are likely to be carrying on a business. Conversely, if you sell household goods that you do not want anymore – although you may get a “good price” – it is unlikely to be a business.
4) Do you make repeated or regular sales?
If you sell a number of items every week (or month) for an extended period of time, you may be carrying on a business. These sales could be to the same customer, or a number of different customers.
5) Do you sell your online items for more than cost price?
If your answer is “yes”, you are most likely carrying on a business. For instance, if you make or buy an item cheaply and then sell it online for significantly more than you paid for it, you have made a profit and may need to declare that income.
6) Do you manage your online selling as if it were a business?
In the ATO’s view, you are most likely carrying on an online business if any of the following applies:
• your online selling activity is organised, methodical, and has systems and processes in place
• your activity has characteristics of size, scale and permanency
• you have invested sufficient capital in the activity
• you advertise your online space
• you give quotes and supply invoices, and keep some or all of your records
• you have a business plan
• you use specialised knowledge or skills
• you have prior experience in the activity’s area
• you have conducted ample market research
• you spend a significant amount of time on the online activity
• the activity is your main income-earning activity rather than a part-time sideline project
• you sell your items in a similar manner to other businesses in your industry instead of in an ad hoc manner, and
• your activity is better described as a business, rather than a hobby, recreation or sporting activity. Common areas where people are likely to carry out a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.
7) Is what you are selling online similar or the same as to what might be sold in a “bricks and mortar” business?
If the items or services you are selling are reasonably easy to find in an offline store, then you are probably carrying on a business and these sales should be included as business income.
Note: Each time you answer “yes” to a question, the likelihood that you are carrying out a business increases. However, all the questions need to be considered together to get an accurate picture of your situation as no one indicator is decisive – consult this office to discuss your personal circumstances.
Why is it important if my online activity is a business?
The classification of whether a taxpayer is conducting a business is critical as there are a number of tax and reporting obligations that have to be fulfilled. Obligations that are imposed if you are conducting a business typically include:
• online sales income will have to be declared as assessable income; however, expenses incurred in earning this income will generally be deductible
• an Australian business number (ABN) may need to be applied for
• you may be required to register for goods and services tax (GST) in some cases
• accurate records of expenses and sales will need to be kept in line with legal requirements, and
• if the online activity results in a loss, you may be entitled to offset this loss against other income or carry it forward to offset against future income.
Important: Your ability to apply current year tax losses from business activities against other income (such as salary and wages) are subject to the non-commercial loss rules under tax law – consult this office for details.
The case studies below further explain the distinction between carrying out a hobby or a business – first focusing on an individual that sells online but is not conducting a business, and then on an individual who sells online but is a business.
Selling online but not as a business
Camille wants to clear her wardrobe of excess clothing, and decides to list them as on sale on the internet. Some of the items sell for more than her buying price, others for less. She charges the buyers postage and receives a total of $2,065.
Conclusion: Camille is not carrying on a business because she:
• did nothing to improve the value of the items
• does not sell any more items for a long time
• does not pay the online auction site for a “shop” space
• generally receives less than the original purchase price of the clothes, and
• has no intention to sell clothes online as a business.
Selling online as a business
For two years, Jim from J’s Carpentry has had a listing on Gumtree for selling his carpentry work.
Even as his business gets busier and he needs to employ someone, Jim still uses the same Gumtree listing because he is now established and has good ratings – he does not want to disadvantage his business. He continues to use this site to sell his work and services and makes over 1,000 sales per year at a total value of $100,000.
J’s Carpentry also trades offline and reports an annual income of $458,000. He has an ABN and is registered for GST. Jim does not include the income from his online sales, but he does claim the GST credits.
Conclusion: Jim is carrying on a business and is avoiding his tax obligations by:
• not reporting all his income, and
• claiming the GST credits for the online portion of his work.
Jim should immediately amend the relevant income tax returns to include his online sales.
Consult this office for further information on how to determine if you are partaking in a hobby or online business. There are various tax implications which may ensue from miscategorising your online activities.