It may seem fairly obvious whether a person is in business or not, but the distinction can be important for other reasons. Your client may be having fun AND making money. But is it a business or a hobby?
For example, if you are not carrying on a business, the option to deduct losses from other income is lost. So it’s important to establish, from a tax obligation point of view, that your “activity” is more than a hobby, and is in fact a bone fide business. Losses from hobbies (including most party plan ventures, such as Tupperware parties) are not deductible against other 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.”
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, but the following 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.
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 will have additional tax or reporting obligations. It 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” form to avoid the business withholding an amount from their payment to you for not having an ABN.”