Navigating taxation: Business vs hobby

When it comes to taxation matters, it’s essential to understand the clear distinctions between running a business and pursuing a hobby.

The differences lie primarily in tax, insurance, and legal obligations. To ensure accurate categorisation, it’s crucial to recognise the characteristics of both activities.

Are you in the business?

Determining whether you are operating a business involves considering several factors:

  • Your intention is to make a profit, even if it may not be immediately realised.
  • Taking concrete steps to establish a business, such as registering a business name and obtaining an Australian Business Number (ABN).
  • Engaging in repeated and similar activities.
  • Conducting your activities on a scale consistent with other businesses in your industry.
  • Approaching your activities with a planned, organised, and businesslike manner, which may involve maintaining records, operating from business premises, holding licenses, and adhering to business regulations.

The benefits of running a business

Running a business comes with certain advantages:

  • Applying for an ABN to facilitate business transactions.
  • Enjoying flexibility in managing your time and work hours.
  • Registering a or .au website once you have an ABN.
  • Accessing government information, services, and concessions for businesses.
  • Establishing a business identity when dealing with customers and other businesses.
  • Claiming tax deductions for business expenses against your taxable income.

Is it a hobby?

A hobby refers to a leisure activity pursued in spare time for enjoyment and recreation. While some hobbies can evolve into businesses, the primary purpose remains personal fulfilment rather than profit generation.

The benefits of a hobby

Engaging in a hobby offers its own set of benefits:

  • Finding personal enjoyment and satisfaction in the activity.
  • Gifting or selling your work at the cost of materials.
  • Pursuing the hobby at your leisure or in response to requests without the reporting obligations of a business.

Difference business and hobby for tax purposes

Understanding the distinctions between a business and a hobby is crucial for tax-related matters:

  • Declaring Payments: Income generated from a hobby need not be declared to the ATO. In contrast, business income must be reported in your annual tax return.
  • Claiming Tax Deductions: Hobbyists cannot claim deductions for creative work losses. Conversely, businesses can claim expenses deductions, usually requiring an ABN for eligibility.
  • Keeping Records: While keeping records is not mandatory for hobbies, maintaining records becomes essential for businesses to meet tax and other obligations.
  • Licenses & Permits: Hobbies typically do not require licenses and permits, unlike specific business operations.
  • Australian Business Number (ABN) Eligibility: Hobbyists are not eligible for an ABN; however, businesses can opt to register for one. Having an ABN simplifies running a business, especially for other tax registrations like GST.
  • Selling Goods: Businesses selling goods need to comply with Australian Consumer Law (ACL). Customers enjoy automatic rights in case of product issues.

If you’re uncertain about the classification of your activity, seeking professional advice from our KMT accountant, legal expert, or business adviser can provide valuable insights and help you determine the correct status. Making informed decisions ensures compliance with relevant regulations and minimises potential complications down the line.

Contact us today to learn more about how we can support your business and ensure compliance with the latest tax updates from the ATO.

Learn more: Understanding the tax obligations of side hustles

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.