It can be difficult to determine whether your activities amount to a business or a hobby. While there is no single factor that differentiates the two, there are certain factors that you must consider. In this article, we’ll discuss the factors to help you understand the differences between a business and a hobby. Then, we’ll provide you with an overview of your obligations in relation to your activities. Keep in mind that your hobby may develop into a business or even operate as a side hustle. Therefore, it is important that you regularly monitor your circumstances to avoid complications down the track.
Hobby vs Business
Hobby
The Australian Government defines a hobby as a ‘pastime or leisure activity conducted in your spare time for recreation or pleasure’. The benefits of a hobby can include:
- Gaining a personal enjoyment from the activity.
- Having the flexibility to do it in your own time.
- Choosing to gift or sell your work for the cost of materials.
If your activity is a hobby, you do not have the reporting obligations of a business. This also means you can’t claim any losses from your activity.
However, as previously mentioned, it is possible that your hobby becomes a business. In this case, you may be subject to licensing and permit requirements depending on your activity type.
Business
Unlike a hobby, a business has additional tax and reporting obligations. To help determine if you are in business, some factors you need to consider include:
- You’ve made a decision to start a business and you have done something about it such as registering a business name, or obtaining an ABN.
- You intend to make a profit or genuinely believe your activity will be profitable.
- You regularly undertake your activity.
- The activities are carried out in an organised and business-like manner such as keeping business records, operating from a business premises, or having licenses or qualifications.
- The scale of your activities is consistent with other businesses within the same industry.
If you agree with a few of these statements, it would be reasonable to assume that you are operating a business. However, if you’re still unsure whether your activity is a hobby or a business, it is best to seek legal advice for further clarification.
Create your own Business Plan for free.
Customise, update and download our Business Plan.
Get startedWhat are the next steps?
If your activity is a hobby, you may need to register for an Australian business number (ABN) in order to supply your goods or services to businesses. You should provide a ‘Statement by a Supplier’ form to avoid businesses withholding the top rate of tax from any payment made to you if you don’t have an ABN.
If you’re running a business, all revenue generated from your activity forms parts of your assessable income and you may incur tax. This means that any expenses incurred in the course of your trade are deductible and any losses can be offset. In operating a business, your responsibilities include:
- Registering for an ABN and potentially, good and services tax (GST).
- Determining your business structure.
- Declaring any income to the Australian Taxation Office (ATO) in your annual tax return.
- Maintaining tax and other business records.
- Checking your licensing obligations.
You can read more about running a business here.
Conclusion
As discussed, it is essential that you determine whether your activity should be defined as a hobby or a business. This is in order to keep track of any tax, legal or business obligations. Even if your activity is a hobby, it is important to regularly monitor any changes in income or practices in order to stay on top of your business responsibilities. If you’re still having trouble in understanding the differences between a hobby and business, contact a business lawyer for further advice.
