Taxed for a hobby or running a business – where do you cross the line?
Someone once said you shouldn’t mix business with pleasure. Although they probably weren’t talking about taxation, the adage holds true for activities which have the potential to bring in income.
It’s fair to say that the vast majority of hobbies aren’t of concern to the ATO. Fishing, stamp collection and video games (among other things) all tend to be activities that cost money and reap their benefits in other less tangible ways (enjoyment, primarily).
But it is possible to reap income from a hobby, even if the activity is not being conducted for a commercial purpose. For example, collectors frequently resell items and may make small amounts of money back. Amateur artists of musicians might gain a small supplementary irregular income by selling their creations for cash.
However, many successful businesses have indeed started that way. Amateur artists who take freelance requests or commissions might start by receiving only minor payments until one day they ‘hit it big’ and the money starts rolling in – same concept with musicians. Stamp collectors who started for the fun of it might find a lucrative niche as a reseller or an auction shark.
So at what point do you need to worry about the tax implications?
The ATO makes a clear distinction between activity done for commercial purposes and income derived from ‘genuine hobbies’. Income from a business is naturally taxed; however, businesses can also claim deductions and various kinds of tax relief to reduce taxable income.
Income received from a genuine hobby, meanwhile, is not taxable; but in a similar vein none of the expenses are deductible. A hobby photographer who buys a camera to film their children’s wedding can’t deduct the cost of the camera from their income!
However, you must provide evidence to the ATO when income is derived from a genuine hobby. This is to avoid purchasers being required to withhold the top marginal tax rate from payments, as is normally required when conducting business with a seller that cannot provide an Australian Business Number (ABN).
So how do you know for sure? The ATO has a checklist of sorts that assesses individual criteria to determine whether or not the activity being conducted is a genuine hobby or a business, but there is no single factor that determines if you are in business. The factors that are considered include (but are not limited to!) the following:
- Is your reason for doing the activity commercial or recreational?
- Do you intend to make a profit from the activity?
- How frequently and regularly do you take the activity? Is it whenever you feel like it or is it on e.g. fixed weekly schedule?
- Is the activity informal and ad-hoc or is it planned and structured, like a business?
- What is the scale of the activity?
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