Has your hobby become more than simply a pastime? This blog will look to assist you in identifying whether your venture once considered a ‘hobby’ has in fact turned into a business.
There is no hard and fast rule in determining whether your venture is a business or hobby, so we must look towards the tax commissioner’s view found in Taxation Ruling TR97/11.
Steps in Determining the Nature of your Activity:
The following indicators must be considered when deciding the nature of your activity or venture:
- Does you activity have a significant commercial purpose or character?
In other words, is one of your main intentions to make a profit? The answer to this is often a clear ‘yes’ or ‘no’ and is evident by your answers to other indicators below.
- Do you have more than just an intention to engage in business?
For example, you must be able to prove that you are actively engaged in taking steps to make things happen!
- Do you have a purpose of profit?
This was touched on in indicator number 1, and is a crucial element to carrying on a business.
- Is there repetition and regularity in your activity or venture?
Your activity must be conducted on a regular basis in order to be deemed a business by the ATO.
- Is your activity of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business?
This is often necessary to be considered on a case-by-case basis, as all businesses are carried out differently dependant on their nature.
It is useful to look towards similar businesses within your field, such as competitors within the market and make a comparison of the level of operation.
- Is your activity planned, organised and carried on in a business like manner, with a purpose of making profit?
Do you have clearly defined goals, a business plan or a cash flow forecast?
Do you know who your target customers are, and what your volume of sales is?
Handy Hint – If you are selling only to family and friends, this is often an indication that you are merely undertaking a hobby!
- Consider the size, scale and permanency of your activity!
The larger the scale of your venture, the more likely it is that it will be classed as a business by the ATO.
- Finally, is your activity better described as simply a ‘hobby’ or form or recreation?
This indicator is fairly self-explanatory – i.e. if you believe your activity feels like a hobby then it most probably is!
Benefits of Business:
If you have come to the conclusion that your activity is a ‘business’, there are many benefits that come alongside this, such as:
- You can apply for an Australian Business Number (ABN) to use in your transactions.
- You can register a website once you have an ABN.
- You will gain access to government information, services and concessions for businesses.
- You are able to claim tax deductions for business expenses against your taxable income.
Tax Implications for a Business:
When carrying on a business, you are required/able to:
- Declare your income to the ATO in your annual return.
- Claim deductions on your expenses.
- Keep records for your business for tax and other obligations.
If you have any further questions please feel free to contact Optima Partners (6267 2200) – Your Pathway to Personal and Financial Security
Sarah Koios
Accountant
