When you are having fun and getting paid
It may seem fairly obvious whether a person is in business or not, but the distinction can be important for other reasons. You may be having fun AND making money. But is it a business or a hobby?
For example, if you are not carrying on a business, the option to deduct losses from other income is lost. It’s important to establish, from a tax obligation point of view, that your “activity” is more than a hobby, and is in fact a bonafide business. Losses from hobbies are not deductible against other income.
It is an ongoing issue, from the ATO’s point of view. “A hobby is a spare-time activity or pastime pursued for pleasure or recreation,” the ATO said in a recent document on the topic. “Unlike a hobby, a business is run with the intention of making a profit and has basic reporting requirements, such as declaring income and claiming expenses.”
It is therefore important to know the difference between a hobby and a business. To help, the ATO has come up with a set of guidelines. It says that there is no single rule that determines if you’re in business, but the following are indicators that you may be:
You’ve made a decision to start a business and have done something about it, such as registered a business name or got an ABN.
- You intend to make a profit or genuinely believe you’ll make a profit from the activity, even if you’re unlikely to do so in the short term.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include
- keeping business records and account books
- having a separate business bank account
- operating from business premises
- having licenses or qualifications
- having a registered business name.
To also help, the ATO has devised a “Hobby or business?” decision tool (click here)