Hobby vs Business
It’s not unusual for many small businesses to start out as a hobby or for people to wonder if they could or should turn their hobby into a business.
Here are 5 considerations when it comes to determining whether what you’re doing is or should be a hobby or business in Australia.
1. What is your main intention?
Is your primary intention to make a profit? – this is most likely a business.
Is your primary intention to obtain enjoyment in your spare time – this is more likely a hobby (though it depends on other factors outlined below).
2. Pros and Cons
The benefits of a hobby is that you can gift or sell your work for the cost of materials, you can pick and choose when to do your hobby activities and you have no business reporting obligations.
If it’s a business you may be able access concessions for business and claim tax deductions for business expenses against your taxable income.
3. Hobby or business – does it matter?
It does matter whether you’re considered a hobby or business when it comes to tax, insurance and legal purposes.
Even if you believe you have a hobby and not a business (or vice versa) the Australian Taxation Office (ATO) may see it differently.
The ATO will consider how frequently you undertake your activity and whether its carried out in a businesslike manner.
You should consult the ATO website to help you understand the differences between a hobby and a business.
4. What should I do?
If your activity is a hobby you’re not entitled to an ABN, but you may need one when transacting with other businesses. In this case you need to provide the payer with a Statement by Supplier form.
Since hobbies can sometimes grow into businesses, it’s important to monitor any change in income or operations and be aware of your business and tax obligations. Check out our 5 Steps to Starting a Business. You may also need additional licences and permits. Visit the Australian Business and Licences Information Service (ABLIS) to find out more about licences and permits for your activity.
5. Get advice
If you want a definitive answer on whether you’re a hobby or business or you want advice on whether you should transition to a business, consult a qualified legal professional, accountant or business adviser.
You may also wish to get a private ruling from the ATO to protect yourself from possible penalties.