When is a hobby considered a business?

The pursuit of a hobby by an individual may be to supplement wages, create income after having lost a job, or to simply follow a passion.

With the growth of entrepreneurship, conducting activities to earn income needs to be understood carefully, so that taxpayers are fully aware of their tax obligations. For example, drop shipping operations are a common setup, which has gained significant traction in recent years, due to its relatively low set-up costs. Depending on the way these activities are operated, the ATO may treat these as either a hobby or a business.

The following article will outline the distinguishing factors of what may point towards a set of activities being considered a hobby versus a business, noting that these rules only apply to individual taxpayers, including partnerships of individuals.

 

Rules to determine whether a business exists

Tax law defines a business as any profession, trade, employment, vocation or calling, but not occupation as an employee.

Tax Ruling 97/11 provides a summarisation of indicators that assist in determining whether a business is being operated by a taxpayer;

• • They have a significant commercial purpose or character
  • The taxpayer has more than just an intention to engage in business
  • There is a purpose of profit as well as a prospect of profit from the activity
  • There is regularity and repetition
  • The activity is of the same kind and carried out in a manner that is characteristic of the industry
  • The activity is planned, systematic and organised in a business-like manner
  • They have the necessary size, scale and permanency
  • Whether the activity is better described as a hobby, a form of recreation, or sporting activity

No one indicator is decisive, and analysis of the indicators must be considered in combination. The conclusion is drawn from the general impression gained during the analysis.

 

Tax Implications

Hobbies

Under tax law, the pursuit of a hobby is not the same as carrying on a business, which means that;

• Profits derived from a hobby are not taxable income and therefore are not assessable.
• Conversely, hobby expenditure is also not tax deductible.
• A hobbyist is not entitled to an ABN and cannot register for GST

Non-Commercial Losses

Because of the difficulty involved in determining whether an individual is carrying on a business versus partaking in a hobby, the non-commercial losses rules were bought in during 2000.

These rules outline that a loss made by an individual (including those in partnership) from a business operation will generally not be deductible against any other income (such as employment or investment income) in the income year in which it arises.

There are broadly two exceptions to this rule.

Firstly, where the loss occurs from a primary production business or a professional arts business activity, AND where the individual has other assessable income of less than $40,000 (excluding net capital gains), then the taxpayer may offset such losses.

Secondly, if the business does not fall within the primary production business or a professional arts business activity exception rule, and the individual has an adjusted taxable income of less than $250,000, then the losses can be offset against other income if one of the following tests are satisfied:

• Assessable income from the business activity during the financial year is at least $20,000 (this amount is pro-rated for businesses that either commence or cease during the financial year);
• The business has earned a profit in three out of the past five years (including the current year);
• Land and buildings of at least $500,000 in value (excluding any main residence property) are used in the business activity in that year;
• Other assets of at least $100,000 in value (excluding cars, and motorcycles) are used in the business activity in that year.

Any loss which cannot be offset in the current financial year is not lost and can be carried forward to future income years, making them available to offset against the assessable income from the “non-commercial” business activity.

 

If you would like to understand more about whether your current or planned activities may be considered a business, please contact Link Advisors and we can assist you.