Hobby vs Business: What is the Difference?


Everyone enjoys a good hobby.

From photography, scrap-booking, cooking or even horseback riding, each of these hobbies can turn into a business. With that in mind, when it comes time to lodge your tax return, your hobby could possibly be your business. Taxpayers get confused about whether or not they should be reporting their hobby as a business. Of course, you want to avoid being penalised if you’re not declaring income to the ATO, right?

Find out if your hobby is actually a business by reading below!

What is a hobby?

First off, a hobby is an activity that you engage in for personal enjoyment. This means you are doing your hobby for your satisfaction. Generally, there are some factors that you can think about to ensure you’re actually a hobby. Follow these guidelines below:

  • Your do not have a set schedule for your hobby.
  • Gifting or selling your items for the cost of your materials.
  • You do not intend to make a profit.
  • You do not make a profit.
  • You’re simply involved in your hobby for recreation.

Although taxpayers may have expensive hobbies, the ATO doesn’t specify an income limit as to when you’re considered a business. Luckily, you won’t need to declare any income you earn from your hobby to the ATO. However, if you experienced any losses from your hobby, you can’t report that on your tax return.

Signs of a Business

Now if you’re selling your lavish paintings to people who are interested in art and you’re marking up each art piece to make a profit, good news is, you’re a business. Here are some indicators that you have a business:

  • You regularly make a profit.
  • An item’s price is worth more to guarantee a profit.
  • Your schedule is consistent in order carry out your activities.
  • You plan your activities in a business like manner.
  • You are paying for advertising or any commercial outlet of your activity.

As you can see, the main difference between a hobby and a business would be your intention to make a profit.

Attention Business Starters!

If you realise that you’re indeed a business, you need to determine your business structure. Overall, this means you need to identify with a business type such as a Sole trader, Partnership, Company or Trust.

  1. Sole Trader: An individual owns a business and reports this on their personal income tax return.
  2. Partnership: Two or more people start a business to share profits and losses. You must lodge a separate partnership income tax return.
  3. Trust: A third party has legal control of a business and runs the business to benefit someone else. You must lodge separate trust income tax returns.
  4. Company: Legally, a company is separate from its shareholders. You must lodge a separate company income tax return.

Additionally, common registrations in order to be a business are Tax File Numbers (TFN), Australian Business Numbers (ABN), Goods and Services Taxes, Pay As You Go (PAYG) withholdings, Fringe Benefits Taxes (FBT), and Fuel Tax Credits. As a reminder, your business structure helps you to find out your tax obligations. Find out which business structure you are by taking a look at the ATO’s guidelines by clicking here and what registrations you need to focus on by clicking here.

Is your hobby online selling?

Online selling might be tricky. If you sell items online as a hobby, this means you are carrying out your activity for your own personal interest without the goal of making a profit.

For example, Amanda loves to shop. She constantly buys clothing from blouses to jeans to shoes. However, as seasons and years change trends age and go out of fashion. Amanda decides to list her clothes on Amazon for individual sale. She sells some clothing for more or less than the original purchase price. She charges buyers for the shipping costs and receives $1,075.

Amanda’s online-selling is a hobby. She did not improve her clothing to increase it’s value, she didn’t sell repeatedly, she didn’t pay the online website to advertise, and mostly sells clothing for less than the purchase price. Lastly, she does not have the intention of selling clothing online to make consistent income.

Online Selling as a Business.

To make matters simple, if you set up an online website to advertise and sell the products created from your hobby to make a regular sale, then it is no longer a hobby. It becomes a business and your income will be subject to tax.

For instance, Sharon has a full-time job as a kindergarten teacher at New Hill Public School. Her hobby is collecting old antiques and repairing them during her spare time. Her friend; Bill, offers her $300 for an antique vase. Then, Sharon starts to take an interest in making a business out of this activity. Due to this, Sharon takes pictures and shares them on social media like Facebook and Twitter. The total profit was $25,000 for the year. This is considered taxable because her intention was to make a profit. In the end, she did sell her items for a profit since she restored these antiques, made repeated sales, and because she uses a specific online website to advertise even though she didn’t specifically pay for advertising.

What happens if I don’t declare my income?

Your business income is labeled as “assessable income”, which means you are required to declare it to the ATO and it is subject to tax. If you do not declare your income, you can possibly trigger the ATO to take a closer look at your entire tax situation. Steer clear of this by reporting all of your business income to avoid possible ATO audits. Fortunately, your earnings from your hobby is not assessable income, so you can exclude this on your tax return.

Still confused?

With taxpayers who are artists, makers and creators, it’s hard to find out if you’re a business when you’re earning income. The ATO provides a convenient tool to help you determine if your hobby is a business. Click here to find out.

No worries, E-Lodge can help.

We offer the Investor/Business Package if you’re self employed and are looking on how to report your earnings. Create your account now and even catch up on your tax returns going back to 2006-2007 fiscal year!

Did you lodge your 2016-2017 tax return as yet? Use our tax calculator to figure your refund and our recent blog to guide you on how to lodge your late tax return. E-Lodge is here to make lodging your return stress free.

Hobby vs Business: How do I Report Earned Income?

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