In Australia, there is no limit to what you can earn if the activities you are undertaking are a hobby and not a business. However, note that if the activity you are doing has more traits of a business and not a hobby, you may be mandated to apply for an ABN. And if you are in business, you are required to report income from the first $1 you earn and claim your business related expenses.
The pursuit of a hobby by an individual may be to supplement wages, create income after having lost a job, test the waters for a new commercial venture or simply follow a passion. However, the pursuit of a hobby in Australia is not seen as carrying on a business for taxation purposes, which means that money derived from a hobby is not income and therefore is not assessable. Conversely, hobby expenditure is not tax deductible.
Howbeit, there is a risk for individuals conducting profitable hobbies that the Commissioner of Taxation will regard them as carrying on business operations. In Australia, a hobbyist is not entitled to an ABN and cannot register for GST because private recreational activities, pursuits or hobbies are specifically excluded from the definition of an enterprise.
But you should note that the distinction between a hobby and a business is determined by the ordinary meaning of those words as determined by the courts, although the Income Tax Assessment Act 1997 defines ‘business’ non-exhaustively as ‘including any profession, trade, employment, vocation or calling, but not occupation as an employee.’
In Australia, court cases over the years have created varying circumstances that generally need to be present before a business is regarded as being operated by a taxpayer. Still the distinction between a hobby and a business can be confusing when you want to determine the nature of your income – generating activities.
Nonetheless, it is still very crucial that you establish whether you have a hobby or a business as each classification has different regulatory and tax implications. Note that what might have started as a hobby can turn into a business, sometimes without you realising the point of transition from one to the other.
Also note that if the ATO identifies you as a business, and you fail to declare your income, you could end up with an unexpected hefty tax bill. Worse still, a penalty for not reporting your income correctly may apply. It is a good idea to review your activities regularly to make sure you are still a hobby and have not transitioned to being a business unintentionally.
Difference Between a Hobby and a Business in Australia
It is imperative that you analyze and understand the differences between a hobby and a business for tax, insurance and legal purposes. For one thing, there will be certain tax and other obligations that start once you are in business. Also note that it is a myth that there is a dollar threshold to be in a business (some people can have very expensive hobbies).
However, what tend to really matter is whether, as a whole, your activity is “commercial”, with an aim to make a profit. Once you are in business, there are dollar thresholds that can affect what you can claim for tax purposes.
Characteristics of a Business in Australia
In Australia, there is no single factor that determines if you are in business, but some of the factors you need to consider include:
- You have made a decision to start a business and have done something about it to operate in a businesslike manner, such as: Registered a business name, or obtained an Australian business number (ABN).
- You intend to make a profit or genuinely believe you will make a profit from your activity (even if you are unlikely to do so in the short term).
- You repeat similar types of activities, and the size or scale of your activity is consistent with other participants.
- Your activity is planned, organised and carried out in a businesslike manner. This may include: Keeping proper accounting records and documentation, having a separate bank account for business, Operating from dedicated premises, Having licenses or qualifications, or having a registered business name.
If you are yet to start up a business in Australia, it is imperative to keep these factors in mind as your activities change or grow, so you’ll know when you need to register for tax and other business responsibilities.
Characteristics of a Hobby in Australia
Even in Australia, it is more or less accepted that a hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. Note that with a hobby:
- You achieve personal enjoyment and satisfaction
- You can gift or sell your work for the cost of materials
- You can do it in your own time or when people contact you
- You don’t have the reporting obligations of a business.
In Australia, if you consider your activities as a hobby then you do not have any additional tax or reporting obligations. And if your activity is a hobby you may need to meet certain requirements to transact with a business. When making a purchase, a business more or less collects the seller’s ABN.
If the seller can’t provide an ABN, then a business is expected to withhold the top rate of tax from the payment for any total more than $75 for tax purposes. But since you are not in business and therefore not entitled to an ABN, you need to provide justification that the payer need not withhold tax. This can be done by providing the payer with a “Statement by a supplier” form.
Sometimes the distinction between a hobby and a business can be confusing when you want to determine the nature of your income – generating activities. Income – earning hobbies can indeed grow into businesses, so it is pertinent to monitor any change in income or practises so that you are aware of your obligations before they happen.
Once an individual’s activity moves from being a hobby to carrying on business, the small business capital gains tax concessions potentially become available. Given the complexity of these rules, it is advisable that you discuss your specific circumstances with a qualified tax adviser.
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