Starting a business - Hobby vs Business

Hobby vs Business
This post is the second in a series of posts on the topic of Starting and Running your own business.
 
Are you thinking of turning your favourite pastime into a business?
 
If so, then you need to be aware that there are different taxation and reporting obligations, insurance and legal requirements depending on whether you are a hobby or a business.

​What is a hobby?
A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure[1]. For example, your passion may be cooking. Your friends love what you provide and have on an ad hoc basis asked you to do the catering for their family get togethers.

What are your obligations and responsibilities if you are a hobby?
If your activities are a hobby you do not need to declare the income from your hobby to the Australian Taxation Office (ATO) and you cannot claim any expenses associated with your activities in your yearly tax return.  
 

What is a business?
There is no single factor that determines if you are in business. Some key questions to determine if you are running a business include:

• Are your activities done for commercial reasons?
• Is your main intention, purpose or prospect to make a profit?
• Do you regularly and repeatedly undertake your activity?
• Is your activity planned, organised and carried out in a businesslike manner? For example,
• Are you keeping business records and account books?
• Do you have a separate business bank account?
• Are you planning on registering a business name?[2]

 
Overtime, your hobby may evolve into a business. Hence, it is important to monitor changes in your activities. 

What are your obligations and responsibilities if you are running a business? 
As soon as you start your business, you:

• will need to keep records of your business for tax and other reporting obligations.

• will need to declare your income. You can claim your expenses in your annual income tax return.
• will need to lodge your annual income tax return with the ATO.

• ​may generally need an Australian Business Number (ABN), a unique 11-digit number used to identify businesses. You can obtain and ABN from the Australian Business Register (ABR)[3].
• may need to register for goods and services tax (GST), if your income is greater than $75,000 per year. You will need to lodge an activity statement (AS) with the ATO.
• will need to plan how you will pay the taxes you owe to the ATO.
• may need additional licences and permits. For example, if you are running your activities from your home you may need council approval. The Australian Business and Licences Information Services (ABLIS)[4] website provides information about licences and permits you may need.

Conclusion 
Whether or not you are running a business will depend on your individual circumstances.
 
Many government agencies including the ATO provide further information to help you understand the differences between a hobby and a business.
 
It may also be useful to obtain professional advice as to whether you are a hobby or a business from a solicitor, an accountant or a business advisor.
 
Why not make a complementary consultation with me today to go through your business ideas.
 
If you have determined you are running a business.  The next step in setting up your business is deciding on your business structure, such as, a sole trader (individual), partnership, company, or trust in order to operate your business.
 
My next post will look at the different business structures to operate your business.
 
 

[1] https://www.business.gov.au/Info/Plan-and-Start/A-business-or-a-hobby

[2] https://www.business.gov.au/Info/Plan-and-Start/A-business-or-a-hobby

[3] https://abr.business.gov.au/

[4] https://ablis.business.gov.au/