Many people start up various types of small home-based businesses without really understanding or considering the implications that it may have on their tax position, insurance or other legal obligations. Issues may arise which may not have been considered and yet end up being very costly for the “Hobbyist/Business Owner”. For this reason, it is important to understand the differences between a hobby and a business. According to the Australian Taxation Office, the key questions to consider are:
Is the activity being undertaken 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?
If you answered YES to most of these questions, you're likely to be running a business, although it does depend on your individual circumstances. What do I need to do if it’s a hobby? If your activity is a hobby, you need to complete a “Statement by Supplier” as evidence to anyone with whom you are transacting that the service you are providing is a hobby, and you are therefore not required to have an ABN. Normally, without an ABN, the business would be required to withhold 49% of the payment for tax purposes. As long as you provide a “Statement by Supplier form” to your customers, in order to advise them that the service you are providing is a hobby, withholding this payment will not be necessary. Be aware that although your activity may have started out as a hobby, the nature of your activities may change and your hobby may have grown into a business over time. It is important that you monitor any change in income or practices so that you’re aware of your obligations before they happen. If you are in business? You will need to:
Declare your income to the ATO in your annual return
Register for an ABN
Determine your requirement to be registered for GST (thresholds apply)
Claim deductions on your expenses.
Keep records of your business for tax and other obligations.
Check for any other licences or permits specific to your type of business that may be needed (i.e. if you're running a home-based business, you may need council approval to operate from your home).
What about income from my Hobby?
You don’t need to declare the amounts you make from your hobby to the ATO. You can’t claim any losses from your activity if it’s a hobby.
There is NO dollar threshold that determines whether you are in fact a business. Some people can have very expensive hobbies! What matters is whether, as a whole, your activity is commercial with an aim to make a profit.
The ATO website provides further information and examples to help you understand the differences between a hobby and a business. Read more here: www.business.gov.au/info/plan-and-start/a-business-or-a-hobby or contact our office on (08) 9243 0681 and we can assist you.