A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure. It’s important to understand the differences between a hobby and a business for tax , insurance and legal purposes. If you’re working from home or selling handmade goods online for example, you need to decide whether you are doing so as a business or a hobby.
If you develop your hobby into a business, you need to establish your status early as it will affect your tax and deductions. Failing to declare your business activities and income could lead to fines and penalties on top of the tax you may otherwise pay to the ATO.
Some key questions to consider:
- 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 business-like manner?
If you answered yes to most of these questions, you’re likely to be running a business. The ATO website provides further questions, information and examples to help you understand the differences between a hobby and a business
What do I need to do if it’s a business?
When running a business you pay tax on the money you earn, can claim for deductions on your expenses and generally need an Australian Business Number (ABN). These do not apply if your activities are just a hobby.
Once your hobby becomes a business, you will also need additional licences and permits specific to your type of business. If you’re running a home-based business for example, you may need council approval depending on the type of business.