The ATO (Australian Tax Office) has guidance about how much can you sell before you need to declare the income like a proper business, that is whether an activity is a hobby or not. It is not simply based on turnover, but on the intention to make profit and indicators of formal set-up such as having a business plan etc.
From the ATO website – at “Am I in Business?” a series of questions are posed to help work out if the activity a business.
Quoted from the ATO site –
- Does your activity have a significant commercial purpose or character?
- Do you have more than just an intention to engage in business?
- Do you have a purpose of profit as well as a prospect of profit?
- Is there repetition and regularity to your activity?
- Is your activity carried on in a similar manner to other businesses in your industry?
- Is your activity planned, organised and carried on in a business-like manner?
- Does your activity have characteristics of size, scale and permanency?
- Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?
Each time you answered yes to the questions above, it increases the probability that you are in business though no one indicator is decisive, they must be considered in combination and as a whole.
Why does it matter whether your activity is a business?
It matters because it may affect if:
- Any money you receive from the activity is assessable income;
- You are entitled to an Australian Business Number (ABN);
- You can or must register for goods and services tax (GST).
How does the question of whether your activity is a business affect your tax?
There are numerous areas in which people carry out activities, often in a small way, which may constitute a business. These include, for example, gardeners, tradesmen, and couriers.
If you are carrying on a business:
- Any money you earn from this activity is generally assessable for income tax;
- You are generally entitled to claim tax deductions for any allowable expenses you incur in earning this income;
- If your activity results in a loss, you may be entitled to offset this loss against other income or carry it forward to offset against future income, and therefore reduce the income tax you might have to pay in the future.
Common areas where people carry out activities which may be a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.
If your activity constitutes a hobby or recreation:
- Any money you earn from this activity is generally not assessable income;
- You are not entitled to claim tax deductions for any expenses you incur in carrying out this activity;
- If your activity results in a loss, you are not entitled to offset this loss against other income or carry the loss forward.
Do you need to apportion your expenses?
It may be necessary to consider whether your expenses were incurred solely for business purposes, or for a `dual purpose’ (for example, partly for business purposes and partly for private purposes).
Generally, if your expenses were not incurred purely for business purposes, it is necessary to apportion your expenses between the different purposes.
What evidence might you have to show that your activity is a business?
These are examples of questions that we may consider in determining if your activity constitutes a business:
- Do you have a business plan?
- Do you use specialised knowledge or skills?
- Have you had prior experience in this area?
- How much capital have you invested in the activity?
- Have you done market research?
- How much time do you spend on the activity?
- Is the activity a part-time side-line or your main income earning activity?
- Do you give quotes and supply invoices?
- Do you advertise?
As well as guidance about how much can you sell before you need to declare the income like a proper business spend time and read other information about being in business – refer to Tax basics for small business and Starting a business essentials