There are critical differences between having a hobby and running a business, and they mostly have to do with your tax, insurance and legal obligations.
Understanding the characteristics of businesses and hobbies is essential to ensure you correctly determine your activities.
While there is no single, defining factor that determines whether or not you are in business, some of the factors that you still need to consider include:
The Benefits Of Running A Business
If you run a business you can:
A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. While you may create a business from the starting point of a hobby (such as crocheting or painting, etc), that is not the primary purpose of the hobby.
The Benefits Of A Hobby
Having a hobby allows you to:
The key differences between a business and a hobby are as follows:
You do not need to declare the amount made from your hobby to the ATO. However, you must declare your income to the ATO in your annual return as a business.
You cannot claim a deduction for any losses from your creative work if it is a hobby. As a business, you can claim for deductions on your expenses and generally need an ABN to do this.
You do not need to keep records of your hobby for the ATO, however it’s good practice to keep records in case your circumstances change.You must keep records for your business for tax and other obligations.
Generally, you will not need to hold licences and permits for your hobby. However, you may need licences and permits specific to your type of business.
As a hobby, you are not eligible for an ABN for a hobby, however if you sell goods or services to businesses, they may ask you for an ABN when they pay you. You can use a Statement by a supplier form to avoid the business withholding an amount from the payment to you for not having an ABN. The statement lets the business know you are selling the goods or services as a hobby.
As a business, it is not compulsory for businesses to register for an ABN, however getting an ABN is free and makes running your business easier, particularly if you have to register for other taxes like GST. Without an ABN, other businesses must withhold 47% from payments they make to you for tax purposes.
If you’re selling goods, you’ll need to comply with Australian Consumer Law (ACL). Your customers have automatic rights if they buy a product that breaks easily, doesn’t work or doesn’t perform as generally expected.
If you are not sure about whether your activity would be classified as a business or hobby, you can seek professional advice from an accountant, legal expert or business adviser who can help you decide what exactly it is that you’re running.