Many small businesses start out as hobbies. Perhaps you occasionally sell at markets or online, or perhaps you sometimes use your skills to help family and friends.
While these activities may not be considered a business, the more formal and regular your selling activities become, the more likely you are to be considered a business and subject to the legal and tax obligations that accompany that status.
So, when does a hobby become a business?
This is an important question because businesses pay tax while hobbies don’t.
You don’t want to do the wrong thing in the eyes of the ATO, but you also don’t want to register before you have to and deal with unnecessary tax and paperwork.
As a general rule, you are in business as soon as you start doing business-like things with the intention of making a profit. This may include printing business cards, advertising, launching a website or a business page on social media.
Am I running a business?
There is no single factor that determines if you are undertaking a business activity. If you answer ‘yes’ to most of the questions below it is quite likely that you are running a business:
- Is your purpose to make a profit and do you believe you have the opportunity to make a profit?
- Have you registered a business name or obtained an ABN?
- Do you have a business plan?
- Do you provide quotes and invoices?
- Do you maintain records?
- Do you have a separate business bank account?
- Do you advertise? This includes having a website, via social media, and via traditional marketing techniques.
- Have you invested capital into the activity?
- Is your activity carried on in a similar manner to other businesses in your industry?
- Do you use specialised knowledge, skills or qualifications to earn this income?
If you answered ‘no’ to most of the above you are most likely engaging in a hobby rather than a business. However, it’s important to keep reassessing as your activities change or grow, so you’ll know when you need to register for tax and other business responsibilities.
What do I need to do if I my activity is a hobby?
If you determine your activities are a hobby then you don’t have the tax or reporting obligations of a business. You are able to gift or sell your work for the cost of materials and can’t claim any losses.
If your activity is a hobby, you may need to meet certain requirements to transact with a business. When making a purchase, a business generally collects the seller’s ABN, otherwise it must withhold 49% of the payment for tax purposes.
Since you’re not in business, and therefore not entitled to an ABN, you need to provide evidence that you’re a hobby or the payer will withhold 49% of your payment. You can do this by providing the payer with a Statement by a supplier form. You can find out more about this and download a Statement by a Supplier form here.
What do I need to do if I’m running a business?
When running a business you:
- may need to apply for an ABN to use in your business transactions
- will need to declare your income to the ATO in your tax return
- can claim tax deductions for business expenses against your taxable income
- will need to keep records for your business for tax and other obligations
- will need to decide on an operating structure for your business
- may need additional licences and permits specific to your type of business. For example, if you are running your business from home you may need council approval to operate from your residence.
Which business structure is right for me?
Many new business owners start out as a Sole Trader because it’s inexpensive and simple. However, as your business grows, changing to another type of structure may be beneficial. Deciding which structure is best can be complex and has an impact on how much tax you pay, ongoing administration costs, your personal liability, the risk to your assets and your ability to raise capital.
If you’d like help setting up your business or deciding on the best business structure, Marsh & Partners can assist. Our business specialists can go through the pros and cons of all the options so you can make an informed decision. We can also take care of the legal set up, registrations and help you organise an accounting system so you can get on with doing what you love. You can get in touch with one of our business specialists on 07 3023 4800 or at firstname.lastname@example.org
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