With the growing popularity of social commerce websites such as etsy.com or even the accessibility to affordable e-commerce website development, many people are turning their hobbies from pastime activities to lucrative businesses. Not knowing if you’re in actual business or not can be quite risky.
So why does it matter whether your activity is a business? Because, if you are making any money from your activity, it is classed as assessable income. According to the Australian Tax Office, assessable income is income that can be taxed, provided you earn enough to exceed your tax free threshold. Examples of assessable income are:
- salary and wages
- interest from bank accounts
- dividends and other income from investments
- bonuses and overtime an employee receives
- commission a salesperson receives
Some examples of hobbies or activities which may constitute a business include tradesmen, jewelry makers, or landscapers.
With this in mind you are entitled and in some cases even obligated to receive an Australian Business Number (A.B.N.) and you can or must register for goods and services tax (G.S.T.)
If you are carrying on a business, you are eligible to claim tax deductions for allowable expenses you acquire in creating this income. Also, if your business results in a loss, you may be able to counterbalance the loss against other income or carry it forward to offset against future income. This reduces the income tax you may have to pay in the future.
There is no simple, structured formula for assessing whether you are in business or not. Each case is different. If you are wondering whether your hobby is a business ask yourself the following questions:
- Does your hobby or activity have a commercial nature or purpose?
- Do you have more than just intent to run a business?
- Do you have a purpose of profit and or a prospect for profit?
- Is the activity you engage in repetitious and consistent?
- Do other businesses in your industry carry on activity in a same or similar manner as you?
- Do you manage your hobby in the same way you would a business?
- Does your hobby or activity have traits of scope, scale and longevity?
- Do you sell the products of your hobby through a retail outlet?
If you answer yes to any of these questions you are closer to stating that your hobby or activity would be better described as a business. Although no one single indicator is conclusive, a combination of them may point you in an accurate and fitting direction.
Here is an example of a hobby vs. a business:
Jenna knits. She is especially good at knitting jumpers and she does so for about 4 hours a week. Sometimes her sister will ask Jenna to knit a jumper for a small price. In this case, even though she will take the money, is not knitting for a profit or a regular basis. This is just a hobby.
Here is an example of a business vs. a hobby:
Jenna knits 30 jumpers a month. She has a contract with a local retailer to supply 15 jumpers per month and the other 15 she sells through her e-bay shop. In this case Jenna makes a steady and relatively profitable income making her hobby a taxable business.
Remember, If you are considered to be carrying on a business you must declare any income earned by the business.
If you ascertain that you are in business you must apply for an A.B.N.
Next, you should choose an appropriate name for your business and register the business name.
Next, secure a domain name closely matching your business name.
Best of luck with your venture!
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