Many small businesses start out as hobbies. Perhaps you sell your crafty creations at markets, or using your skills to help out family and friends.
And then someone says ‘you could make money doing this!’.
Wow. Maybe they’re right?
You print business cards, create a Facebook page, and start spreading the word… things are going well!
So at what point does a hobby become a business?
This is an important question because businesses pay tax and hobbies don’t.
You don’t want to do the wrong thing and get in trouble from the tax office, but you also don’t want to register before you have to and pay unnecessary tax.
Am I Running A Business?
The general rule is, as soon as you start doing ‘business-like’ things, such as printing business cards, advertising, bookkeeping or building a website, with the intention of making money, you are in business.
This is a pretty fuzzy definition through. The ATO have a list of questions that help you work out if you’re a hobby or business. No one question is definitive. Instead, the more you answer yes to, the more likely you’re considered a business.
Is there more than just an intention to engage in business?
You need to have made a solid decision to commence business and have done something about it. If you are still thinking about, setting up or preparing to go into business, you might not yet have actually commenced business.
Do you have the purpose of profit as well as the prospect of profit?
Do you intend to make a profit or genuinely believe that you will make a profit in the future?
Does your activity have a significant commercial character?
Is your activity is carried on for commercial reasons and in a commercially viable manner?
Is there repetition and regularity to your activity?
Businesses usually repeat similar types of activities, although one-off transactions can constitute a business in some cases.
Is your business similar to other businesses in your industry?
Is the way you operate consistent with industry norms or other businesses in your industry?
What is the size, scale or permanency of your activity?
Is the size or scale of your activity consistent with other businesses in your industry? Is it sufficient to allow you to make a sustainable profit?
Is your activity planned, organised and carried on in a business-like manner?
This can be indicated by business records and books of account, a separate business bank account, business premises, licences or qualifications, and a registered business name.
Many online retailers, and especially eBay sellers, would be considered ‘businesses’ by the Tax Office, but don’t declare their income. The Tax Office are allocating more staff and resources than ever to finding online sellers who should be paying tax. They’ve even teamed up with eBay and other similar websites to find tax evaders.
If you sell a product or service online, it’s important you check whether you should be registered. This Tax Office list is similar to the one above, but adapted especially for online sellers:
Did you set up your online sales with the intention of being a business?
If you set up a ‘shop’ on an online trading or auction site, you may be carrying on a business – this is more likely if you paid fees to operate this ‘shop’.
Do you pay for your online-selling presence?
If the online space you sell on looks like a shop, has a brand name, proper business name or any other signs that people would likely consider to be a business, then you are likely to be carrying on a business – this is more likely if you paid fees for this to occur.
Is your main intention to make a profit?
If you sell items online because you want to make a profit, then you’re likely to be carrying on a business. However even if you don’t make a profit, you may still be carrying on a business. For example, if you sell household goods or possessions that you don’t want anymore, although you may get a ‘good’ price it is unlikely to be a business. But if you deliberately buy items to sell online for more money than you paid, you’re most likely a business.
Do you make repeated or regular sales?
If you sell items online on a regular basis, you may be carrying on a business. These sales could be to the same customer, or a number of different customers. For example, if you sell a number of items every week (or month) for an extended period of time, then you may be carrying on a business.
If you make the items you sell online, do you charge more than they cost you to make?
If you charge more for items than they cost you, then you are likely to be carrying on a business. The more regularly, the more likely you are to be carrying on a business.
Do you manage your online-selling activity as if it was a business?
If you do any of the following, you may be carrying on an online business:
- your online-selling activity is organised and has systems and processes in place
- you advertise your online space
- you keep some or all of your records
- you have a business plan
If you sell items in the same way and timeframe as a business in the same industry, then you may be carrying on a business.
Is what you are selling online similar or the same as what might be sold in a ‘bricks and mortar’ business?
If the items or services you are selling are commonly available or reasonably easy to find in an offline store, then you are likely to be carrying out a business and these sales should be included as business income.
The key message here is that if it looks like a business, and smells like a business, then it probably is a business.
What If I Am A Hobby?
If you are genuinely a hobby, you don’t need to register an ABN, and you don’t have to declare your income and expenses on your tax return. This is great news, no formal bookkeeping required, and no handing over part of your income to the tax office.
Be sure to reassess things regularly. If your hobby grows, you begin advertising, or you decide to start taking your hobby more seriously, then chances are it will become a business at that point.
What If I’m A Hobby But Want To Register A Business Anyway?
Some genuine hobby owners want to register as a business anyway. To register for an ABN you’ll need to meet the ABN eligibility requirements, which are very similar to the ‘Am I A Business?’ questions above. One of the requirements specifically states to be eligible for an ABN your activity must not be a hobby.
Based on this, if you want to register your hobby as a business, you’ll first need to take steps to establish it as a genuine business. This might include increasing sales, pricing your activities to be profitable, establishing formal bookkeeping procedures and advertising.
Keep in mind that there are some downsides to registering before you need to. Proper bookkeeping, reporting to the ATO and paying tax on your profits are all requirements of holding an ABN.
Another common myth is that if you make a loss in your business you can claim it as a deduction in your tax return. Unless you have sales of more than $20,000 (or meet a few other requirements) sole traders and partnerships cannot claim their losses. Instead, your losses will be quarantined, carried forward to future years, and can only be claimed in a year you have a profit.
If you’re confident you’ll hit profits sometime soon, registering a business will mean you claim the expenses you’re incurring now. But if profits are a while away yet, consider whether it’s worth the extra work in the meantime.
What If I Am A Business?
If you’re a business, you need to have an ABN, keep records of your income and expenses, declare them on your tax return and pay income tax on any profits.
If you’d like help setting up your business, SmallBizLaunchPad can help. We can take care of your registrations, legals, and your complete business setup, so you can get on with doing what you do best. Head to our page on Launching your Business for more information.