Sometimes, what begins as a simple hobby can transform into a full-fledged business, and with that transition come some important tax implications. In this guide, we’ll explore the key differences between a hobby and a business to help you understand exactly what your activities qualify as.
There are significant differences in the legal obligations between businesses and hobbies.
Making money from a hobby without recognizing it as a business can give you big consequences. That’s why it’s so important to understand the differences between a hobby and a business.
In this guide, we’ll share insights to help you figure out whether your activities are just for fun or if they’ve crossed into a business.
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What is a hobby?
The Australian Taxation Office defines a hobby as “pastime or leisure activity conducted in your spare time for recreation or pleasure”. Typically, it is not carried out professionally or for monetary gain, with an emphasis on skill and knowledge development in the chosen area.
Examples of hobbies include:
- collecting themed items
- engaging in creative and artistic pursuits
- participating in sports
- enjoying various forms of amusement
What is a business?
If the majority of your time is devoted to a hobby that also serves as a source of financial support, chances are, it qualifies as a business.
A business is an entity engaged in commercial, industrial or professional activities. Whether you are considered to be in business isn’t determined by a singular factor. However, various factors should be taken into account, including:
- Your intention to derive a profit or an expectation of profitability from the activity.
- The size or scale of your operations aligns with other businesses in the industry.
- Your activities are planned, organized, and executed in a businesslike manner, encompassing practices like maintaining business records, operating under a business name, and maintaining a separate bank account.
At what point does a hobby turn into a business?
To determine if you have a business or hobby, ask yourself:
- Do you intend to make a profit from your activities?
- Do you undertake the activity regularly and in a structured and businesslike manner?
- Have you registered a business name or secured an Australian business number (ABN)?
If you answered yes to any of the questions we just went over, it’s likely that what you’re doing is considered a business by the authorities.
Hobby vs business: A practical example
Let’s look at Oliver’s story as a practical example of a hobby turning into a business. Oliver started off simply loving photography—it was just a hobby. But as more people became interested in his work and he started charging more, his earnings began to grow. Before long, the tax authorities started treating his once casual photography hobby as a legitimate business. This story highlights just how crucial it is to recognize when your hobby has made the leap to becoming a business.
I’m engaged in business — what now?
If you determine that your activities constitute a business, establishing a company is imperative. The simplest business structure is sole trader. A sole trader is an individual running a business. It is inexpensive to set up and there are generally less compliance and legal requirements.
This guide takes you through the process of setting up as a sole trader.
As a sole trader, it’s essential to prioritize organizing your business finances from the outset. This involves maintaining accurate records of various business activities, such as expenditures, acquisitions, sales, and employee payments.
Recommended reading: Eight great tips for sole traders at tax time
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