We get asked from time to time if your side business is seen as a hobby or a business by the ATO. Here is some information about how the ATO views it.
In the ATO's view, it will often be the case that an activity is a hobby where:
• the taxpayer does not intend to make a profit and there is no system to allow a profit to be produced
• losses are incurred because the activity is motivated by personal pleasure
• transactions are isolated and there is no repetition or regularity of sales
• the activity is not carried on in the same manner as business activity
• the activity is on a small scale (although hobbies can be expensive!)
• the taxpayer’s intention is to carry on hobby, recreation or sport
• any products are sold to friends and family and not to the public at large.
Warning: A hobby can develop into a business. A taxpayer whose hobby is growing should consider if they should treat it as a business.
Timing — when does a business start?
Identifying when a business commences can be critical particularly where expenses are being incurred but there is little or no income. In these circumstances, a deduction may be available if the expense can be shown to be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
But, expenses incurred before the business has commenced will not be deductible because they have been incurred too soon or they may be of a capital nature.
The characterisation of a business is critical to the resolution of when a particular business activity can be said to have commenced. If the business is characterised as manufacturing and selling then, generally, the business will commence when the taxpayer first engages in those activities, i.e. the activities which will produce or generate assessable income.
But another example is: A taxpayer buys a run down 700 hectare rural property on which they intend to start a cattle farming business. Over the next five years they spend large amounts on farm machinery, clearing land, building tracks and lane ways and mending fences as well as erecting farm buildings. In the sixth year, they finally buy 100 head of cattle. They are considered to commence their cattle farming business when they buy the cattle in the sixth year. Their activities in the first five years were preparatory to the commencement of the business.
So, whether you have a hobby or a business really comes down to management and intention.
As a hobby, any income you derive is not taxable, but as a business the first dollar you earn needs to be accounted for in a tax return. And if your hobby has become a business over time, then there are registrations that need to occur to keep it all above board with the ATO.
If you have any doubts at all whether you have a hobby or a business, do not hesitate to contact us and we will help you work through the criteria.
The following wesbite also gives some further information on whether you are running a business or a hobby https://www.business.gov.au/info/plan-and-start/a-business-or-a-hobby